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Keystone XL pipeline: Good for Big Oil, bad for the economy

2012-02-01T21:51:53Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

[We’re] probably looking at…from Montana to Houston, I don’t know, [job creation] in the hundreds...” (Robert Jones, TransCanada’s Vice President for Keystone Pipelines, CNN, November 11, 2011)

Interesting quote. TransCanada and its allies can’t seem to keep their numbers straight for the proposed tar sands Keystone XL pipeline. Just the day before, the company released a press statement predicting 20,000 pipeline and 118,000 “spin-off” jobs. In September of 2010, they claimed 13,000 jobs. Two months prior to that, a “study” they commissioned was released predicting 250,000 to over half a million jobs (p. 33). The Republican Party claims over 100,000. All of these estimates contradict the statement by the company’s own Vice President, even those at the lower end.

Analysts who aren’t trying to make money off the pipeline conclude that it would create far fewer jobs. Researchers at Cornell University project as few as 2,500 jobs, and the State Department up to 6,000 (p.ES-22). Notably, most projections are for short-term jobs associated with construction—something proponents don’t always make clear. (There’s nothing wrong with short-term jobs, any would be welcome, but their temporary nature shouldn’t be in the fine print). According to the State Department, as few as 20 jobs will be permanent (p. 3.10-80) (excluding “induced” jobs created from wages spent by these workers). (Click here for a good summary explaining the differences across industry and independent analyses, by the Columbia Journalism Review).

So what is going on here?

After failing to convince their own country’s citizens that the pipeline would be good for them, Big Oil and its Congressional protectors have launched what can only be characterized as an aggressive disinformation campaign to build the pipeline. Preying on the fears of America’s unemployed and economically insecure, they are trying to sell it as a national jobs plan and a way to increase national security by reducing dependence on foreign oil.

It’s a cruel hoax. Canadians didn’t fall for it, and neither should we.

The proposed project would construct a 1,700 mile conduit from Alberta, Canada for the world’s dirtiest and most corrosive form of oil (tar sands) right through the heart of America’s farmland —threatening not only the bread basket of the US, but also the world. It promises little to potentially negative economic returns for Americans.

Maybe that’s why President Obama made the bold decision to reject TransCanada’s permit application. With Citizens United giving the oil industry (even more) unlimited influence, and the American Petroleum Institute’s blatant threat to the President to approve Keystone XL or face “huge political consequences,” Obama’s courage shouldn’t be underestimated.

Here’s the truth about the pipeline:

* It will create only a very modest number of jobs. While these jobs are important and could certainly help some workers, industry has grossly overstated its case.

* It might destroy more jobs than it creates:

By TransCanada’s own account, Keystone XL is expected to increase oil prices in the Midwest (building a pipeline to the Gulf Coast will eliminate an excess supply of the oil in the Midwest, pushing up prices). As part of its permit application to the Canadian government, TransCanada said (p.21) annual oil company revenues are expected to increase as a result by $2 to nearly $4 billion. In turn, our farmers could see an increase in fuel costs of $2.6 billion dollars or more over 2009 levels…Higher oil prices might be good for the oil industry, but they will increase the cost of living and doing business in the Midwest, negatively impacting its economy and potentially increasing unemployment.
Pipeline leaks and spills into aquifers and water ways threaten the livelihoods of a quarter of a million farmers, and businesses providing outdoor recreation and other tourism services. Public health is also threatened, as already evidenced from a major tar sands spill in 2010 along a different pipeline (more below).

* Finally, the pipeline will not reduce our oil dependence or increase national security. The price of TransCanada’s oil will be determined by surging global demand for oil, and OPEC’s monopolistic production decisions that limit the world’s oil supply and increase its price (the cartel (OPEC) has almost 80 percent of the world’s known oil reserves). For all the rhetoric about energy independence and controlling the price of oil, Keystone XL’s marginal contribution to global production won’t amount to a hill of beans.

There is one source of potential long-term job creation about which oil industry has remained silent: jobs created to clean up inevitable spills and leaks. So far, TransCanada has experienced major problems with the section of the Keystone project already completed. In its first year of operation, its so-called safe “state-of-the-art” pipeline has already leaked 35 times, (21 times in Canada, 14 in the U.S--p. 3.13-11). According to the University of Nebraska, approximately 91 major spills can be expected over the 50-year lifetime of the pipeline. Clean up jobs will last longer than that…

There is also the potential for a major disaster. In 2010, the largest tar sands spill in U.S. history devastated the Kalamazoo River with over 800,000 gallons of oil at a price tag of over $700 million. We’re still cleaning it up, a year and a half later.

A worst-case spill from Keystone XL could cause widespread groundwater and river contamination. Any resulting clean up expenditures will strain public budgets, diverting limited resources away from productive investments that generate long term job growth, such as infrastructure, education, and clean energy.

Finally, there’s public health and the environment. The $700 million figure cited above was just for cleaning up. According to a November 2010 report (p.12) from the Michigan Department of Community Health, almost 60 percent of people surveyed who lived near the Kalamazoo spill experienced at least one adverse health effect following it, including respiratory, gastrointestinal and neurological symptoms (compared to a baseline of less than 5% in a community 15 miles upstream of the spill). Ethics aside, sick people do not make a healthy economy. Nor do the droughts, forest fires, extreme weather, smog pollution, and other impacts associated with climate change: extracting tar sands oil generates three times as much global warming pollution (in addition to generating other pollutants) as does conventional oil.

We should take heed of Canadians' oppostion to transporting Alberta's dirty oil through their own land for their own oil; they are no fools. They know TransCanada’s Keystone XL tar sands pipeline is a terrible project: it promises few if any jobs, puts existing jobs at risk, and threatens water supplies, public health, and the environment. They know the oil industry has one objective and one objective only: to increase profits. It is not to bestow a new supply of cheap oil on the US or reduce unemployment. As PT Barnum famously said, “There’s a sucker born every minute.” Let’s make sure we’re not one of them.

(Updated 2/3/2012 to add climate change impacts).

CIBO's rehashed and discredited analysis of toxic emission standards

2011-12-21T00:27:17Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

As part of their ongoing jobs-scare campaign to block public health standards (and protect their bottom line), the Council of Industrial Boilers (CIBO) just rehashed its discredited 2010 economic “study” (click here for a summary of critiques by myself, the Congressional Research Service, the National Association of Clean Air Agencies, and a respected economics professor we asked to grade the report (it earned a D for quality and an F for transparency, and was graded as if it were an undergraduate level paper)). In that report, CIBO projected economic ruin would result if large industrial and commercial facilities were required to reduce their toxic air emissions from boilers.

Public health benefits ignored by CIBO

Before looking at the problems with CIBO analysis, it’s worth summarizing the expected health benefits unaccounted for in their report: in 2015 alone, these standards would prevent an estimated (p. 141)

3,100 to 8,000 premature deaths
2,000 cases of chronic bronchitis
4,900 nonfatal heart attacks
5,350 hospital and emergency room visits
4,600 cases of acute bronchitis
390,000 days when people miss work,
51,000 cases of aggravated asthma, and
96,000 cases of respiratory symptoms

These benefits are worth an estimated $25 to $67 billion, more than 16 to 44 times the cost of $1.5 billion.** Moreover, they are 60 percent higher than, and cost half as much as, the rule as it was initially proposed in 2010. Then, the proposed rule was expected to bring an estimated $15 to $41 billion in benefits, at a cost $2.9 billion (still a great return).

As discussed below, CIBO’s flawed cost estimates were much higher than EPA’s.

EPA’s estimated employment impacts versus CIBO’s

Against the huge health gains, EPA originally estimated a modest net gain of 3,000 jobs, with a range of -6,000 jobs to +12,000. For the reconsidered rule** just released, the central estimate is now +1,600, with a range of -3,000 to +6,300. Basically inconsequential—and consistent with four decades worth of regulatory experience showing slightly positive net gains in employment resulting from environmental regulation. (It’s important to note that net gains do not necessarily mean actual jobs were lost: for the most part, more jobs were created in the environmental protection industry than would have been created had the resources spent on compliance been invested elsewhere).

In contrast, CIBO estimated 337,702 jobs would be at risk from the 2010 proposed (recall CIBO used its analysis of the proposed rule for the “new” figures) rule. CIBO’s estimates look…well…kind of ridiculous.

CIBO’s extreme job loss estimates are a result of an extremely flawed analysis, inconsistent with even the most basic economic theory taught in introductory courses. Some of the most egregious mistakes were (click here for a more exhaustive review):

1) CIBO incorrectly assumed that output would be reduced by an amount equal to the capital investment required for compliance. The proper analysis would have estimated how much of the cost firms would have been able to pass on to consumers by raising prices, and then consumer responses to that price change;

2) CIBO failed to estimate jobs created elsewhere in the economy, i.e. in the pollution control sector. Since that sector is more labor intensive than the rest of the economy, typically there is a small, but positive, net gain in jobs resulting from environmental regulation. Expenditures on pollution control are not simply a loss to the economy: they stimulate demand and provide jobs in the pollution control sector. A pertinent example: the International Brotherhood of Boilermakers reported that the number of boilermakers in the United States increased by 35 percent over just two years – from 1999 to 2001—as a result of the EPA’s standards to implement the Clean Air Act (see p.6 for citation).

3) CIBO mistakenly treated one-time capital investment costs as recurring expenses. Instead, the up-front capital investment should have been annualized over the life a loan required to finance it.

Finally, fed into this flawed analysis were exaggerated costs. CIBO’s capital costs were more than twice EPA’s in the proposed rule, and four times higher than what was ultimately promulgated**. Some control mechanisms were orders of magnitude greater: in the proposed rule, CIBO’s cost of carbon monoxide controls was 200 times higher EPA’s, and the cost of carbon injection 180 times higher.

Conclusion

Reputable sources in government and academia have documented numerous and egregious flaws contained within the CIBO study. Politicians and policy analysts relying upon this study cannot be taken seriously. Proponents of EPA’s proposed standard should correct obstructionists trying to use this study to argue that cleaner air standards will result in economic ruin.

