Reflecting on Trump’s Record and Anticipating Biden’s Performance

On January 20th, a bit more than two weeks from today, Joe Biden will be sworn in as the 46th President of the United States, along with Kamala Harris as Vice President.  Changes from one U.S. administration to another are always significant, but sometimes the anticipated changes are not dramatic when the same political party retains the White House, although the last time that happened was the transition in 1988 from Ronald Reagan to George H.W. Bush.  That said, I do not recall a transition that has represented anticipated changes – in terms both of style and substance – as great as the transition from President Trump to President-Elect Biden.

            One of the areas – among others – where that is the case is the realm of environmental, energy, and natural resource policy.  And there is no one better qualified to reflect on the environmental record of the Trump administration and the prospects of the forthcoming Biden administration that Richard Revesz, my long-time colleague, co-author, and friend.  He is my guest in the latest episode of my podcast, released today, January 5th, on the day a pair of Senate runoff elections in Georgia are taking place (which will determine which political party controls the Senate for at least the next two years).

            As readers of this blog know, in these podcasts – “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program – I talk with well-informed people from academia, government, industry, and NGOs.  Ricky fits the bill as the Lawrence King Professor of Law at New York University, where he was previously Dean, and was the co-founder of the Institute for Policy Integrity.  He is also the co-author with Michael Livermore of a new and important book, Reviving Rationality: Saving Cost-Benefit Analysis for the Sake of the Environment and Our Health.

            You can hear our complete conversation in the Podcast here.

First of all, reflecting on the past four years of the Trump Administration, Revesz points to the decisions to:  roll back motor vehicle energy efficiency (or CAFE) standards; repeal the Obama Administration’s Clean Power Plan; and pursue what the Trump administration termed “strengthening” regulation – all as examples of bad policies with negative consequences.

“On virtually any significant environmental issue, the Trump Administration was on the wrong side. It was on the wrong side of the legal issues; it was in the wrong side of the economic issues; it was in the wrong side of the scientific issues. And it was really on the wrong side of history,” he remarks.  Revesz also implies that the administration’s disrespect for science and economics might have very deep and injurious impacts on environmental policy going forward. 

However, Revesz expresses optimism that the incoming administration may be able to undo some of the damage done over the past four years.

“I am extremely hopeful and very optimistic that the Biden Administration will restore confidence in science and economics, and that these will be taken as serious analytical frameworks, and not as tools to be bent at will to justify the political preferences of the moment,” he says. “And that is extremely important because I don’t think our country could take another four years of the bending of truth without it having very serious long-term repercussions.”

Revesz also says he expects the Biden-Harris Administration to hold true on its campaign promises to push forward with tough greenhouse gas emission policies. 

“I expect we’ll see a continued significant ratcheting down of automobile emissions, including much greater penetration of zero emitting vehicles.  And we will see very significant work, I assume and hope, on the stationary source side. Even in the Obama Administration, where we ended up with regulations for new oil and gas facilities, we didn’t have regulations for existing facilities, which is where a lot of the emissions are. The electric sector will have to be looked at. And then other industrial sectors that have not yet been being gotten attention, like refinery cement plants, will need to get significant attention. So, I see a lot happening on the regulatory side.”

Despite the challenges the Biden-Harris Administration may face from legal challenges to new regulatory actions because of the 220 judges appointed by President Trump as well as the new 6-3 conservative majority in the Supreme Court, Ricky Revesz maintains that the new administration will be much more successful in defending its regulatory actions in the courts than was the Trump administration, which lost an astonishingly high 83 percent of challenges against its regulatory actions.

All of this and more is found in the latest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.”  I hope you will listen to this latest discussion here.  You can find a complete transcript of our conversation at the website of the Harvard Environmental Economics Program.

My conversation with Professor Revesz is the 19th episode in the Environmental Insights series, with future episodes scheduled to drop each month.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

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What are the Benefits and Costs of EPA’s Proposed CO2 Regulation?

­On June 2nd, the Obama Administration’s Environmental Protection Agency (EPA) released its long-awaited proposed regulation to reduce carbon dioxide (CO2) emissions from existing sources in the electricity-generating sector.  The regulatory (rule) proposal calls for cutting CO2 emissions from the power sector by 30 percent below 2005 levels by 2030.  This is potentially significant, because electricity generation is responsible for about 38 percent of U.S. CO2 emissions (about 32 percent of U.S. greenhouse gas (GHG) emissions).

