EPA's greenhouse gas rule poses challenges for US policy review process

by |February 28, 2012

Just in case anyone you missed it, the US Environmental Protection Agency (EPA) is moving, albeit almost imperceptibly, toward regulating greenhouse gas (GHG) emissions. It took one more step in January, published the emissions of 6700 facilities with annual emissions of more than 25,000 MtCO2e. This category of emitters was required to report these figures beginning in 2010. Mandatory reporting is a critical prerequisite to regulating emissions.

Someday, EPA will issue its first greenhouse gas regulations for stationary sources, as an amendment to existing new source performance standards for electrical generating units. This process began in 2007 when the Supreme Court ruled that the EPA was required to treat greenhouse gases as a pollutant under the Clean Air Act. Pursuant to that decision, EPA issued an endangerment finding in 2009. Final rules were to be issued in the summer of 2011, but have been delayed indefinitely. At a January press conference announcing the publication of the database, Gina McCarthy, Assistant Administrator for the Office of Air and Radiation, said that the EPA had “…indicated an-end-of January timeline [for the new source regulations], and [is] looking forward to trying to adhere to that.”  Not a hard deadline, to be sure, but it has now come and gone. So what’s the hold up?

EPA’s proposed regulation has been under review by the Office of Management and Budget (OMB) and more specifically the Office of Information and Regulatory Affairs (OIRA) since November 7, 2011. OIRA’s job is to conduct cost-benefit analyses of “economically significant” rules (those with a projected cost of more than $100 million) and is required by executive order to provide a response to the submitting agency within 90 days. That period expired on February 7 and there is no indication at this point when the proposal will again see the light of day.

OIRA certainly has its work cut out for it, as the application of cost-benefit analysis of climate change regulation is fraught with difficulties. The damages of climate change will manifest mainly in the future, while policies to mitigate those damages will require spending as soon as they take effect. Estimating future costs requires use of the social cost of carbon (SCC), an estimate of the monetary value of damage caused by each additional ton of CO2 (or its equivalent) emitted. In an effort to rationalize the treatment of SCC across the US government, an interagency task force recommended a range of figures for agencies to use: $5, $21, $35, and $65. The task force did not specify which of these should be used, leaving open a wide If OIRA used a $5 SCC in its evaluation of EPA’s proposed rule, it would determine that if it costs more than $5/ton of carbon to implement, it is economically inefficient, because the cost exceeds the benefit. On the other hand, using a $65 SCC would justify substantial spending and might lead to meaningful emission reductions in the medium term.

These SCC estimates range so widely because each uses a different discount rate, a percentage used to compare the value of a dollar today with the value of the same dollar in the future. A high discount rate implies a steep decline in this ratio while a smaller one results in a shallower decline over time. The discount rate is only one of many of assumptions are required to arrive at a dollar figure for the social cost of carbon. These include judgments about how to represent the response of climate to increasing GHG emissions and how those impacts interact with the welfare of humans and other animals. See here for a clear and concise discussion of the social cost of carbon and discount factors in climate policymaking.

Some economists and others argue that cost-benefit analysis should not be used in evaluating climate change policy choices, because there is no societal agreement on a basis for assigning monetary value to the protection of the environment or the climate system, or the impacts of climate change on future humans, and other key questions. We’ve never faced a problem like climate change before, and we need new tools to help guide our responses. Perhaps this drawn out review process of the EPA’s rules will be the beginning of an institutional adaptation process that will allow us to respond more effectively to climate change and other complex challenges.

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