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**These figures are for the revised/reconsidered version (just released) of the final promulgated rule, after EPA considered some additional data. In the final rule, benefits were estimated at $22 to $54 billion, and costs $1.4 billion. CIBO cost estimates were based upon the proposed rule.

Making it real: new study shows exactly where EPA regulations create jobs

2011-12-08T21:00:36Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

A refreshing study, released by the Coalition for Environmentally Responsible Economies (Ceres), now shows us exactly where jobs will be (and have been) created from the supposed “job-killing” environmental regulations under attack in the US House of Representatives. It’s a nice complement to other studies (click here and here, for example) that project employment changes more broadly across different “sectors” of the economy (e.g. “construction,” “manufacturing,” etc.). Here, we see actual industries, involved in actual pollution abatement activities, with actual firms, hiring actual workers, in actual places across the US.

It’s hard to argue that something that exists doesn’t exist…

Regulation and compliance with pollution standards sustains an estimated 142,000 direct jobs (Brookings Institution clean economy jobs study, Table 1), which in turn sustain hundreds of thousands more (indirect) jobs throughout the supply chain (e.g. materials used to make pollution control equipment, such as steel). Both, in turn, support further employment, as the earned income spent by workers creates demand for other goods and services economy-wide.

The study is not meant to be exhaustive: it aims to show, by way of only a handful of examples, the vast network of businesses and employment supported by the pollution control industry. Both now and in the future.

The analysis features four pollution compliance projects across the country currently underway, or recently completed. For each, the authors provide a list of some of the businesses supplying the inputs and labor.

They also profile, for five states, the amount of investment that will be needed to comply with the EPA’s proposed Mercury and Air Toxics Rule and Cross-State Air Pollution Rule.

To illustrate the value of the report for those with limited time, below I develop my own sub “case study” from it. One of the four compliance projects is also in one of the featured states, Pennsylvania. Combined, we can see both what current and future environmental regulation might look like for a state, using PA as an illustration.

But first let me give some interesting “big picture” stats from the report. Below is a figure showing the types of firms in the pollution control industry for the US as a whole (organized by their typical distance from compliance sites), and a map locating 175 major pollution control-related companies identified in the report.

(The other compliance project case studies are in New Hampshire, New York, and Minnesota)

Project:

Construction of a wet scrubber to remove 97% of sulfur dioxide emissions from a power plant’s flue gas, located in York Haven. Sulfur dioxide causes respiratory diseases, such as asthma, emphysema, and bronchitis, aggravates heart disease, and causes premature deaths.

Total investment cost:

$800 million.

Job creation:

30 permanent operation jobs, thousands of direct and indirect supply chain jobs over the three year construction period.

U.S. companies hired, and their locations:

APi Construction (New Brighton, MN)
Brayman Construction Corporation (Saxonburg, PA)
FMC Technologies (Houston, TX)
Grout Systems Inc. (Wadsworth, OH)
McCarl’s, Inc. (Beaver Falls, PA)
M.J. Electric (Iron Mountain, MI)
Stebbins Engineering (Watertown, MI)
Sterling Boiler & Mechanical (Evansville, IN)
3L&T (Mountain View, CA)

(Other state profiles are for Illinois, Massachusetts, Michigan, and Ohio)

Investment required:

$4.7 billion by 2015

PA Companies:

21 companies in the PA environmental equipment supply chain (employing over 5,000 workers, with $28 billion in annual revenues worldwide):

To conclude:

EPA’s proposed Mercury and Air Toxics and Cross-State Air Pollution Rules will not only support actual workers in the pollution control industry, they will also create actual new jobs. It’s not hypothetical.

As Michael Morris, the CEO of American Electric Power, one of the largest U.S. utilities, recently said during an investors’ conference call, EPA’s proposed tighter mercury and toxics standards would stimulate investment and employment: “Once you put capital money to work, jobs are created” (in public forum, AEP and other polluters have claimed economic ruin, (same as previous link)).

Utilities are flush with record-level cash reserves, and can afford to clean up their acts. And in so doing, they will stimulate demand for products and services in an economy widely recognized to be suffering from a severe lack of demand, not from “job-killing” regulations.

The coal lobby grabbed my inhaler: another junk industry analysis of EPA regulations

2011-11-12T16:41:08Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

National Economic Research Associates (NERA) is at it again, producing yet another industry-backed report (click here, here and here for some others) claiming economic calamity from proposed environmental regulations. Funded by the leading coal-industry front group, the American Coalition for Clean Coal Electricity (ACCCE), the report makes assumptions that artificially inflate costs, and displays a level of (non)transparency so egregious it would never pass a peer-review process.

Against exaggerated cost estimates, NERA ignores sizable benefits of the regulations, including preventing tens of thousands of premature deaths, nonfatal heart attacks, and hospitalizations and emergency room visits, almost a million cases of aggravated asthma and other respiratory ailments, and millions of days of missed work or school due to illness, per year (click here, p, 1-2, and here, p.12).

The report sets out to analyze the collective economic impact of four EPA proposals, including the Utility MACT (Maximum Achievable Control Technology, proposed as standards for “mercury and air toxics”), the Cross-State Air Pollution Rule, standards for Coal Combustion Residuals (coal ash hazardous waste), and the Cooling Water Intake Structures Rule under 316(b) of the Clean Water Act. It is cloaked in two sophisticated and well regarded economic models, NEMS and REMI, broadly used by government agencies, non-partisan institutions, the private sector, and universities.

Don’t be fooled by the respected models: NERA feeds results from its own obscurely documented proprietary one, and a set of illegitimate assumptions, into them. Here are some:

1) While approximately 12% of coal fired power plant capacity (39GW) will be retired by these new rules (consistent with other forecasts), NERA doesn’t actually say how much power generation this represents. EIA data suggests it is likely to be around 2% of our national power output, given how infrequently these older, dirtier plants run. These conclusions are roughly in line with financial industry estimates,[1] that find this reduction in power generation having very limited impacts on power prices, due to slower demand growth projections, cost savings from fuel switching away from coal to natural gas, and accelerated use of demand response by utilities to reduce the need for shoulder power during peak loads. (Shoulder power refers to the little bit of extra power needed during peak load on extreme temperature days. It amounts to only a few hours in a day, on a few days of the year, and is often provided by old, dirty plants that otherwise are not running).

2) While the retirement estimates seem largely in line with other analyses, NERA makes a number of assumptions that significantly inflate compliance costs:

NERA incorrectly assumes that most coal plants will have to install equipment of some sort. However, a May 2011 report, published by Sue Tierney of the Analysis Group, finds that over 150 GW of the 320 GW of coal capacity in the U.S. already have control equipment installed that would bring those units into compliance with the rules, with an additional 55 GW of retrofits in progress. This amounts to more than two-thirds of the nation’s coal fleet being in compliance with the rules without incremental capital expenditures.
NERA assumed power plants would have to purchase multiple pieces of equipment to comply with the regulations; there is no discussion of the fact that some technologies enable compliance with more than one regulation. Some utilities are evaluating the co-benefit potential of control technologies in order to determine how they intend to comply with MACT.
NERA assumed that plants would have to comply with the cooling water rule by 2015, when in fact the guidance in the rule proposal states that the compliance window begins three years later and over a period of four years, from 2018 to 2022.
NERA assumes only natural gas or less polluting coal plants will be available as substitutes for the coal plants retired or not built due to the regulations. But alternative sources of power, especially wind, could provider cheaper energy in some areas.

3) Suspiciously, NERA also leaves out some key information:

It does not report what actual plants are retired, making it impossible to evaluate how the power they would have provided might be offset by other local sources.
Underlying assumptions on coal prices, natural gas prices, energy efficiency, peak and energy demand and financial assumptions (including debt life, book life, cost of capital, inflation, charge rate, equity and debt rates, and equity and debt ratios) are not disclosed.

One last point: the pollutants reduced by these regulations do not account for all of the health and environmental damages caused by coal. In a recent paper published in the top (peer-reviewed) economics journal by Muller, Mendohlsohn, and Nordhaus titled, “Environmental Accounting for Pollution in the United States Economy,” the authors calculated the gross economic damages (GED) from air pollution for each industry in the United States, concluding that the largest industrial contributor to external costs is coal-fired electric generation, with a GED of 2.2 (central estimate) times value added (generally speaking, value added is the difference between materials costs and sales revenue; it is divided between workers in the form of wages and owners of capital as profits).

The fictional claims in NERA’s September 2011 study for the ACCCE are built on a house of cards. NERA’s traditional tactics of non-disclosure and deficient analysis not only contradict EPA and peer-reviewed studies, they once again wholly discredit their conclusions.

This post was coauthored with my colleague Starla Yeh, at NRDC’s Center for Market Innovation, and Andy Stevenson, an NRDC Advisor specializing in finance.

[1] Goldman Sachs, August 30th, October 9th, and October 24th, 2011 Equity Research statements.

The high costs of fossil fuel dependency: climate change-related health and economic costs, and a costly dirty energy economy

2011-11-07T23:33:40Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

Following on the tails of the recent IPCC report documenting the connection between extreme weather events and climate change (click here for excellent NBC coverage, and here for here for other summaries, stories and reports) comes two analyses attaching dollar figures to these and other types of events. One looks at health costs, the other economic damages. The numbers are staggering.

The health cost analysis, the first-of-its-kind published in the November 2011 edition of the journal Health Affairs and co-authored by NRDC scientists, looks at health costs from six climate change-related events over the 2002-2009 period. The second analysis, from weatherunderground.com, provides an updated tally of economic damages caused by billion dollar extreme weather events in 2011 (to date), which hit a record annual number of fourteen. While the estimated costs are not solely attributable to human-induced climate change, our global warming pollution has increased the severity and number of such events. These analyses suggest how much worse things might become in the future if we continue doing nothing to reduce emissions.

Table 1 summarizes the health costs by event and type of health impact.

Between 2002 and 2009, health costs from the six events exceeded $14 billion dollars, caused an estimated 1,689 premature deaths, and generated over 760,000 interactions with the health care system. These included an estimated 8,992 hospitalizations, 21,113 emergency room visits, and 734,398 outpatient visits.