On June 18th, EPA published the proposed rule in the Federal Register, initiating a 120-day public comment period.  In my previous essay at this blog, I wrote about the fundamentals and the politics of this proposed rule (EPA’s Proposed Greenhouse Gas Regulation: Why are Conservatives Attacking its Market-Based Options?).  Today I take a look at the economics.

Cost-Effective, Perhaps – but Efficient?

The proposed rule grants freedom to implementing states to achieve their specified emissions-reduction targets in virtually any way they choose, including the use of market-based instruments (the White House has referenced cap-and-trade in this context, although somewhat obliquely as “market-based programs,” and state-level carbon taxes might also be acceptable – if any states were to include them in their plans to implement the regualtion).  Also, the proposal allows for multistate proposals and for states and regions to establish linkages among their state and multi-state market-based instruments.  Some questions remain regarding the temporal flexibility (banking and borrowing) that the proposed rule will allow, but it’s reasonable to conclude at this point that although EPA may not be guaranteeing cost-effectiveness, it is allowing for it, indeed facilitating it.  As Dallas Burtraw of Resources for the Future has said, the proposed rule ought to be judged to be potentially cost-effective.

Cost-effectiveness (achieving a given target at the lowest possible aggregate cost) is one thing, but economists – and possibly some other policy wonks – may wonder if the proposal is likely to be efficient (maximizing the difference between benefits and costs).  This is a much higher mountain to climb, and a particularly challenging one for a regional, national, or sub-national climate-change policy, given the global commons nature of the problem.

The Challenge of this Global Commons Problem

GHGs mix globally in the atmosphere, and so damages are spread around the world and are unaffected by the location of emissions.  This means that any jurisdiction taking action – a region, a country, a state, or a city – will incur the direct costs of its actions, but the direct benefits (averted climate change) will be distributed globally.  Hence, the direct climate benefits a jurisdiction reaps from its actions will inevitably be less than the costs it incurs, despite the fact that global climate benefits may be greater – possibly much greater – than global costs.

(An Aside:  This presents the classic free-rider problem of this ultimate global commons problem:  It is in the interest of no country to take action, but each can reap the benefits of any countries that do take action.  This is why international, if not global, cooperation is essential.  See the extensive work of the Harvard Project on Climate Agreements.)

On June 2nd, EPA released its 376-page Regulatory Impact Analysis (RIA) of the proposed “Clean Power Plan” rule, the same day it released the 645-page proposed rule itselfAn RIA is essentially a benefit-cost analysis, required for significant new Federal rules by a series of Executive Orders going back to the presidency of Jimmy Carter, and reaffirmed by every President since, including most recently President Obama.

Given the fundamental economic arithmetic of a global commons problem, it would be surprising – to say the least – if EPA were to find that the expected benefits of the proposed rule would exceed its expected costs, but this is precisely what EPA has found.  Indeed, its central estimate is of positive net benefits (benefits minus costs) of $67 billion annually in the year 2030 (employing a mid-range 3% discount rate).  How can this be?

Two Answers to the Conundrum

First, EPA does not limit its estimate of climate benefits to those received by the United States (or its citizens), but uses an estimate of global climate benefits.

Second, in addition to quantifying the benefits of climate change impacts associated with CO2 emissions reductions, EPA quantifies and includes (the much larger) benefits of human-health impacts associated with reductions in other (correlated) air pollutants.

Of course, even if benefits exceed costs at the given level of stringency of the proposed rule, it does not mean that the rule is economically efficient, because it could be the case that benefits would exceed costs by an even greater amount with a more stringent or with a less stringent rule.  However, if benefits are not greater than costs (negative net benefits), then the rule cannot possibly be efficient, so I will stick with the all-too-common Washington practice and simply ask whether the analysis indicates a winner or a loser at the proposed rule’s given level of stringency.  In other words, the question becomes, “Is the proposed rule welfare-enhancing (even if it is not welfare-maximizing)?”

Now, let’s take a look at the numbers from these two key aspects of EPA’s economic analysis and the issues surrounding the calculations.

U.S. versus Global Damages

There are surely ethical arguments (and possibly legal arguments) for employing a global damage estimate, as opposed to a U.S. damage estimate, in a benefit-cost analysis of a U.S. climate policy, but until recently all Regulatory Impact Analyses over several decades had focused exclusively on U.S. impacts.

In a recent working paper, “Determining the Proper Scope of Climate Change Benefits,” Ted Gayer, Vice President and Director of Economic Studies at the Brookings Institution, and Kip Viscusi, University Distinguished Professor of Law, Economics, and Management at Vanderbilt University, review the history of RIAs, including their virtually exclusive focus on national impacts (defined by geography or U.S. citizenship) in benefit and cost estimates of regulations.

