EPA Adminstrator Scott Pruitt announced yesterday that today he will propose the repeal of the Obama-EPA Clean Power Plan, which required a system of carbon-emissions reductions by power plants to mitigate climate harms. The CPP was a good first step to obtain modest reductions in greenhouse gas emissions from the power sector, and would have put the US on track towards meeting its Paris Accord pledges, though the CPP by itself was insufficient to meet these pledges.
This move is bad policy on many grounds, most urgently due to the evident foolhardiness of delaying climate action at the very moment that California is burning up and the fourth deadly hurricane in about a month has struck US soil. As a statutory matter, the Clean Air Act leaves little doubt that EPA’s 2009 endangerment finding for greenhouse gases requires EPA to regulate emissions from the power sector consistent with the “Best System for Emissions Reductions.”
In an Op-Ed in the New York Times, Richard Revesz and Jack Lienke point out that EPA’s economic justification for the withdrawal of the Clean Power Plan depends on an accounting trick. Under executive orders going back to President Reagan (and continued by Presidents Clinton and Obama), agency rulemaking proposals must include a cost-benefit analysis of the proposed rule. Obama’s EPA Administrator, Gina McCarthy, amply justified the economics of the Clean Power Plan based on the economic benefits of immediate respiratory health improvements of the co-reduction of lung irritants along with the global economic benefits of mitigating climate change. The CPP cost benefit analysis treated the cost savings arising from promoting energy efficiency as a reduction of the economic cost of that rule, offsetting the increased cost associated with renewable energy. In order to justify repealing the Clean Power Plan, Pruitt’s EPA simply changes the accounting rules, choosing to ignore climate mitigation benefits outside the United States, and treating avoided generation costs as a “benefit” rather than a cost of the CPP in order to inflate the apparent “cost” of the Clean Power Plan to the economy.
Revesz and Lienke lament the Pruitt EPA’s recalculated cost benefit analysis as a “smoke and mirrors” accounting trick. But this is a fundamental problem with relying on cost benefit analysis in the first place. The “benefit” side of cost benefit analysis seeks to place a dollar value on non-marketable public goods such as human life, health,, and well being, aesthetics, recreation, and ecosystem integrity. This dollar value is always going to be a fiction. Lisa Heinzerling and Bruce Ackerman have an excellent book on the subject – Pricing the Priceless: Cost benefit analysis of Environmental Protection. The lack of any real world dollar values for environmental benefits leads to some questionable substitute price practices, such as opinion polls of consumers to develop valuations. In one case, EPA used the results of an opinion poll about chronic bronchitis medication in order to put a value on non-fatal bladder cancers.
The problem is, there are no Generally Accepted Accounting Principles for cost-benefit analysis. Imagine what investment prospectuses would look like if businesses could make up the accounting rules as they went along. Fact is, cost-benefit analysis can be used to support pretty much any decision the agency wants. Cass Sunstein pointed out that in the case of EPA’s drinking water arsenic standard, CBA could have been used to find a net benefit between zero and $560 million, depending on the accounting choices made.
Business accounting principles arose in order to impose uniformity that would allow investors, lenders, and taxing authorities to rely on statements of dollar values and dollar profit and losses. Unfortunately, the manipulability of cost benefit analysis is an inherent feature of an analysis that seeks to apply monetized accounting concepts to values for which there are no dollar values and no accounting rules. Which argues against ever relying on cost benefit analysis for regulatory rulemaking in the first place.