But these are examples of just health impacts from climate change-related events. We can also calculate economic damages from extreme weather events (e.g. destroyed homes, flooded crops, crushed bridges, etc.). This year gives us an idea of what we might be looking at, so far mounting to a whopping $53+ billion, and the year isn’t over yet. Table 2 summarizes these events (click here for more details).

The figures are sobering. As climate change progresses so too will the number, severity, and price tag of such events.

But…there is more bad news (sorry). The story does not end with climate change damages. We’ve incurred many other costs from our fossil fuel dependency. Here are some of them:

Deaths, brain damage, and respiratory diseases caused by traditional fossil fuel pollutants (e.g. toxics and soot) (click here and here to see the benefits of reducing them, and Congressional attempts to undermine them)
Trillions of dollars on the Iraq and Afghanistan wars
Hundreds of thousands of lives lost in the U.S., Iraq and Afghanistan (click here and here)—with some estimates reaching more than a million for Iraqi civilians
Billions of dollars sent every year (via oil purchases) to regimes hostile to U.S. interests
Devastating oil spills (click here for the Deepwater Horizon and here for Exxon Valdez, for two of the worst)
Polluted rivers, streams and aquifers from mining coal, natural gas, and oil
Ruined landscapes from mountaintop removal mining
Vulnerability to oil price shocks as supplies dwindle
Billions of dollars in fossil fuel subsidies

It’s all very depressing, I know, but there is a ray of hope. We don’t have to sit idly by and do nothing. Reducing greenhouse gas emissions presents an opportunity to promote a stronger economy through developing our clean energy industries. While the fossil fuel lobby would like us to believe the opposite, the facts tell us that addressing climate change and promoting a healthy economy are inseparable. Sure, in the short run cleaner energy might be more expensive on a cent-per-kilowatt basis, but this pales in comparison with all the costs enumerated above. And cleaner energy will only get cheaper in the future, with economies of scale and innovation.

What are we waiting for?

Cement industry's junk economic analysis of EPA toxic emission standards

2011-09-20T18:26:25Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

(Apologia to my readers for having to repeat text from my other blogs. What else can a poor economist do when industry keeps making the same “mistakes”...)

The U.S. House of Representatives is currently considering a bill (H.R. 2681) that would indefinitely delay toxic emission standards for pollutants known to cause cancer, birth defects, heart attacks, asthma and other illnesses—in order to protect cement manufacturing profits. The industry’s response is predictable: a “study” from its trade association (Portland Cement Association, or PCA) predicting thousands of jobs will be lost.

They’ve got it more than wrong: delaying standards will not prevent jobs losses, it will put at risk the lives and the health of millions of Americans. Every year, the standards would prevent as many as 2,500 premature deaths, 1,000 emergency room visits, 1,500 heart attacks, 17,000 cases of aggravated asthma, 32,000 cases of upper and lower respiratory symptoms, and 130,000 days people must miss work (Table 6-3). H.R. 2681 is a people-killer, not an anti-dote to “job-killing” regulations.

PCA’s study is not credible: only a cursory examination reveals gross exaggeration of compliance costs and employment impacts, and an economic analysis that is fundamentally flawed—i.e. an analysis that is not based upon basic principles of economic theory and analysis. It is not possible to do justice to the difference in sophistication between EPA’s very detailed and careful analysis (174 pages) versus this industry study (37 pages), but let me offer just a few observations, starting with a comparison between EPA and PCA estimates.[1]

PCA’s compliance cost, price impacts, and job loss estimates are way out of line with those of EPA (and it’s worth keeping in mind EPA regulatory cost estimates have historically been overstated [2]):

How is it that PCA estimates for compliance costs are almost 7 times higher than EPA’s? And the job loss estimates so negative relative to EPA’s modest projection of 350 net new jobs?

Perhaps it’s because EPA is required to use established economic methodology, and justify and document all of its assumptions to economists at the Office of Management and Budget—ensuring independent review by the career economists that evaluate all government regulations. In contrast, PCA is accountable to no one.

Behind the flimsy numbers are numerous methodological flaws in the analysis. Here are some of them:

1) The study ignores how much of the compliance costs can be passed on to consumers, and how the price of domestically produced cement will fare relative to imported cement. In order to estimate decreases in domestic production that might result from the standard, two critical steps are required—neither of which are mentioned in the report as part of the analysis. First, you have to have an estimate of the percentage of costs industry can pass on to consumers. It turns out this is quite important to their argument, because demand for cement is relatively “inelastic,” which means that a significant portion of costs can be passed on to consumers. Put another way, cement manufacturers can recover a large portion of their abatement costs through price increases. EPA estimates that the average compliance cost of $5.20/ton will be offset with an average price increase of $4.50/ton, i.e. 87% of costs can be recovered (Table 3-6, based upon detailed industry price and purchasing data). Second, you have to compare prices between domestic and imported cement. PCA predicts a huge volume of domestic production will be displaced by cement imports, but nowhere can you even find the price of imported cement. Without this information it is simply not possible to estimate how much imports will displace domestic production.

2) PCA’s analysis (for all the air regulations combined, not just the two in the bill) projects enormous job losses in the construction sector due to supposedly huge increases in the cost of cement, but at the same time huge volumes of cheap imported cement. You cannot claim drastic increases in cheap imports and at the same time huge price increases in domestically produced cement—domestic producers have to maintain competitive prices. PCA finds that, by 2015 (across all of the regulations examined), 24 million tons of imported cement will flood the market, an amount equal to more than 29% of total consumption (calculated from p. 11 and p. 35 tables). By comparison, without the standards, imports would equal about 12% of total consumption (up from 9.2% in 2010). PCA’s huge increase in both cheap imports and domestic prices doesn’t make any sense.

3) PCA assumes all pollution control equipment must be paid for up front, rather than annualized over their expected lifetime, which is 20 years for most devices. Assuming all costs are incurred upfront artificially produces negative short-run profits and the need to shut down operations.

4) The analysis does not include increased production in cement plants absorbing output formerly made by plants that decide to reduce production (EPA estimates 10 of 115 plants could fall idle or permanently shut down). This would both moderate price increases (by maintaining supply levels), and offset compliance costs (through greater sales volume).

5) The analysis does not discuss, and thus does not appear to model, where the money formerly spent on cement goes.

To correctly estimate the economic impacts of the cement rules, you have to estimate not only decreases production in directly impacted sectors, but also where the expenditures formerly spent on this output go. Consumers will spend that money on other goods in the economy, increasing output in those sectors. PCA ignores this obvious consequence altogether.

Further, PCA fails to account for employment associated with the production and sales of pollution abatement equipment. In reality, someone will earn money from producing and selling pollution control equipment, as will the people that transport, install, and maintain it. Some cement firms themselves will directly hire these workers. Together, expenditures on other goods and services and pollution control equipment will generate significant income and jobs—none of which are acknowledged or estimated in PCA’s report. Were these accounted for, not only might the net change in employment be zero, it would likely be positive. This would occur if expenditures shift toward more labor-intensive sectors of the economy, and there are unemployed workers to hire. And, in fact, the pollution control industry is more labor-intensive on average than the rest of the economy and unemployment is high. Consistent with the historical record on jobs and environmental protection, the cement standard is likely to generate more jobs than the small number of manufacturing jobs it might displace.

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The Bottom Line:

Given highly exaggerated cost estimates, and the lack of any real economic analysis translating these costs into employment impacts, it’s not surprising that PCA’s analysis is so at odds with EPA’s. But then, EPA’s estimates are heavily reviewed while PCA’s are not.

Polluters’ sole aim in studies like this is to produce alarmist numbers and fear. We have seen this pattern time and time again from industry: every time EPA proposes new standards, it responds with hysterical prognostications. But they never come true, and they won’t here either. No serious economist would consider PCA’s analysis credible; in fact, it is embarrassing.

Rather than hurting the economy, pollution standards improve society’s well being. EPA has four decades of experience issuing pollution standards that have delivered enormous net benefits. As EPA passed its 40th birthday (December 2, 2010), we can celebrate an economy with a GDP three times its 1970 size, household incomes that are on average 45% higher, the creation of tens of thousands of jobs in the environmental protection industry (click here for a recent blog on Obama’s decision not to strengthen the ozone standard, also discussing job creation in the pollution abatement sector). The Clean Air Act alone has saved millions of lives and prevented as many chronic illnesses, with benefits exceeding costs by more than 26 to 1 in 2010 alone (for a discussion of these, click here).

[1] The PCA estimates presented here are with respect to just the standards in this bill, the “NESHAP” and “NSPS” requirements under the Clean Air Act—the study also considered a number of other EPA regulations as well.

[2] “How accurate are Regulatory Cost Estimates?” Winston Harrington, et al., Resources for the Future. March 5, 2010. http://www.rff.org/wv/Documents/HarringtonMorgensternNelson_regulatory%20estimates.pdf.

Pulp and paper industry's junk economic analysis of EPA toxic emission standards for industrial boilers

2011-09-12T18:41:23Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

In response to toxic air pollution standards finalized by the Environmental Protection Agency (EPA) for industrial boilers, the American Forest and Paper Association (AFPA) just released a ‘study’ (conducted by Fisher International Inc.) projecting massive job losses from the proposed standards. However, only a cursory examination reveals gross exaggeration of compliance costs and employment impacts, and a lack of understanding of even introductory-level economics. It is not possible to do justice to the difference in sophistication between EPA’s very detailed and careful analysis (251 pages) versus this industry study (17 pages), but let me offer just a few observations, starting with a comparison between EPA and AFPA estimates.

AFPA’s compliance cost and job loss estimates are way out of line with those of EPA, to put it mildly (well, beyond mildly):

AFPA

Compliance costs

Pulp and Paper

EPA

Compliance costs

All affected industries

AFPA

Employment changes

Pulp and Paper

EPA

Employment changes

All affected industries

Approx

$3 billion

$1.4 billion

20,541*

-3,100 to +6,500*

(+1,700 mid point)

How is it that AFPA estimates compliance costs for one industrial sector are more than twice as high as EPA’s estimates for all affected industries combined? Even worse, how is it that AFPA’s job loss estimate for one sector is almost 12 times as high as EPA’s for all affected industries combined?

Perhaps it’s because EPA is required to justify and document all of its assumptions to economists at the Office of Management and Budget, ensuring independent review by the career economists that evaluate all government regulations. AFPA is accountable to no one.