In the context of a conventional RIA, it does seem strange – at least at first blush – to use a global measure of benefits of a U.S. regulation.  If this practice were applied in a consistent manner – that is, uniformly in all RIAs – it would result in some quite bizarre findings.  For example, a Federal labor policy that increases U.S. employment while cutting employment in competitor economies might be judged to have zero benefits!

Another example, this one courtesy of Tim Taylor via Ted Gayer:  Under global accounting, if a domestic climate policy had the unintended consequence of causing emissions and economic leakage (through relocation of some manufacturing to other countries), that would not be considered a cost of the regulation (and with diminishing marginal utility of income, it might be counted as a benefit)!

On the other hand, a counter-argument to this line of thinking is that the usual narrow U.S.-only geographic scope of an RIA is simply not appropriate for a global commons problem.  Otherwise, we would simply restate in economic terms the free-rider consequences of a global commons challenge.  In other words, a domestic-only RIA of a climate policy could have the effect of “institutionalizing free riding,” to quote my Harvard Kennedy School colleague, Professor Joseph Aldy.  Of course, if global benefits are to be included in a regulatory assessment, it can be argued that global costs (such as leakage) should also be considered.

I leave it to legal scholars and lawyers to debate the law, and I defer to the philosophers among us to debate the ethics, but let’s at least ask what the consequences would be for EPA’s analysis if a U.S climate benefits number were used, rather than a global number.  For this purpose, we can start with EPA’s estimates (from Table ES-7 on page ES-19 and Table ES-10 on page ES-23 of its Regulatory Impact Analysis of the proposed rule) for 2030 benefits and costs, using a mid-range 3% real discount rate.  The estimated (global) climate benefits of the rule are $31 billion.

In order to think about what the domestic climate benefits might be, we can turn to the Obama administration’s original calculation of the Social Cost of Carbon in 2010, where the Interagency Working Group estimated a central global value for 2010 of $19 per ton of CO2, and noted (and explained in more detail in a subsequent scholarly paper by several members of the Working Group) that U.S. benefits from reducing GHG emissions would be, on average, about 7 to 10 percent of global benefits across the scenarios analyzed with the one model that permitted such geographic disaggregation.

(The Interagency Working Group also suggested that if climate damages are simply proportional to GDP, then the U.S. share would be about 23%.  However, given the IPCC’s prediction of highly unequal geographic distribution of climate change effects worldwide, combined with the exceptionally heterogeneous nature of climate sensitivity among the world’s economies, which vary from those with trivial reliance on agriculture to those dominated by their agricultural sectors, I find the argument behind this second approach unconvincing.)

Taking the midpoint of the Obama Working Group’s 7-10% range, U.S. damages (benefits) may be estimated to be 8.5% of global damages, which would reduce the $31 billion reported in the new RIA to about $2.6 billion, which is considerably less than the RIA’s estimated total annual compliance costs of $8.8 billion (assuming that the states facilitate cost-effective actions).  This validates the intuition, explained above, that for virtually any jurisdiction, the direct climate benefits it reaps from its actions will be less than the costs it incurs (again, despite the fact that global climate benefits may be much greater than global costs).

There are plenty of caveats on both sides of this simple analysis.  One of the most important is that if the proposed U.S. policy were to increase the probability of other countries taking climate policy actions (which I believe is probably the case), then the impacts on U.S. territory of such foreign policy actions would merit inclusion even in a traditional U.S.-only benefit-cost analysis.  More broadly, although it has been traditional to use a U.S.-only benefits measure in RIAs, the current guidelines for carrying out these analyses from the Office of Information and Regulatory Affairs of the U.S. Office of Management and Budget (Circular A-4) requires that geographic U.S. benefit and cost estimates be provided, but also allows for the optional inclusion of global estimates.

Pending resolution (or more likely, discussion and debate) from lawyers and philosophers regarding the legal and ethical issue of employing domestic benefits versus global benefits in a climate regulation RIA, it is essential to recognize that there is an even more important factor that explains how EPA came up with estimates of significant positive net benefits (benefits exceeding costs) for the proposed rule (and would have even if a domestic climate benefits number had been employed), namely, the inclusion of (domestic) health impacts of other air pollutants, the emissions of which are correlated with those of CO2.

