MATS: Regulatory Rollbacks in the USA and Calculating Co-Benefits in Emission Reduction Rules

by Tanya Abrahamian 07 Nov. 2018

In the latest of a series of regulatory rollbacks by the Trump Administration, the U.S. Environmental Protection Agency (EPA) is expected to propose removing the requirement that the EPA account for “co-benefits” when calculating the economic impact of environmental regulations.

The EPA rollbacks are a result of Executive Order 13783 issued by the Trump Administration, Promoting Energy Independence and Economic Growth, which directs federal agencies to “review…and appropriately suspend, revise or rescind those [regulations] that unduly burden the development of domestic energy resources beyond the degree necessary to protect the public interest or otherwise comply with the law.”

The determination of which regulations are to be rolled back relies on the results of cost/benefit calculations the EPA is required to conduct for all “major” federal regulations. These calculations include co-benefits, which can be defined as any added benefits that result from climate regulations above and beyond the intended, direct benefits.

In this article, we examine the legal maneuverings that are underway and could have a significant impact on the administration’s further attempts to reduce the environmental regulatory burden on industry.

When and How to Calculate Costs and Benefits

When developing environmental rules, the EPA is required to weigh the financial costs of the regulation against any societal health benefits that may accrue from its implementation. This requirement was instituted by Executive Order (EO) 12866, Regulatory Planning and Review, which requires that significant regulatory actions be submitted for review to the Office of Information and Regulatory Affairs (OIRA) and Office of Management and Budget (OMB).

The EO defines a “significant regulatory action” as a rule having the following characteristics:

  • Has an annual impact on the economy of USD $100 million or more or which may otherwise adversely impact in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, and public health or safety;
  • Creates inconsistencies between agency actions;
  • Materially alters the budget of grants or other entitlement programs and
  • Raises novel legal or policy issues.

Arguably, under this standard, every environmental regulation can be deemed a “significant regulatory action” because it impacts the environment and/or public health in a material way.

Most environmental statutes have a built-in cost/benefit analysis. For example, the Clean Air Act (CAA) requires the EPA to set “standards of performance” to reduce air pollution based upon “the best system of emission reduction, or BSER. This standard takes into account “the cost of achieving…[emissions] reduction and any non-air quality of health and environmental impact and energy requirements the Administrator determines has been adequately demonstrated.”[1] In practice, it is within the EPA’s discretion to determine whether a policy rises to the level of significance as to warrant a cost/benefit analysis—and even how these costs and benefits should be considered when creating environmental standards.

Case Study: In 2016, the OIRA estimated the annual benefits of “major” Federal Regulations (a term including “significant regulatory actions”) to be between $13.6 billion and $27.3 billion, while the costs accrued during this same time by state and federal agencies and the private sector were estimated to be between $3.3 billion and $4.9 billion.[2] Consequently, even assuming the most conservative of these estimates, the annual benefits of these environmental regulations are 178% greater than their costs.

The OIRA found that the highest estimated costs and benefits were logged by the EPA’s Office of Air and Radiation, and in particular its National Emission Standards for Hazardous Air Pollutants From Coal- and Oil-Fired Electric Utility Steam Generating Units (commonly referred to as “MATS”). This means that while compliance with MATS may be relatively costly for industry, the benefits achieved by compliance were also relatively large. This is due primarily to the regulation’s added co-benefit of reducing public exposure to fine particulate matter (PM 2.5).

The Obama Administration EPA’s analysis of MATS included factors such as generation capacity, electricity demand and constraints on electricity generation in its evaluation of the costs associated with complying with the rule. EPA’s cost calculation reflected the least costly way of complying with the standard given these factors. As such, it took into consideration the installation of abatement technologies by facilities and the transition to less-polluting natural gas. Based upon this multi-faceted analysis, the EPA found costs associated with the program to be $9.4 billion in 2015, with an additional $0.22 billion for record-keeping and administrative compliance. The models suggested that most generators would comply with MATS by constructing new pre-combustion controls that would not only reduce emissions of mercury, but would also have the added benefit of reducing PM 2.5.

The EPA found the majority of the benefits of the MATS program would be due to the indirect effect it has on reducing these pollutants. The calculation of these co-benefits” was the primary point of contention in the Court and informs EPA’s current rule reconsideration. To calculate co-benefits, EPA identifies specific health and welfare impacts associated with air quality and identifies the populations exposed to the pollutants. It calculates epidemiological changes to these populations in response to different levels of pollution to identify the causal impact between pollution exposure and health. It translates these health impacts into a monetary value using the “value of statistical life,” which represents the price individuals are willing to pay for a certain reduction in the probability of mortality.

In its calculation, EPA also considered the wider climate benefits of reducing pollution by using the social cost of carbon metric, which estimates the monetary damages associated with climate change caused by greater carbon emissions. The agency also discounts estimated benefits by a discount factor since most impacts are expected to manifest in the future.

This all may be wonkish, but here is why it matters.

The Impact of Ignoring Co-Benefits

The current Administration is proposing to re-examine its consideration of co-benefits when calculating the benefits of MATS. This could set a precedent for other environmental rules, where EPA could similarly forgo consideration of co-benefits. Considering that EPA’s rules, particularly air emissions standards, are the rules with the highest estimated costs, failing to consider co-benefits may substantially shift the cost/benefit ratio for these rules and their implementation. This may result in less stringent standards in the future for facilities with air emissions.

Perfect is the Enemy of the Good

Seeking perfection should not discount good existing policies. Though any inclusion of co-benefits may be attenuated and indirect, the failure to include these benefits would produce skewed and inaccurate representations of the impacts of environmental standards. They would perpetuate one of the major faults in current climate policy: that a global problem is being addressed at a localized level with no consideration for its broader impacts.

On a more practical level, most coal and oil-fired electricity generators subject to the rule are largely compliant with MATS as it is currently written; any change of this regulation based on a purportedly high cost of compliance would be unnecessary for cost avoidance.[3] It is with this in mind that many major utilities have authored a letter to EPA asking that it retain the regulation as written.[4]

 

All this begs the question: If altering the cost/benefit for MATS will not ease compliance costs for utilities and would produce an economically inefficient result, then why the EPA proposal? The answer: To set wide-ranging precedent that would justify the withdrawal of countless other environmental standards. This isn’t just an issue just about cost/benefit math, but one that could inform a future of environmental laws and regulations.


[1] 42 USC 111(a)(1)

[2] https://www.whitehouse.gov/wp-content/uploads/2017/12/draft_2017_cost_benefit_report.pdf

[3] https://www.eia.gov/todayinenergy/detail.php?id=32952

[4] https://www.eenews.net/assets/2018/07/11/document_gw_04.pdf