Behind the shoddy numbers are numerous methodological flaws in the analysis. Here’s three of them:

1) The study makes an arbitrary and unjustified assumption for how compliance costs translate into job losses. Instead of using standard economic methodology, the authors create an arbitrary method that bears no relationship to economic theory.

In order to assess potential decreases in output that might result from pollution abatement costs, three statistics are needed. First, you need to estimate how much of the abatement costs will be passed on to consumers (i.e., how much firms increase the price of their products). Second, you need to estimate the change in demand for products that occurs in response to the price increase (technically, economists refer to this relationship as “demand elasticity”). Third, you need to assess if, and how many, firms cannot afford compliance costs and consequently close operations. (Economists call this type of assessment “incidence” analysis). None of these statistics are used to estimate AFPA’s assumed job losses. Instead, the authors make an ad hoc assumption that a mill will shut down if compliance costs exceed a mill’s profit margin. This assumption, combined with the vastly overstated compliance costs, results in an estimated 14% decrease in pulp and paper jobs. Wow. Drawing upon peer reviewed research, EPA estimates that, industry-wide (i.e. all affected sectors), average domestic production could decrease by only about .01%, and average price increases of only .01%. Jobs are not directly proportional to production levels, of course, but surely AFPA’s estimates cannot possibly be even close to correct.

2) The analysis does not discuss, and thus does not appear to model, where the money formerly spent on pulp and paper products goes.

To correctly estimate the economic impacts of the boiler rules, you have to estimate not only decreases production in directly impacted sectors, but also where the expenditures formerly spent on this output go. Consumers will spend that money on other goods in the economy, increasing output in those sectors. AFPA ignores this obvious consequence altogether, because it’s not convenient to its biased cause.

Furthermore, AFPA fails to account for output associated with the production and sales of pollution abatement equipment. In reality, someone will earn money from producing and selling pollution control equipment, as will the people that transport, install, and maintain it. Together, expenditures on other goods and services and pollution control equipment will generate lots of income and jobs—none of which are acknowledged or estimated in the industry report. Were these accounted for, not only might the net change in employment be zero, it could actually be positive. This would occur if expenditures shift toward more labor-intensive sectors of the economy. And, in fact, the pollution control industry is more labor-intensive on average than the rest of the economy. Consistent with the historical record on jobs and environmental protection, the boiler standard could generate more jobs than any manufacturing jobs it displaces.

3) The analysis incorrectly converts capital costs to annual costs.

It assumes half of capital costs are funded by equity, which fully expenses the costs in the year they are incurred. This is inappropriate. While equity may require a higher rate of return than debt, it is still amortized over a multi‐year period. This error by Fisher tends to overstate the costs of the proposed rule.

-------

The methodology employed in this study is the same as the one done by Fisher last year, when the rulemaking was still being drafted. At that time, we asked a respected and widely published economist well known in the environmental economics field to grade their report as if it were an assignment one of his undergraduate courses (Disclosure: we gave him honorarium for his time). (Click here for this and professor grades of other industry studies).

Here was the good professor’s final assessment:

"In sum, the methods used by Fisher are fundamentally flawed. The resulting estimates of job losses are completely invalid.

If I were grading this, I would give it an F. The economics is all wrong (lack of an incidence analysis or acknowledgement of its importance; failure to draw on the relevant literature), which of course would be my main concern. But the paper has some redeeming features ‐‐ the English grammar is decent and typically better than I see on a poor paper. Furthermore, I would want to encourage the student to work harder on the next assignment."

The Bottom Line:

Given highly exaggerated cost estimates, and the lack of any real economic analysis translating these costs into employment impacts, it’s not surprising that AFPA’s analysis is so at odds with EPA’s. But then, EPA’s estimates are heavily scrutinized while AFPA’s are not.

These industry impact estimates were bought and paid for by polluters whose sole aim is producing alarmist numbers and fear mongering. We have seen this pattern time and time again from industry: every time EPA proposes new standards, industry responds with hysterical prognostications. But they never come true, and they won’t here either. No serious economist would consider AFPA’s analysis credible; in fact, it is embarrassing.

Rather than hurting the economy, pollution standards improve society’s well being. EPA has four decades of experience issuing pollution standards that have delivered enormous net benefits. As EPA passed its 40th birthday (December 2, 2010), we can celebrate an economy with a GDP three times its 1970 size, household incomes that are on average 45% higher, the creation of tens of thousands of jobs in the environmental protection industry (click here for a recent blog on the ozone standard, also discussing job creation in the pollution abatement sector), and tens of thousands of prevented chronic illnesses and saved lives (for a discussion of these, see my colleagues’ blogs here and here).

Apologia to my readers for having to repeat text from my other blogs. What else can a poor economist do when industry keeps making the same “mistakes”...

-------

* These are only direct jobs in the mills themselves and do not include effects in industries that supply inputs to them nor changes in labor income spent economy-wide as workers lose or gain jobs. AFPA estimates 87,299 for this; EPA does not do the calculation beyond the sectors directly impacted.

Smog in a fog: President Obama abandons the ozone standard, killing jobs rather than protecting them

2011-09-07T20:40:21Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

Last Friday, just before the holiday weekend, President Obama caved to GOP demands by withdrawing plans to strengthen the nation’s public health standard for ozone pollution (“smog”) under the Clean Air Act.

It’s hard to make sense of. Tightening the ozone public health standard to 70 parts per billion (as EPA intended) from the current level of 75 ppb would save 4,300 lives and prevent 23,000 cases of aggravated asthma, 770,000 hospital visits, 2,200 heart attacks, and 2.6 million days of missed work or school, every year. All told, it would bring an estimated $37 billion per year in health benefits for kids and adults (and that’s only the ones you can monetize), with compliance costs between $19 and $25 billion.

The most unfortunate aspect of this bad decision is that the president has given an official blessing to the polluters’ worst propaganda and perpetuated the decades-old myth that public health and environmental protection must be traded off against jobs. But public health and environmental safeguards don’t destroy jobs, they create them -- especially during a recession or a weak recovery.

Though the political class falls prey to the myth of the public health/jobs tradeoff, the public doesn’t buy it: across the political spectrum, the public strongly supports the Environmental Protection Agency (EPA) and its record in protecting their health.

There are many reasons why environmental protection creates rather than destroys jobs. Some of the most important are:

Producing, installing, and maintaining pollution control equipment requires labor and capital.
There is plenty of unused labor and capital during a weak recovery, and both are a bargain (witness near zero interest rates now).
The costs of complying with environmental regulations are an extremely small portion of total production costs.
Regulations are phased in over many years, giving plenty of time for innovation and creative solutions.

The rest of this blog provides real data on:

Job creation in the pollution control sector
Compliance costs in impacted sectors
Employment trends in impacted sectors

1. Job creation in the pollution control sector

I’ve written extensively on the substantial job creation resulting from the nation’s environmental regulations, and the lack of evidence pointing to any significant job losses (more on this below under section 3).

The fact is pollution control equipment is a big business. According to the U.S. Department of Commerce, “[T]he U.S. is regarded as a world leader in many environmental technology categories including: engineering, design, construction, consulting services;…stationary and mobile air pollution monitoring and control equipment;…and information systems/software for environmental management analysis.” In 2007, air pollution control equipment alone generated more than $18 billion in revenue (see p.5 for citations). One example: the International Brotherhood of Boilermakers reported that the number of boilermakers in the United States increased by 35 percent over just two years – from 1999 to 2001—as a result of the EPA’s standards to implement the Clean Air Act (see p.6 for citation).[1]

Any air pollution standard we promulgate today will unquestionably create jobs in the pollution control sector, especially now during our anemic recovery. With weak demand, investment has come to a near standstill—with no obvious place to turn. As Paul Krugman aptly put it:

“[Y]ou can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.”

With this decision, the Administration is likely killing jobs, not protecting them. We cannot say exactly how many jobs would be created by the ozone standard being strengthened, but based upon analyses of other pending Clean Air Act rulemakings, probably somewhere in the tens of thousands (click here for one study that estimates two rulemakings creating 290,000 jobs, and here for another estimating 90,000 jobs for another rulemaking). That would certainly help right now. (Note: you cannot add cost or employment estimates for separate analyses of air standards, as pollution control methods used to comply with one standard are often the same as those needed for another).

2. Compliance costs in impacted sectors

Polluters always scream that the cost of regulation will be enormous, resulting in such high price increases that demand for their products will crash. In turn, they say, they will be forced to lay off huge numbers of workers. But, if you look retrospectively at past rounds of clean air standards, they can’t produce any data supporting their apocalyptic projections.

After 40 years of cleaning up a polluted America, one cannot find any example of industries’ dire predictions coming true. I know because I have tried.

One reason for this is that costs almost always end up being far less than projected, even those estimated by the EPA. In fact, ironically, the exact opposite happened with projected electricity prices resulting from the 1990 Clean Air Act Amendments. The power sector, the industry most heavily affected by the Amendments, saw electricity prices actually decline during the 1990s, alongside dramatic reductions in pollution (See Figure 1).

Environmental compliance costs are also a very small portion of production costs. The U.S. Census Bureau conducted an annual survey of the U.S. manufacturing sector and found that pollution abatement operating costs were on average only 0.4% of overall manufacturing costs, including not just air pollution controls but all other abatement costs. Since 1980, the share of total revenues allocated to pollution abatement by U.S. manufacturing has been small, ranging from 0.4% to 0.6%, despite a substantial increase in the number and scope of environmental regulations impacting this sector. Even for the most heavily regulated industries, the figure is typically between 1% and 1.5% (see p.7 for citations).

3. Employment trends in impacted sectors

We also have actual experience with changes in employment and the Clean Air Act. A fellow economist (Helene Jorgensen) and I compared employment trends in the decade prior to the 1990s with those in the 1990s, in industries expected to be directly impacted by the Amendments.[2]

We were surprised by the results:

While employment trends in manufacturing continued on their downward path of the last four decades, with the de-industrialization and outsourcing of American production, the rate of job losses slowed for industries directly affected by the Amendments, while it increased for other manufacturers.