Correlated Pollutants and Co-Benefits

The Obama Administration’s proposed regulation to reduce CO2 emissions from the electric power sector is intended to achieve its objectives through a combination of less electricity generated (compared with a business-as-usual trajectory), greater dispatch of electricity from less CO2-intensive sources (natural gas, nuclear, and renewable sources, instead of coal), and more investment in low CO2-intensive sources.  Hence, it is anticipated that less coal will be burned than in the absence of the regulation (and more use of natural gas, nuclear, and renewable sources of electricity).  This means not only less CO2 being emitted into the atmosphere, but also decreased emissions of correlated local air pollutants that have direct impacts on human health, including sulfur dioxide (SO2), nitrogen oxides (NOx), particulate matter (PM), and mercury (Hg).

It is well known that higher concentrations of these pollutants in the ambient air we breathe – particularly smaller particles of particulate matter (PM2.5) – have very significant human health impacts in terms of increased risk of both morbidity and mortality.  The numbers dwarf the climate impacts themselves.  Whereas the U.S. climate change impacts of CO2 reductions due to the proposed rule in 2030 are probably less than $3 billion per year (see above), the health impacts (co-benefits) of reduced concentrations of correlated (non-CO2) air pollutants are estimated by EPA to be some $45 billion/year (central estimate)!  (By the way, I assume that the co-benefits estimated by EPA are based upon a comparison with a business-as-usual baseline that includes the effects of all existing EPA and state regulations for these same local air pollutants.  If not, the RIA will need to be revised.)

The Bottom Line

The combined U.S.-only estimates of annual climate impacts of CO2 ($3 billion) and health impacts of correlated pollutants ($45 billion) greatly exceed the estimated regulatory compliance costs of $9 billion/year, for positive net benefits amounting to $39 billion/year in 2030.  This is the key argument related to the possible economic efficiency of the proposed rule from the perspective of U.S. welfare.  If EPA’s global estimate of climate benefits ($31 billion/year) is employed instead, then, of course, the rule looks even better, with total annual benefits of $76 billion, leading to EPA’s bottom-line estimate of positive net benefits of $67 billion per year.  See the summary table below.

The Obama Administration’s proposed regulation of existing power-sector sources of CO2 has the potential to be cost-effective, and if you accept these numbers, it can also be welfare-enhancing, if not welfare-maximizing.

That said, I assume that proponents of the Obama Administration’s proposed rule will take this assessment of EPA’s Regulatory Impact Analysis as evidence of the sensibility of the rule, and opponents of the Administration’s proposed actions will claim that my assessment of the RIA provides evidence of the foolishness of EPA’s proposal.  So it is in our pluralistic system (not to mention, in the context of the political polarization that has gripped Washington on this and so many other issues).

————————————————————————————————————————–

Benefits and Costs of EPA’s Proposed Clean Power Plan Rule in 2030

(Mid-Point Estimates, Billions of Dollars)

Climate Change Impacts

Health Impacts (Co-Benefits) of Correlated Pollutants plus …

Domestic

Global

Domestic Climate Impacts

Global Climate Impacts

Benefits
  Climate Change

$ 3

$ 31

$3

$31

  Health Co-Benefits

$45

$45

Total Benefits

$ 3

$ 31

$48

$76

Total Compliance Costs

$ 9

$ 9

$ 9

$ 9

Net Benefits (Benefits – Costs)

– $ 6

$ 22

$ 39

$ 67

————————————————————————————————————————–

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Is Benefit-Cost Analysis Helpful for Environmental Regulation?

With the locus of action on Federal climate policy moving this week from the House of Representatives to the Senate, this is a convenient moment to step back from the political fray and reflect on some fundamental questions about U.S. environmental policy.

One such question is whether economic analysis – in particular, the comparison of the benefits and costs of proposed policies – plays a truly useful role in Washington, or is it little more than a distraction of attention from more important perspectives on public policy, or – worst of all – is it counter-productive, even antithetical, to the development, assessment, and implementation of sound policy in the environmental, resource, and energy realms.   With an exceptionally talented group of thinkers – including scientists, lawyers, and economists – now in key environmental and energy policy positions at the White House, the Environmental Protection Agency, the Department of Energy, and the Department of the Treasury, this question about the usefulness of benefit-cost analysis is of particular importance.

