Costly Confusion

With today’s roll-out of Environmental Protection Agency (EPA) guidance for reducing coal-fired electricity plants carbon emissions, industry interests have been pressuring hard to undermine public support for EPA action.  Before heading further, and in line with the Debunking Handbook, let us start with an aside covering some basic truths about investing in climate mitigation:

  • Climate mitigation investments will have huge economic returns on that investment ranging from energy efficiency reducing total energy bills to new economic activity surrounding the new technologies and businesses seeking to reduce our climate impact.
  • Climate mitigation investments will have huge corollary benefits — such as improved human health (from reduced allergy risks to reduced emergency room visits with asthma attacks to reduced deaths due to fossil fuel pollution), improved visibility at national parksa
  • Climate mitigation will reduce the huge risks associated with climate change and will provide an insurance against the potential that climate change implications could be far worse than standard projections suggest (e.g., the risk that the modeling is erring on the too optimistic side).
  • Climate mitigation is an investment that will provide huge returns — across a spectrum of economic, social, and environmental fronts.

Another simple truth, even proponents of action on environmental issues typically overstate costs and understate benefits for a number of understandable reasons.

With that in mind does the past historical record provide us a window on whether we can trust institutions like the U.S. Chamber of Commerce to provide reliable information as to the costs of environmental compliance?

Ramez Naam’s The Infinite Resource: the power of ideas on a finite planet is a powerful discussion of how innovation can enable us, even at this stage, to address climate change successfully. Naam presents a strong version of what I describe as ‘pessimistic optimism’ — he is quite clear as to the extent of our challenges and problems while also providing cogent arguments as to why and how unleashing innovation can enable a transformation of American (and global) society toward a prosperous, climate-friendly future.

Naam has, among other things, an excellent discussion of how opponents and proponents have gotten the cost-benefit equation wrong on past policy discussions of addressing environmental.  In particular, he gives the example of the government’s early 90s attempt to regulate Acid Rain through a cap-and-trade system for sulfur emissions.  On one side, the industry predicted annual costs of $25 billion per year.  On the other, the EPA projected costs of $6 billion per year.

GDP Acid Rain Graph

The actual costs?  Over the past 20 years the costs have been “only $3 billion per year, just one-eight of the industry estimates, and half of what the EPA estimated.”  Compare these to benefits of the regulations that reach $118 billion in reduced health expenses alone.  This doesn’t include the non-market benefits of things like better views and reduced pollution in eastern national parks.

Another example comes from the Montreal Protocol’s attempts to prevent the hole in ozone layer from expanding.  From Naam again, “[DuPont] warned that phasing out CFCs could cost the United States more than $130 billion and “that entire industries could fold.” … the Competitive Enterprise Institute … phasing out CFCs would cost the country between $45 billion and $99 billion.”  Meanwhile, “The EPA expected the phase-out to cost a total of $28 billion.”  In reality, the cost turned out to be less than $10 billion – a fraction of the cost projections from industry and the EPA.  Even with these low costs the Montreal Protocol has been an unparalleled success that celebrated its 20th year in effect this fall and still serves as a model for international environmental agreements.

The examples extend to nearly every major regulation of an industrial chemical.  Chemical companies forecast costs of $350,000 per plant if they were required to limit benzene emissions at industrial sites.  Within a few years, changed processes that eliminated benzene entirely (beating the regulations) reduced this cost to zero.  The health benefits are not estimated but it is not unreasonable to suggest – in line with the benefits of other reduce pollution loads – they are in the billions.  A more publicized example is the removal of asbestos. OSHA estimated costs of $150 million to end asbestos use in insulation and the costs turned out to be $75 million.  Again, the health benefits through reduced exposure to a known carcinogen are multiples of this cost.  Finally, the EPA estimated costs of $4 billion in 1987 for reducing coke oven pollution.  By 1991 industry learning had led to revised cost estimates of $400 million. Meanwhile, health benefits follow the same familiar story above.

Graph Enviro Regs Wreck Economy

Figure. Claims that environmental laws will destroy the economy have been regularly made and are consistently false. This graph shows U.S. GDP from 1929 to 2013 in real 2009 dollars (corrected for inflation) along with the years major environmental laws were passed. (Prepared by Peter Gleick, Pacific Institute. GDP data from the US Bureau of Economic Analysis.)

In short, as Naam says, “Everywhere we look, the cost of reducing either resource use or pollution drops through innovation.  Even the cost estimates of regulators turn out to be too high.”

Much will (and should be said) about the EPA rules released this morning. (Questions such as … Whether the 2005 starting point is gamesmanship to make the targets look bigger? (Yes) Whether the rules go far enough? (No) Whether the coal industry is bearing enough of the financial burdens for the damages burning coal causes? (Absolutely not) ) But the fact that the EPA is moving forward with guidance on coal fired plants  is — seriously — good.  That President Obama and the Administration are demonstrating a willingness to take Administration action in wide public view, with serious interest group pushback and in the face of a do-nothing Congress is good. That this is a step in the right direction is — without question — good.

What is not good is that, inevitably, the entire discussion will exaggerate the costs of action and understate the benefits of action.

And, well, as to the question above:

Does the past historical record provide us a window on whether we can industry groups to provide reliable information as to the costs of environmental compliance?

Yes. And, that window says that their predictions should not be trusted.  To be fair, neither can the estimates of the regulators themselves.  Both groups systematically and consistently overestimate costs and underestimate benefits.  Thus, the moral?  If the estimated benefits of environmental action are even close to offsetting the estimated costs it will almost certainly turn out to be, in hindsight, a policy we should implement or action we should take.

 

This is a cross-post from Get Energy Smart.  The original post can be seen here along with additional links to Gina McCarthy’s comments (video below) and additional commentary on the regulations.  

 

 

Image Credit: Wikimedia Commons

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