Specifically, in the business cycle preceding the Amendments, 1979-1989, total employment in these sectors declined about 10%--versus roughly 2.5% between 1989-2000. In contrast, the rest of the manufacturing sector saw employment losses of almost 5% in the first time period, versus 8% in the second.[3] (Controlling for the business cycle avoids selectively choosing beginning and ending dates to give desired but misleading results).

These overall trends of course don’t show the Clean Air Act made the employment picture better in these industries. We can say, however, that one would expect the exact opposite outcome if the industry allegations had merit.

With the ozone standard, we can also look at geographical data. A recent study by the Center for American Progress reported that parts of the nation failing to meet current smog standards – thereby necessitating stronger clean air measures – had job growth and employment statistics similar to the rest of the country. The report shows that previous industry claims that ozone standards were unachievable have been shown time and again to be false.

Conclusion

Industry’s dire claims about the ozone standard and other pending measures protecting public health simply lack credibility. When President Obama delivers his jobs-plan speech tomorrow, Americans will want to know whether this is the president’s first Clean Air Act cave, or the last. He didn’t have to pick a poison.

[1] International Brotherhood of Boilermakers, Boilermaker Labor Analysis and Installation Timing, March 2005, EPA Docket OAR-2003-0053 (docket of the Clean Air Insterstate Rule).

[2] The sectors we chose were those identified in the two prominent industry studies criticizing the Amendments, as well as industries that are relatively energy-intensive and therefore the most likely to be affected by increasing electricity costs. Combined, these included the following sectors: stone, clay and glass; primary metals; fabricated metals; electrical equipment; petroleum refining; miscellaneous petroleum and coal activities; iron and steel foundries; paper mills; agricultural chemicals; plastic materials & resin; pharmaceutical preparations; rubber and plastics; transportation equipment; instruments; and industrial machinery. The two industry-funded studies were funded by the Business Round Table and the National Association of Manufacturers (NAM), respectively. NAM also claimed that the energy price increases they predicted, which did not occur, would decimate the housing industry. Instead, the 1990s saw a housing boom, spurred by low interest rates and lax financial market regulations.

[3] Source: Bureau of Labor Statistics, Employment from the Current Employment Statistics Survey (National, SIC basis). Discontinued BLS database.

Can't get “NERA’” to the truth: industry's disingenuous attack on EPA's ozone analysis

2011-08-16T17:04:40Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

In a last minute attempt to stop the Environmental Protection Agency (EPA) from protecting public health, industry is furiously trying to weaken pollution standards that prevent asthma, acute respiratory illnesses, and deaths. Funded by the American Petroleum Institute, a recent report by National Economic Research Associates (NERA) attempts to discredit EPA’s benefit cost analysis of proposed ozone standards. Its attack portrays EPA as being intentionally deceptive and dishonest, and incorrectly accuses the agency of violating the law. A closer look under the hood, however, shows that it’s NERA that is being disingenuous. It also shows a misinterpretation of the law.

NERA’s analysis is not surprising. Taking liberally from a previous blog of mine, the firm, and its author Anne Smith, have been in the business of anti-regulatory industry-funded studies for a long time. Over the years, the company has conducted numerous analyses at the behest of polluters (e.g. click here, here and here for studies conducted for the National Association of Manufacturers, the American Petroleum Institute, and the Electric Power Research Institute, respectively). Last year, NERA also produced a state-by-state analysis against the proposed ozone standards (click here and here for critiques of a study that relied upon this analysis, by Professor Richard Howarth of Dartmouth College and myself, respectively). As former Vice President of Charles River Associates, Smith used to conduct similar analyses against regulations (click here for CRA’s analysis of the Climate Security Act of 2007 supported by the American Petroleum Institute and Edison Electric Institute, and here and here for their analysis (funded by the National Black Chamber of Commerce) of the American Clean Energy and Security Act of 2009 and my critique of it, respectively).

The report

The analysis makes six key points, all of which are misleading, wrong, or both:

1) Smith claims that EPA’s science advisory committee, CASAC, disagrees with the 2008 findings from the National Academy of Sciences determining a link between ozone and mortality. That CASAC viewed NAS’s findings as “not ready for prime time.” This is wrong. CASAC did not express this view. It held this view in the past, with respect to the science that was available up to 2006. It did not express this view with respect to the 2008 NAS findings or any other research since then.

2) Smith claims that EPA is legally not allowed to consider any new science produced since the 2008 proposed standards—that it cannot do that until the next formal review period in 2013 (standards determining safe levels are reviewed every 5 years). This is also wrong. NERA is confusing the process of determining what the safe level can be versus evaluating it. In determining the level, and therefore the standard, the EPA administrator can only use what was scientifically determined to be safe based upon the science that was available during the 2008 review (the NAS report came out later in 2008, after the proposal). The state of the science at the time of the 2008 proposal, which CASAC agreed with, was that ozone levels needed to be somewhere between .060 to .070 ppm in order to protect human health. That is an entirely separate part of the regulatory process. In evaluating the health and economic impacts of the standard, EPA can and should use all available evidence, which certainly would include the most recent science.

3) Smith states that EPA is misrepresenting the benefits of the ozone standard by also including benefits obtained from reducing particulate matter pollution; that only the benefits of reducing ozone should be calculated. This is scientifically naïve at best: the same pollutants that form ozone also produce particulate matter. The two cannot be separated. Reducing one of the pollutants reduces the other, by definition.

4) Smith claims that EPA arbitrarily increased the monetary value given to reducing mortality risk. What she leaves out is that the increase actually corrected an arbitrary decrease made under the Bush Administration. EPA simply reinstated the value to its original level in 2000, based upon the economics literature and approved by EPA’s external science advisors.[1]

5) EPA also made a standard adjustment to the 2000 value, which increased the value of mortality risk reduction further. Smith contends that this increase was based upon a rationale that “seem[ed] purely arbitrary.” She leaves out the actual science-based reason, which EPA explicitly discussed: mortality risk reduction benefits, which are approximated using how much workers require in additional wages to perform riskier jobs, must be adjusted for increases in income (and hence wages) over time (benefits of the standards extend into the future). This is both theoretically correct and standard economic practice.

6) Smith asserts that EPA’s linear extrapolation of health damages to lower levels of pollution, specifically levels that are not observed in the real world, is scientifically invalid. In fact, this is a very common scientific procedure when no data is available for unobserved levels, and perfectly legitimate. Linearity is a “middle ground” assumption intended to give equal weight to two possibilities concerning the relationship between pollution levels and health impacts. Loosely speaking, one possibility is that as pollution levels decrease (increase), health damages decline (increase) relatively slowly (quickly). The other is that as pollution levels decrease (increase) health damages decline (increase) relatively quickly (slowly). In contrast, a linear extrapolation assumes an equal amount of reduction in health damages for any given level of reduction no matter what level you start from.

Conclusion

Overall, the author’s critique of EPA’s benefits analysis is wrong, misrepresents the facts, and contradicts basic science. This should not be surprising: the industries that regularly hire them are legally obligated to maximize profits for shareholders. As we know all too well, this can come at the expense of the health and well being of everyone else.

[1] The document NERA cites, EPA’s 2009 RIA the NO2 standard, contains the following text: “As is the nature of Regulatory Impact Analyses (RIAs), the assumptions and methods used to estimate air quality benefits evolve over time to reflect the Agency’s most current interpretation of the scientific and economic literature. For a period of time (2004‐2008), the Office of Air and Radiation (OAR) valued mortality risk reductions using a value of statistical life (VSL) estimate derived from a limited analysis of some of the available studies… However, the Agency neither changed its official guidance on the use of VSL in rule‐makings nor subjected the interim estimate to a scientific peer‐review process through the Science Advisory Board (SAB) or other peer‐review group… Therefore, the Agency has decided to [now] apply the VSL that was vetted and endorsed by the SAB in the Guidelines for Preparing Economic Analyses (U.S. EPA, 2000) while the Agency continues its efforts to update its guidance on this issue.” (pp 5-26, 5-27)

Climate change endangering public health; new interactive site gives state by state data

2011-08-04T17:57:51Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

Recently I posted three blogs (click here, here, and here) summarizing a state-level analysis of various economic damages we can expect from climate change, and the different dollar figures attached to them.

Drawing upon recent research, NRDC has now just launched a new site with state-level public health impacts currently being felt as a result of climate change--and what to expect in the future.

For each state, data is given on extreme flooding incidents, extreme drought incidents, exacerbated ozone pollution (which causes respiratory and cardiac illnesses), ragweed pollution (which increases asthma), extreme heat events, and infectious disease outbreaks (e.g. West Nile virus, Lyme disease, and Dengue fever). It also gives you steps you can take to protect your family from these threats, information about state plans that are being implemented (or not) to address them, and links with more information about the threats--what they are, how they relate to climate change, and what they mean for you and your family.

The information is given in an excellent user-friendly map format--just click on whatever state you are interested in and learn your local stats.

Pay Now or Pay Later III: report finds all states lose from inaction on climate change

2011-08-02T19:03:58Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

(This blog is Part III of three part blog).

A recent report released by the American Security Project, a think tank whose bipartisan board of directors brings together a broad range of experts, gives a sobering picture of what we stand to lose by failing to tackle climate change.

The report draws upon various state-level studies and economic statistics, a sort of hodgepodge of what we know, and might reasonably speculate upon. It details past and current climate events likely caused by our greenhouse gas emissions, others expected to occur with or without mitigation and, most of all, how much worse things might get if we continue doing nothing. No state is spared.

The report is extensive, so my humble goal with this three-part series blog is to give you a taste of it, and hopefully entice you to take a deeper dive. The table below gives examples from a few states, including Arkansas, New Mexico, Nevada, Florida, Washington, Oregon, and New York (click here for links to all 50 states). These by no means include all damages in these states; that’s simply not possible.

Given the uncertainty of future impacts, many damages are not quantified. Instead, the size of the economic sector exposed is given. Note that this does not mean that the entire sector will be lost. It is simply intended to give the reader a sense of the potential magnitude of an impact: the larger the sector or economic activity exposed, the higher absolute damages are likely to be. Where years in which damages occur by are given, they are reported in the table. Otherwise, no date was specified.