For many years, there have been calls from some quarters for greater reliance on the use of economic analysis in the development and evaluation of environmental regulations.  As I have noted in previous posts on this blog, most economists would argue that economic efficiency — measured as the difference between benefits and costs — ought to be one of the key criteria for evaluating proposed regulations.  (See:  “The Myths of Market Prices and Efficiency,” March 3, 2009; “What Baseball Can Teach Policymakers,” April 20, 2009; “Does Economic Analysis Shortchange the Future?” April 27, 2009)  Because society has limited resources to spend on regulation, such analysis can help illuminate the trade-offs involved in making different kinds of social investments.  In this sense, it would seem irresponsible not to conduct such analyses, since they can inform decisions about how scarce resources can be put to the greatest social good.

In principle, benefit-cost analysis can also help answer questions of how much regulation is enough.  From an efficiency standpoint, the answer to this question is simple — regulate until the incremental benefits from regulation are just offset by the incremental costs.  In practice, however, the problem is much more difficult, in large part because of inherent problems in measuring marginal benefits and costs.  In addition, concerns about fairness and process may be very important economic and non-economic factors.  Regulatory policies inevitably involve winners and losers, even when aggregate benefits exceed aggregate costs.

Over the years, policy makers have sent mixed signals regarding the use of benefit-cost analysis in policy evaluation.  Congress has passed several statutes to protect health, safety, and the environment that effectively preclude the consideration of benefits and costs in the development of certain regulations, even though other statutes actually require the use of benefit-cost analysis.  At the same time, Presidents Carter, Reagan, Bush, Clinton, and Bush all put in place formal processes for reviewing economic implications of major environmental, health, and safety regulations. Apparently the Executive Branch, charged with designing and implementing regulations, has seen a greater need than the Congress to develop a yardstick against which regulatory proposals can be assessed.  Benefit-cost analysis has been the yardstick of choice

It was in this context that ten years ago a group of economists from across the political spectrum jointly authored an article in Science magazine, asking whether there is role for benefit-cost analysis in environmental, health, and safety regulation.  That diverse group consisted of Kenneth Arrow, Maureen Cropper, George Eads, Robert Hahn, Lester Lave, Roger Noll, Paul Portney, Milton Russell, Richard Schmalensee, Kerry Smith, and myself.  That article and its findings are particularly timely, with President Obama considering putting in place a new Executive Order on Regulatory Review.

In the article, we suggested that benefit-cost analysis has a potentially important role to play in helping inform regulatory decision making, though it should not be the sole basis for such decision making.  We offered eight principles.

First, benefit-cost analysis can be useful for comparing the favorable and unfavorable effects of policies, because it can help decision makers better understand the implications of decisions by identifying and, where appropriate, quantifying the favorable and unfavorable consequences of a proposed policy change.  But, in some cases, there is too much uncertainty to use benefit-cost analysis to conclude that the benefits of a decision will exceed or fall short of its costs.

Second, decision makers should not be precluded from considering the economic costs and benefits of different policies in the development of regulations.  Removing statutory prohibitions on the balancing of benefits and costs can help promote more efficient and effective regulation.

Third, benefit-cost analysis should be required for all major regulatory decisions. The scale of a benefit-cost analysis should depend on both the stakes involved and the likelihood that the resulting information will affect the ultimate decision.

Fourth, although agencies should be required to conduct benefit-cost analyses for major decisions, and to explain why they have selected actions for which reliable evidence indicates that expected benefits are significantly less than expected costs, those agencies should not be bound by strict benefit-cost tests.  Factors other than aggregate economic benefits and costs may be important.

Fifth, benefits and costs of proposed policies should be quantified wherever possible.  But not all impacts can be quantified, let alone monetized.  Therefore, care should be taken to assure that quantitative factors do not dominate important qualitative factors in decision making.  If an agency wishes to introduce a “margin of safety” into a decision, it should do so explicitly.

Sixth, the more external review that regulatory analyses receive, the better they are likely to be.  Retrospective assessments should be carried out periodically.

Seventh, a consistent set of economic assumptions should be used in calculating benefits and costs.  Key variables include the social discount rate, the value of reducing risks of premature death and accidents, and the values associated with other improvements in health.

Eighth, while benefit-cost analysis focuses primarily on the overall relationship between benefits and costs, a good analysis will also identify important distributional consequences for important subgroups of the population.

From these eight principles, we concluded that benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving the natural environment, health, and safety.  Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible public policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and hence the outcome of policy analysis.

If properly done, benefit-cost analysis can be of great help to agencies participating in the development of environmental regulations, and it can likewise be useful in evaluating agency decision making and in shaping new laws (which brings us full-circle to the climate legislation that will be developed in the U.S. Senate over the weeks and months ahead, and which I hope to discuss in future posts).

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