The peculiar benefit calculation of EPA’s carbon rule

This week, the EPA held a field hearing in Atlanta regarding the Clean Power Plan proposed rule.

Once final, the rule, by 2030, “would achieve CO2 emission reductions from the power sector of approximately 30 percent from CO2 emission levels in 2005.”

To put it mildly, the rule is controversial.

The issue over the Clean Power Plan boils down to a relatively straightforward national disagreement on whether the future benefits of the administration’s plan to aggressively regulate carbon dioxide outweigh the potential economic costs.

The U.S. Chamber of Commerce has claimed that the proposed rule “threaten[s] to suppress average annual U.S. Gross Domestic Product (GDP) by $51 billion and lead to an average of 224,000 fewer U.S. jobs every year through 2030, relative to baseline economic forecasts.”

The Obama Administration maintains decidedly different projections. The EPA argues that the rule “will yield monetized climate benefits of approximately $17 billion in 2020” and “health co-benefits…in 2020 are estimated to be $16 billion to $37 billion.”

Nobody is shocked at the fact that the U.S. Chamber has a different impact projection than the EPA, but the EPA’s benefit calculation seems particularly peculiar.

In justifying the Clean Power Plan rule, the EPA notes two principal areas of benefit: decreases in the “social cost of carbon” and “the health co-benefits associated with reductions in other kinds of air pollution incidental to the carbon rule.”

The health co-benefits calculated by the EPA have little to do with carbon dioxide, a common gas we encounter daily. In fact, the pollutants mentioned in the rule are already highly regulated by the EPA, and America has made tremendous progress in reducing those emissions. According to a recent study by the Alabama Policy Institute, “total emissions of the six major air pollutants measured by the EPA have decreased by 50 percent” since 1980.

In truth, most of the health benefits of regulating carbon dioxide are folded into projected reductions in the social cost of carbon. The EPA references a particularly bureaucratic intera-gency technical document as the source for calculating the social cost of carbon. The support document notes the social cost of carbon is a global calculation “intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change.” The “global” aspect of the calculation means that the referenced benefits justifying an aggressive regulation in the U.S. are not necessarily domestic in nature.

Ironically, that same document notes, “Even if the United States were to reduce its greenhouse gas emissions to zero, that step would be far from enough to avoid substantial climate change.” To that end, the International Energy Agency projects that global carbon dioxide emission will increase by 20 percent to 2035 notwithstanding action from governments around the world.

If the administration’s own carbon pricing scheme puts forth doubts about realizing benefits from even the most aggressive regulatory action, why should Americans be willing to take on any economic risk from the Clean Power Plan, much less the kind of risk claimed by the U.S. Chamber?

Even for Americans who are persuaded by the peculiar benefit calculation for the EPA’s Clean Power Plan or who want to see carbon regulation, questions remain as to whether the President’s rule is the best way to do so.

There is little disagreement that the rule will impose unexpected costs on consumers related to closing cheap coal generation, building new sources of energy, and creating more energy infrastructure across the nation, particularly new natural gas transmission.

Regardless of how significant those government-imposed costs ultimately prove to be, even an administration ideologically bent on regulating carbon would be wise to propose positive incentives to offset them. Energy generators will pass compliance costs on to their customers. Why not provide tax and regulatory fee savings based on the same carbon targets that could be passed to ratepayers as well?

Positive incentives for regulatory compliance will not eliminate the potentially high costs of the rule that will be passed on to consumers, but they would be reasonable concessions to help soften the blow.


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