For an excellent overview of impacts in the US as a whole, I also recommend a 2009 report from the US Global Climate Change Research Program, and a new report just released by the National Academies of Science.

Government vastly underestimates potential health and environment damages from climate change

2011-07-25T19:15:22Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

According to a new (peer reviewed[i]) analysis , the economic, social, and environmental damages to our children and grandchildren from climate change could be far larger than the value currently used by the US government to evaluate climate policy. Discussed more below, now that the Environmental Protection Agency (EPA) must set carbon pollution standards for cars, power plants, and other sources, the value placed on climate damages will be crucial in any evaluation of the benefits and costs of proposed standards.

The authors find that if some of the more dangerous projections from recent climate research come true, damages could exceed the official figure by a factor of 42, or $21 per ton of CO2 emitted versus $893. The difference between the two is equivalent to $0.21 per gallon of gasoline versus $9.00.

The authors were conservative. The $893/ton estimate may still understate potential damages from climate change: it was not the maximum value among the authors’ estimates. It was the “95th percentile” value, which means that 5% of the estimates under dangerous climate change were higher, but not reported. Equally scary, many of the most important damages were not taken into account because they cannot be monetized. To name just a few: damages resulting from socio-political conflicts over land and water resources, from socio-political conflicts from potentially millions of climate refugees, from the loss of all coral reefs, from mass species extinction, or from pain and suffering over loved ones who die or get sick (e.g. from extreme weather events, or disease and illnesses such as malaria, westnile virus, and asthma). The easier things to measure comprised things like changes in heating and cooling costs, and property losses due to sea level rise.

Also not factored into the equation is the tremendous injustice to the poor associated with climate change: some of the world’s poorest regions (and populations within countries) will bear the worst damages (e.g. Africa), while having contributed the least to the problem. Ironically, since many of these areas did not share in the wealth generated from fossil fuel combustion, they have the least ability to deal with impacts. As discussed below, weighing damages by income can increase damage estimates by an order of magnitude (see just before Table 1 below).

Still, $893/ton of CO2 is orders of magnitude higher than estimated costs for even the most aggressive emissions targets that have been proposed, all of which would pass a cost-benefit test with flying colors. For example, the most recent proposed bill in the US Senate, the American Power Act, called for a 17% reduction in CO2 emissions below 2005 levels by 2020 and 83% by 2050. The EPA estimated the cost of this at roughly $21/ton; their worse-case scenario projected $46/ton.

These numbers matter, and will gain increasing traction in the coming years. As the Supreme Court has affirmed, the Clean Air Act requires EPA to regulate CO2 and other global warming pollution now that its scientists have determined they endanger public health. As part of the regulatory review process, the agency compares damages to mitigation costs; estimated damages from climate change will play a prominent role. Indeed, EPA has already used damage estimates in several rulemakings.

Scenarios examined

The authors re-calculated the government’s estimates using one of the three models used by EPA—the one that produced values in the middle of the other two, called DICE. They looked at four scenarios, changing a few key assumptions to reflect recent scientific research. Much of the data EPA used relied upon out of date knowledge, based largely upon the United Nation’s International Panel on Climate Change (IPCC) 2007 Assessment Report. Since then, scientists’ projections have become more ominous by the day, and impacts are happening much faster than originally predicted.

Accordingly, the scenarios examined used more pessimistic climate change assumptions:

Scenario 1: The default scenario to which the others are compared. Uses EPA’s assumed damages for a given temperature increase, and EPA’s assumed rate of change in damages the higher the temperature increase.
Scenario 2: Damages assumed to increase by a factor of four for a given temperature increase, corresponding to a 2010 publication by Michael Hanemann[ii] (University of California—Berkeley); no alteration to the rate-of-change assumption.
Scenario 3: Damages assumed to be increasingly larger the higher the temperature increase, corresponding to a 2009 publication by Martin Weitzman[iii] (Harvard University). The default model assumes temperature increases have to reach 34 degrees F before damages reach only 50% of world GDP. The new “damage function” (the mathematical formula that converts temperature changes into monetized damages) lowers this threshold to 11 degrees, and for 22 degrees stipulates a 99% loss. Put another way, a 22 degree increase would mean that any output produced in the economy would be canceled out by climate damages. Importantly, this puts a cap on total impacts. It also assigns an equal value to damages incurred by poor areas as those to rich areas. This is because GDP reflects only losses that can be monetized (the market value of goods and services produced in the economy), [iv] and places no value on equity. As discussed above, in that sense the authors’ estimates were conservative.
Scenario 4: Scenarios 2 and 3 combined.

Are these assumptions plausible? Yes, if you consider the world today after an increase of only 1.4 degrees F. Extreme weather events (e.g. record heat waves, floods, droughts, hurricanes) and numerous other environmental changes associated with climate change, are accelerating. Of equal if not more concern is that fact that many impacts have not yet been felt from the 1.4 degree increase, due to long lags in the system. One example is declining arctic summer sea ice cover, 30% of which has vanished over the last four decades. As it continues to melt, more of the earth’s surface will be dark, resulting in less heat being reflected back into space. Or consider melting permafrost on the earth’s surface. As this progresses, carbon stored in the earth is being released, increasing greenhouse gases further.

Results

For each scenario analyzed, the authors presented estimates using two different “discount rates,” 1.5% and 3% (discussed further below under “Explanation of the discount rate”). They also presented the average and 95th percentiles (see third paragraph above for explanation). As you’ll see shortly, these specifications make a huge difference.

Table 1 below summarizes the results. I supplement them with another analysis (Hope and Johnson, 2010[v]), where we calculated the default scenario at the 99th percentiles using a 1% discount rate—these are highlighted in purple. Notably, government guidelines stipulate that discount rates of 1% to 3% are appropriate for costs and benefits spanning multiple generations. Given this, it is curious that the lowest rate used by EPA was 2.5%. In this respect, the authors were again being conservative, by stopping at 1.5%. (See “Explanation of the discount rate” section below for discussion of what discounting is and why a range is considered appropriate). In addition, the authors weigh damages to poor countries equally as to those to rich countries. Similar to other research in the literature, Hope and Johnson (2010) show that “equity weighting,” a technique that weighs damages more highly for poorer people, results in much higher damage estimates. For one of the models used by EPA (FUND), equity weighting increased damages by as much as 10 fold.

The report’s highest estimate, $893, is highlighted in yellow. For any point on the distribution in the EPA scenario, damages approximately double when going from a 1.5% to 1%, and more than double when going from the average to the 95th percentile. The average increase when going from the 95th percentile to the 99th percentile, for any given discount rate, is about 20%.

In Table 2, I apply these rates of increase to estimates in Scenarios 2, 3 and 4 (highlighted in blue), to get a crude idea of how much higher their estimates might have been at the 1% discount rate and 99th percentiles. This is of course very inexact, as the actual percent increases would differ somewhat if they were actually calculated, but still provides a reasonable approximation. With a discount rate of 1%, and measured at the 99th percentile, damages could exceed $2,000 per ton of CO2 emitted in Scenario 4. Again, this makes no adjustment to weigh damages to the poor more heavily, which can radically increase damages, and excludes non-monetizable damages.

But even if you stick with Scenario 1’s optimistic climate change assumptions, using the lower end of the government’s recommended discount rate for intergenerational discounting (1%) gives an average damage estimate of $229 per ton of CO2. The 95th and 99th percentiles give $527 and $643, respectively. At worse, EPA’s $21 central estimate for damages (the average over the three models used, using a 3% discount rate (not in Tables 1 and 2)) is equal to the estimated cost of reducing emissions.

Explanation of the “discount rate”

There is a range of opinions as to the correct discount rate to use, based upon the concept of returns on investment.

Taking energy efficiency as an example, suppose I am trying to decide whether to make a $1,000 investment to improve my house insulation. I might want to make a return (through reduced energy bills) at least as good as one I can get from investing in alternative assets. For example, assume other assets give an annual return of 3%. To give up $1000 now to improve insulation, I might require at least $30 in savings per year—what I could have earned elsewhere (I may require less, if I also get personal satisfaction from reducing pollution).

This framework works well for many types of investment decisions, but falls apart with climate change. One reason is that the decision to invest in emissions reduction is not as simple a trade-off as the one between energy efficiency savings and market returns. Unlike these two investments, climate mitigation does not have a positive expected return between the two alternatives. Nor are the returns even remotely predictable. Instead, climate mitigation is a highly uncertain investment, one outcome of which could be preventing enormously negative returns resulting from catastrophic, or even highly damaging, climate change. Another possible outcome is getting a slight net gain or loss relative to what you could have earned in the market. For instance, mitigation might prevent a 3% loss in GDP at an opportunity cost of a 2% market return (a slight net gain of 1%), or vice versa (a slight net loss of 1%).

(For those interested in the mechanics, here's the formula, see just below the conclusion).

If you are risk averse, you’d be thinking of investing in mitigation somewhat similarly to how a parent thinks when investing in life insurance. You’d be willing to pay a lot to insure against a worse case but low probability outcome—your death and its financial impact on your children. On the other hand, if you are risk neutral or love taking risks, you’d view mitigation as worthwhile if expected benefits were equal to or greater than expected costs. You’d be also be assuming monetized impacts are comparable to market returns, and that non-monetizable impacts (e.g. saved lives, avoided violent resource conflicts, preserved ecosystems) either don’t matter or are not that large.

How does this relate to the discount rate? Insurance investments give negative expected returns—you only “make a profit” in the event of a disaster. For most people, that disaster doesn’t occur, and they get a negative return on insurance investments. Thus, any discount rate higher than 0% implies that you require a positive expected return. In this sense, even a discount rate of 1% might be viewed as high.

Thus, what discount rate you advocate depends critically on the degree to which you view climate mitigation as an insurance investment, versus a problem of maximizing expected returns relative to markets. Separately, to the extent that you view climate mitigation from an insurance framework (discussed in the previous section), the 95th and 99th percentiles are the damage estimates that should be used to guide climate policy: it’s the lower probability but disastrous outcomes that matter.

