July 07, 2020

EPA’s newest cost-benefit policy—does it MATS-er?

Norman A. Dupont

The COVID-19 pandemic shows the difficulty of applying seemingly mundane cost-benefit analysis to real life and hard facts. What are the true benefits of a stay-at-home regulatory order to avoid “excess” or premature deaths from the virus versus the true costs of lost jobs, shuttered small businesses, and massive federal deficits? What are the ancillary benefits or co-benefits of keeping many Americans from driving polluting automobiles on busy freeways? What are the ancillary costs to mental health and human psyche from being cooped up inside a tiny Manhattan apartment without even the Guggenheim Museum to visit? Should one even calculate such ancillary costs or benefits?

It is small wonder that the U.S. Environmental Protection Agency (EPA), which has grappled with cost-benefit analysis for decades and focused on reform of its prior methodology for the past three years, has made little tangible progress on applying that methodology to real-world problems. This article examines the application of EPA’s cost-benefit policy in one specific new rulemaking, the Mercury and Air Toxics Standards (MATS), and the difficulties posed to both regulated utilities and environmental groups in applying a new EPA cost-benefit calculation in this the real-world example.

EPA’s efforts to revise calculation of costs versus benefits

The issue of cost-benefit calculations for new regulatory initiatives is hardly new and indeed has been the subject of reform efforts for decades. President Reagan issued one of the first Executive Orders, Executive Order No. 12,291, in 1981, requiring that administrative agencies consider for any “major” rule the rule’s costs and benefits. But Reagan’s order was hardly the last such order. In 1993 President Clinton issued Executive Order No. 12,866 requiring that EPA (and others) coordinate their regulatory impact analysis with the Office of Management and Budget (OMB). Subsequently, in 2003, under President Bush, OMB issued its Circular A-4 that revised and replaced prior guidance designed to implement Executive Order No. 12,866. A 2014 summary of the various executive efforts to control and direct agency consideration of costs and benefits is contained in a Congressional Research Report, “Cost-Benefit and other Analysis Requirements in Rulemaking Efforts.”

More recently, EPA Administrators Pruitt and Wheeler have continued efforts to refine the cost-benefit analysis methodology for environmental rules. In 2018, then-Administrator Pruitt issued a proposed notice of ruling-making entitled: “Increasing Consistency and Transparency in Considering Costs and Benefits in the Rulemaking Process.” In 2019, Administrator Wheeler shifted ground and issued a policy memorandum to his assistant administrators directing them to focus on improving transparency and consistency in undertaking a cost-benefit analysis focusing on specific media, such as air and water. He directed that the assistant administrator for the Office of Air and Radiation Safety be the first to prepare such policy guidance. On June 4, 2020, EPA issued a notice of proposed rulemaking for application of cost-benefit analysis to proposed rules issued under the Clean Air Act in response to the Administrator’s prior 2019 memorandum.

The latest cost-benefit calculation for the MATS rule

In Michigan v. EPA, 576 U.S. 743 (2015), the U.S. Supreme Court rejected EPA’s regulation of mercury and other toxic substances under the Clean Air Act. In that case, section 112 of the Clean Air Act authorized EPA to impose certain additional requirements on stationary source power plants, but only “[i]f the Agency “finds . . . regulation is appropriate and necessary after considering the results of the study . . . .” The Court concluded that this statutory language mandated direct consideration of costs versus benefits in the rulemaking process.

EPA in late 2015 conducted an initial reevaluation of the costs and benefits and concluded in a supplemental finding that issuance of the new MATS regulation was “necessary and appropriate.” EPA essentially reaffirmed the decision to impose stricter regulatory requirements on the electric utility industry as indeed necessary and appropriate—standards that it had initially announced in 2012.

But, some three years later in 2018, EPA announced that it had reached the opposite conclusion. It issued a proposed revised Supplemental Cost Finding opining this time that in fact the costs (estimated at some $7 billion to $10 billion annually) outweighed the remaining “direct” benefits of a mere $4 million to $6 million annually). EPA reached this new conclusion by excluding from consideration certain co-benefits achieved for pollutants other than the “target” pollutants (such as PM2.5 particles) and determining that only the benefits of directly regulating the target pollutants should be considered. EPA then announced this April that it had finalized its 2018 Supplemental Cost Finding and stated that it had determined that regulation of most electrical utilities was not merited. It specifically found that such regulation was not “necessary and appropriate” although it purported to leave the initial rule from 2012 in place.

EPA did not formally revoke the underlying MATS rule, but it left it as a mere ghost of its former regulatory self—given that the rule was now deemed not necessary at all. Indeed, on May 22, 2020, one coal-based power utility, Westmoreland Mining Holdings, LLC, filed a petition with the U.S. Court of Appeal for the District of Columbia Circuit challenging the rule and including in the items for review by the Court of Appeal EPA’s Supplemental Cost Findings finalized this April.

EPA’s new cost-benefit for MATS regulation draws fire from both the regulated and environmental advocates

Many would evaluate a new rule (or revision to an older rule) by how it was received by the regulated community—both utilities (in this case) and environmentalists. While this is certainly not the sole criterion for evaluation, it is one potential metric.

Judging EPA’s new cost evaluation by this metric, it is a failure. Various industry entities, such as the well-known Edison Electric Institute, had previously urged EPA not to reverse the MATS rule because, in part, utilities had already spent billions in capital improvements to adjust to the previously issued (2012) rule.

Environmentalists also rejected the new determination by EPA that regulation was no longer “necessary or appropriate,” with an attorney from Earthjustice, James Pew, asserting that EPA’s newly revised cost-benefit analysis was an exercise in “cooking the books.” EPA’s own Science Advisory Board (SAB) issued a draft letter to Administrator Wheeler complaining that EPA’s chosen cost-benefit analysis for the MATS rule appeared to ignore prior input by the SAB.

EPA violates its own “consistency” criteria by selectively including (or excluding) co-benefits of proposed rules

If one considers the cost-benefit analysis of the EPA MATS rule based solely on the Administrator’s current criteria for such studies, then one can measure the cost-benefit calculation under the metric of “consistency.” But, the recalculation of costs versus benefits in MATS—one that excludes co-benefits of the proposed regulation—fails the consistency test.

EPA has worked with the National Highway Traffic Safety Administration (NHTSA) to arrive at revised (and lower) standards for automobile fuel efficiency. Those standards now use the acronym of SAFE, for “Safer Automobile Fuel Efficiency.” A review of the SAFE rule and current litigation can be found in Professor Trish McCubbin’s March 2020 article in this publication.

The SAFE rule issued by EPA and NHTSA in September 2019, however, expressly cites co-benefits in its consideration of the rule’s overall benefits. In a jointly issued document entitled “MY’s 2021-2026 CAFÉ Proposal by the Numbers,” EPA and NHTSA include co-benefits achieved by a reduction in fuel economy standards, such as fewer auto accidents. However, fewer accidents are certainly not a benefit associated with the aim of the reduced fuel-economy requirements—the economic benefits to potential car buyers who might find new models less expensive due to weaker emissions controls.

In this case, consistency appears to be very much a matter of which side of the cost-benefit equation EPA wants to hail as the winner—i.e., which side EPA wants to win based on the desired regulatory outcome. Thus, consistency is currently a results-oriented outcome, not a process-driven and evenly applied methodology.

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Norman A. Dupont

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Norman A. Dupont is a partner at Ring Bender LLP where he practices environmental law and litigation. He is a member of the Trends editorial board and is active in the Section of Environment, Energy, and Resources.