The formula for discouting is:

Present Value = Future Value/(1 + d.r.)^t, where t is the year in which the benefit or cost occurs, d.r. is the discount rate and ^ is the symbol for raising the term to the power of t. So, as an example, $101 worth of damage in 1 year is counted as $101/(1 + .01)^1 = $100.

Conclusion

The estimated damages from climate change presented here range from $21 per ton of CO2 to more than $2,000. None of these estimates account for the worst impacts from climate change that could not be monetized, such as those resulting from socio-political conflicts over land and water resources, socio-political conflicts from potentially millions of climate refugees, losses of all coral reefs, mass species extinction, or pain and suffering from public health impacts from increased disease and illnesses such as malaria, westnile virus, and asthma. To name just a few. And they make no adjustments for poorer regions bearing larger burdens (a dollar’s worth of damage is assumed to have the same relative impact regardless of income and wealth).

The $21 estimate ignores worse-case outcomes, relies upon optimistic climate change projections that do not reflect the most recent climate research, and assumes the uppermost value of the government’s recommended discount rate range for intergenerational discounting (see “Explanation of discount rate” section above). As a central estimate, it also assumes people are not risk averse to highly damaging or catastrophic climate change. Even despite all of these flaws, EPA’s central estimate it is not less than its estimated cost of reducing CO2 emissions.

Using EPA’s more optimistic climate projections, at the lower end of the government’s discount rate range (1% from its 1%-3% range), EPA’s own model projects average damages of $229/ton of CO2, and a 5% and 1% chance of damages exceeding $527/ton and $643/ton, respectively. Making adjustments to reflect more recent and pessimistic climate science gives a 1% chance of damages exceeding $2,000.

What left is there to say?

This blog was updated July 27th, 2011 to add the discount rate formula.

[i] The report was peer reviewed by a well published scholar in climate change economics who teaches and does research at the London School of Economics (LSE). Consistently ranked one of the world’s top universities, LSE also comes out way ahead in the social sciences (where economics resides)—ranking 5th, 4th, 3rd and 2nd in the last five years.

[ii] Hanemann, M (2010). Chapter 17, in Climate Science and Policy, eds. Schneider, S.H., and Rosencranz, A., Mastrandea, M.D., and Kuntz-Duriseti, K. Island Press: Washington D.C.

[iii] Weitzman, M.L. (2009). On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics 21:255-287.

[iv] Just about all non-market goods are not monetized. One notable exception is the inclusion of what people are willing to pay to reduce their risk of death. For a discussion of how this is estimated in cost benefit analysis (in the context of conventional pollutants regulated under the Clean Air Act), see http://switchboard.nrdc.org/blogs/ljohnson/neras_flawed_critique_of_epas.html.

[v] Hope, C. and Johnson, L.T. (2010). Revisiting the SCC estimates developed by the US Government: The effects of intergenerational discounting methods and regional equity weights.*Available upon request.

Big coal attacks life saving regulations

2011-07-18T12:25:03Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

America’s #1 front group for coal, misleadingly named the American Coalition for Clean Coal Electricity (ACCCE), wants to keep on spewing unlimited amounts toxic air pollution (mercury, hydrochloric acid, non-mercury metallic toxic pollutants, and sulfur dioxide)–pollution that damages children’s brain development and IQs, cause premature deaths, asthma, and heart and respiratory diseases, negatively impacts fishing and other recreation, and harms ecosystems.

In a new “report” (only a power point summary was available and my request for the full report ignored[1]), ACCCE threatens 397,000 net jobs[2] would be lost by 2015 if the Environmental Protection Agency (EPA) set limits on toxic emissions. More objective analyses, however, find net gains in jobs, from +9,000 to +91,000. This is not to say that no jobs will be lost, of course, but that is not a reason to block life saving regulations. Instead of continuing to kill people and make them sick for the sake of profits, effective policies are needed to assist impacted workers.

The report, carried out by consulting firm National Economics Research Associates (NERA), is part of a larger ongoing industry attack on the Clean Air Act and EPA (e.g. click here (another NERA study), here, here, here, and here for more examples). Its results are not credible: they contradict decades of past data and peer reviewed analysis on jobs and environmental regulation, which generally show a positive relationship between the two.

In contrast to NERA’s figures, the $9,000 and +$91,000 figures are consistent with the historical record. The $9,000 comes from EPA’s regulatory impact analysis for the proposed toxics rule, and examines only employment changes in the utility sector. The +91,000 figure is from an analysis by the Economic Policy Institute (EPI). It is higher than EPA’s estimate because it looks beyond the utility sector to the entire economy. For example, it counts jobs created from producing pollution control equipment and the required inputs (e.g. steel)[3]. It also counts employment created from the workers hired to do these jobs; they spend their wages on other goods, which in turn creates demand for more workers to produce those goods. Finally, they estimate negative economy-wide impacts resulting from energy price increases. Notably, EPI gets a significant share of its funding from unions; if anyone were worried about job losses, you can be sure it would be labor.

Before comparing the three studies in more detail, let’s look first at the finish line: health gains from less pollution.

By 2016, looking at only a partial set of benefits, the proposed standards would avoid (Table 1-2):

6,800 – 17,000 premature deaths
11,000 childhood cases of acute bronchitis (age 8-12)
225,000 childhood cases of respiratory illnesses (ranging ages 7-18)
4,500 cases of chronic bronchitis
11,000 nonfatal heart attacks
12,200 hospital and emergency room visits
850,000 missed work days due to illness
120,000 cases of aggravated asthma
5.1 million days when people must restrict their outdoor activities

All told, the benefits EPA was able to estimate add up to $62 to $147 billion in 2016, compared to a cost of $11.5 billion (2010$, converted from 2007$). Importantly, while gains to children from avoided acute bronchitis and respiratory illnesses are counted, other critical benefits are not, including avoided impaired brain development from mercury and lead poisoning (e.g. effects on IQ, learning, and memory). In addition, deaths and illnesses from many pollutants are not estimated, nor preservation of ecosystem recreation activities or ecosystems in general. (See Table 1-4),

Standards putting limits on toxic pollution are long overdue. EPA made the determination to regulate them over 10 years ago (see “Background section”). They should come as no surprise to the affected entities now crying wolf—they’ve had plenty of time to prepare. Furthermore, standards will be phased in over time, as they always are. But…never mind. Forgoing a little extra in profits seems too much to ask.

The coal industry’s analysis compared to EPA and EPI

The industry analysis is notably different from the EPA and EPI analyses in one very important respect: its complete lack of transparency with respect to its “employment multiplier” and “price elasticity” assumptions. Employment multipliers tell you how many jobs are associated with producing different goods, such as the number of workers needed to produce pollution control equipment, and the steel that goes into it. Price elasticities tell you how demand for products change in response to price changes, for example how much demand for electricity changes as energy costs rise, or changes in demand for products whose prices go up as a result.

The EPA and EPI studies both rely upon published peer-reviewed multiplier and elasticity estimates. NERA does not provide any source for its assumptions, or even the assumptions themselves. Without knowing them, it is impossible to evaluate the validity of their estimates. We do know, however, that the kind of job losses predicted contradict the historical record and are way out of line with more objective analyses.

Overall, EPI’s analysis is the most complete. It estimates all possible job impacts from the toxics rule, including:

positive effects of utilities hiring workers to install, manage, and maintain pollution control equipment;
negative effects of higher electricity prices on demand for electricity and in turn demand for workers in the utility sector;
positive effects from the production of pollution control equipment;
positive effects from the production of inputs needed to make pollution control equipment (e.g. steel workers hired to make the steel that goes into the equipment);
positive and negative effects created by changes in workers’ spending resulting from the job changes in any categories 1) through 4). (As workers are hired (or lose jobs), they spend (or decrease their spending) on goods in the economy as a whole, increasing (or decreasing) demand for workers making those goods);
negative effects of higher electricity costs on product prices, and in turn demand for affected products and workers making them.

The table below summarizes the differences between the three studies in what they estimate, what information they provide (or do not provide) regarding their assumptions, and their results.

Conclusion

NERA’s analysis projects extreme job losses, and provides no information on the assumptions used to generate them. Their job loss figures are simply disingenuous and not credible—only a standard scare tactic predicting awful things that never come true. They contradict four decades of data showing net employment gains from environmental regulations, and clearly stand out against more objective studies as both wrong and extreme.

[1] The consulting firm hired to do the study, National Economic Research Associates (NERA), has consistently also ignored requests for other reports.

[2] Figure includes costs from another rulemaking, the Clean Air Transport Rule (CATR), which are much smaller than for those for MACT. EPA estimates a cost of $3 billion for CATR vs. $11.4 billion for MACT. If jobs were proportional to costs, NERA’s figure for MACT alone would be approximately a net loss of 321,000 jobs.

[3] EPA includes jobs created from making the steel used to produce the equipment, but not the rest of the supply chain, which is much larger.

Blog updated--reformatted table, July 26, 2011.

NERA's flawed critique of EPA's analysis of the Clean Air Act

2011-07-05T19:00:57Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

The Environmental Protection Agency’s (EPA) cost benefit analysis of the Clean Air Act is probably one of the most peer reviewed and thorough cost benefit analysis ever carried out by an institution, be it government, private, or academic. But opponents of clean air and public health are intent on discrediting it (click here to read about the Heritage Foundation’s critique a few months ago, and documentation of EPA’s peer review process), because the gains to public health from reducing pollution swamp the costs. For 2010, EPA estimated that benefits exceeded costs by a ratio of almost 26 to 1, and by 2020 30 to 1. In a review of federal regulations, the Office of Management and Budget, a tough critic of EPA, similarly concluded that benefits from clean air regulations were much higher than costs.

A new report by National Economic Research Associates (NERA), prepared by Senior Vice Presidents Charles Montgomery and Anne Smith, again attempts to invalidate EPA’s analysis. NERA and the two authors have been in the business of anti-regulatory industry studies for a long time. Over the years, the company has conducted numerous analyses at the behest of polluters (e.g. click here, here and here for studies conducted for the National Association of Manufacturers, the American Petroleum Institute, and the Electric Power Research Institute, respectively). More recently, NERA produced a state-by-state analysis against proposed ozone standards (click here and here for critiques of a study that relied upon this analysis, by Professor Richard Howarth of Dartmouth College and myself, respectively). As former Vice Presidents of Charles River Associates, Montgomery and Smith used to conduct similar analyses against regulations (click here for CRA’s analysis of the Climate Security Act of 2007 supported by the American Petroleum Institute and Edison Electric Institute, and here and here for their analysis (funded by the National Black Chamber of Commerce) of the American Clean Energy and Security Act of 2009 and my critique of it, respectively).

The analysis

Montgomery and Smith argue that EPA’s estimated benefits of reducing risks to life from regulating pollution, which account for the lion’s share of benefits, are meaningless because they do not represent an actual good exchanged in markets and therefore are unrelated to real output and gross domestic product (GDP). (GDP is the market value of all final goods and services produced in the economy, as measured by their prices. It represents payments to all factors/costs of production, such as labor and raw materials). The authors further assert that because the monetized value of the benefits equate to approximately 10% of GDP, the cost benefit analysis cannot possibly be right, as surely people would not give up 10% of GDP to have them.

These arguments are premised on flawed economics and defy common sense. The authors make three errors:

First, they confuse GDP with well being. As is widely recognized in the economics profession, GDP includes some activities that don’t reflect net increases in welfare, such as the goods and services needed to rebuild infrastructure after a natural disaster. It also does not count many activities that do provide net increases in welfare, such as the intrinsic value people place on nature (e.g. national parks, coral reefs, or rare species). Do these things not exist? Is cleaner air a figment of our imagination?
Second, the authors ignore the fact that GDP does not include damages to people who are not compensated for having to breathe polluted air. Economists call these damages “negative externalities,” to reflect the notion that they are not “internalized” in the market price of the good whose production is causing pollution. A proper cost benefit analysis therefore estimates what the value of these externalities would have been had there been no regulation, and counts the cleaner air from regulation as a real benefit (in the absence of regulation, pollution would be counted as a production cost in GDP if it were "internalized" in the market price). Because economists do not have actual prices to work with, they must estimate them using as proxies either what people would be willing to accept to incur the harm, or what they would be willing to pay to avoid it. For this analysis, EPA uses the former measure, approximating the value of reduced risks to life from pollution reduction using studies that estimate how much more workers require in compensation for given increases in mortality risks on the job*** (controlling for other factors related to wage levels, such as skill level, education, etc).
Third, and following from the previous point, it is incorrect to say that EPA’s estimated benefits are not real and are unrelated to GDP simply because there is no market price for them, or because people would not be willing to sacrifice 10% of GDP for cleaner air. Aside from the obvious point that we did not have to give up 10% of GDP for the cleaner air we now have (we have both the measured level of GDP and the benefits of the Clean Air Act), how (and whether) property rights are defined can make the difference between whether a good (or “bad” in the case here) ends up being reflected in markets, and therefore counted in GDP. If one assumes that the person breathing the pollution has the right to breathe clean air rather than the polluter the right to make it dirty, and that markets are capable of enforcing this assignment of property rights (for various reasons, they rarely are, hence the need for regulation), the polluter would have to pay the victim for the right to pollute, and this would enter the GDP calculation as a cost of production. Wealth and goods would be redistributed away from polluters toward individuals suffering from the pollution who now “own” it as if it were any other resource. How much would the monetized value of the pollution costs equate to in the GDP calculation? I myself would speculate that, under such a property rights assignment, the amount people would require to “sell” clean air to polluters might approach oh, say, 10% of GDP?...Whatever the amount, it would probably exceed the amount sellers could recoup in product prices. Goods generating excessive and dangerous pollution levels would no longer be profitable to make. Furthermore, producers would have an incentive to invent new, less polluting, goods, and to make existing products more cleanly. It follows from these propositions that the supposedly meaningless benefits EPA estimates would not have to be calculated in the first place…

Conclusion

To say that EPA’s analysis is invalid because some of the health benefits it estimates have no market price and are therefore not related to GDP, or because people wouldn't be willing to give up 10% of GDP for cleaner air, is wrong and misleading. It assumes that GDP accurately measures well being, and overlooks the obvious: we already have both the measured level of GDP and cleaner air. The authors present a false choice. They also implicitly assume that GDP does not include pollution costs if property rights are clear and enforceable, in this case if polluters are required to compensate those who have to breathe the dirtier air. Under these circumstances, the pollution would be included in GDP as a cost of production. Finally, there would be strong incentives to make products more cleanly, and invent ones that minimize pollution levels. Pollution would be lower, and EPA would not have to estimate what Montgomery and Smith claim are “meaningless” benefits.

Overall, the authors’ critique of EPA’s cost benefit analysis is not supported by economic theory or common sense. The fact that basic tenets of economics that undermine their argument are missing should not be surprising: the industries that regularly hire them are legally obligated to maximize profits for shareholders. As we know all too well, this can come at the expense of the health and well being of everyone else.

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*** A few studies EPA reviewed in estimating the value of reducing risks to life were based upon hypothetical surveys, but the final value used was approximately equal to the central value of the wage-based studies, of which there were many more (Montgomery and Smith also try to dismiss the benefits by saying they were based on hypothetical data). I should also note that there are a number of factors that could make the amount people are willing to accept to incur pollution-induced risks higher than what they would accept for job-induced risks. If the reader is interested in these factors, feel free to contact me to discuss them.

Updated August 12, 2011 to include link to NERA report.

Representative Upton's anti-regulatory rant: when the evidence isn't there, misrepresent, distort, or ignore it

2011-06-29T22:38:04Z

Laurie Johnson, Chief Economist, Climate Center, Washington, DC

In a short opinion piece published yesterday in the Washington Times, Representative Fred Upton (R-MI), Chair of the House Energy and Commerce Committee, reported that his Committee found piles of evidence showing that the “vast web of costly, duplicative, and often ineffective federal regulations” was the “major culprit” behind America’s diminishing ability to climb quickly out of recessions.

But he failed to substantiate this claim. First, he incorrectly claimed that a study by the McKinsey Global Institute (MGI), a subdivision of one of the most prestigious global consulting firms (McKinsey and Company, Inc.), agreed with his thesis. Second, beyond the McKinsey (mis)representation, he provided no data to support his anti-regulatory tirade. To the contrary, he ignored analysis by the Office of Management and Budget (OMB) finding that, in the aggregate, major federal regulations have yielded net benefits. He also ignored the vast body of literature finding increased employment and economic output resulting from environmental regulation, which he singles out as an example of his diagnosis.

Misrepresenting the McKinsey report

The McKinsey report did not conclude that regulatory impediments were the “major culprit” behind America’s economic woes. This can be readily discerned from their web page summary. The findings (emphasis added) point to deep structural problems in the economy, with existing regulation not effectively solving them:

Recoveries are increasingly becoming "jobless" due to firm restructuring, skill and geographic mismatches between workers and jobs, and sharp decline in new start-ups.
The US needs to create 21 million new jobs by 2020 to regain full employment – and only achieves this in our most optimistic job growth scenario.
The US workforce will continue to grow until 2020, but under current trends, many workers will not have the right skills for the available jobs. Technology is changing the nature of work: jobs are being disaggregated into tasks, work is becoming virtual, and firms are relying on flexible labor (temporary, contract workers). These trends offer new opportunities for creating jobs in the United States, a trend that some companies do not fully appreciate.
Progress on four dimensions will be essential for reviving the US job creation machine: develop the US workforces' skill to better match what employers are looking for; expand US workers' share of global economic growth by attracting foreign investment and spurring exports; revive the nation's spark by supporting emerging industries, ensuring more of them scale up in the United States, and reviving new business start-ups; and speed up regulatory decision-making that blocks business expansion and new investment.

Upton discusses only the last clause of the last sentence of this summary, leaving out all the rest, and downplays McKinsey’s vision for proactive government regulation: “The current pattern of jobless recoveries has evolved over decades…[R]eversing this trend…will require major efforts in education, regulation, and even diplomacy.” (p. 59-60). Along these lines, the report offers many new regulations, based in part on what has worked in other countries.

The problems McKinsey identifies that Upton quotes are shared by both the left and the right, and really should come as no surprise. Probably not many of us would disagree that accelerating the speed of decision-making, eliminating redundancy, and improving interagency and intergovernmental cooperation, would improve government’s role in promoting economic growth. (Parenthetically, let’s also not forget about contravening evidence to Upton’s argument, such as the lack of regulation that led to the financial meltdown and the Deep Water Horizon oil spill).

Contrary to Upton’s claims and distortions, the data show that in general the benefits of regulation exceed the costs.

According to a report just released by the Office of Management and Budget (OMB), the overall benefits of regulation exceed costs:

“The estimated annual benefits of major Federal regulations reviewed by OMB from October 1, 2000, to September 30, 2010, for which agencies estimated and monetized both benefits and costs, are in the aggregate between $132 billion and $655 billion, while the estimated annual costs are in the aggregate between $44 billion and $62 billion.”

Net gains are particularly strong under the Clean Air Act, currently under assault by some legislators in Congress. Benefits from regulations issued by the Office of Air were estimated to be between $77 to $535 billion, compared to $19 to $24 billion in costs (click here for a summary of EPA’s cost benefit analysis, and here for a description of the rigorous peer review it underwent). The fact that this assessment comes from OMB should not be overlooked: it is a tough critic of EPA regulations.

The data also shows that environmental protection is a net job creator and increases economic output.

As I’ve documented extensively in previous blogs (e.g. click here and here), because it is more labor-intensive than the rest of the economy, cleaning up the environment on average generates net increases in jobs. It also increases economic output by improving the health and productivity of the workforce: reduced pollution leads to fewer lost work, school, and restricted activity days, fewer fatalities, fewer hospital visits and other medical expenses, and avoided expenditures on remedial education, such as those needed to address diminished IQ levels caused by pollution.

Conclusion

Research tells us that overall regulation is a net gain to society, and this is especially true with environmental protection, where benefits exceed costs by the largest margin, and the public is protected from dangerous pollution. Sure, regulation is not perfect, but that’s really beside the point. Rather than using regulation as a scapegoat for America’s economic problems, Upton should accept the facts, not distort, misrepresent, or ignore them. His tactics may appease the special interests that contribute to his campaigns, but they do a disservice to his constituents and the country.