On June 11, the Environmental Protection Agency issued a Notice of Proposed Rulemaking for a rule that would preclude the agency from counting indirectly-regulated benefits, known as co-benefits or ancillary benefits, in its cost-benefit analyses underpinning future rulemakings by the Office of Air and Radiation (OAR).  The proposed rule is inconsistent with several of the current administration’s major rulemaking efforts and in fact goes further than most of industry has asked. Perhaps most significantly, the proposed rule is contrary to the fundamental economic principle that actions, including government regulations, are appropriate and desirable where benefits — regardless of their source — outweigh costs.

The use of cost-benefit analyses by federal agencies in the rulemaking process was mandated by an executive order issued by Ronald Reagan in 1981.  At the time, industry welcomed the order as a check on inefficient and overly burdensome environmental regulations. As benefits have become capable of being quantified with more certainty due to improved air monitoring (particularly of fine particulate matter, or PM2.5, which causes respiratory and cardiac ailments), the cost-benefit analysis no longer provides fodder for regulated entities to challenge regulations. Guidance (circular A-4) from the Office of Management and Budget (OMB) directs agencies to consider benefits that are “unrelated or secondary to the statutory purpose of the rulemaking (e.g., reduced refinery emissions due to more stringent fuel economy standards for light trucks),” and to “look beyond the direct benefits and direct costs of your rulemaking and consider any important ancillary benefits and countervailing risks.”  For several recent rulemakings, the benefits associated with reducing PM2.5 have by themselves exceeded the costs of complying with air regulations aimed at other pollutants.  For example, the Obama administration estimated that by 2030 the Clean Power Plan would have provided $34 billion to $54 billion per year in total benefits, including $20 billion in direct benefits and $14 billion to $34 billion in co-benefits, at an annual cost of $8.4 billion.

In June 2018, EPA issued an Advance Notice of Proposed Rulemaking to address the use of cost-benefit analyses in rulemakings across the board, which contained the following question to commenters:

What improvements would result from a general rule that specifies how the Agency will factor the outcomes or key elements of the benefit-cost analysis into future decision making? For example, to what extent should EPA develop a general rule on how the Agency will weigh the benefits from reductions in pollutants that were not directly regulated (often called “co-benefits” or “ancillary benefits”) or how it will weigh key analytical issues (e.g., uncertainty, baseline assumptions, limited environmental modeling, treatment of regulating multiple pollutants within one regulatory action) when deciding the stringency of future regulations?  

After accepting comments, EPA nixed the general rulemaking and instructed the individual program areas to proceed with developing their own rules.  With this proposed rulemaking (the only one so far in response to the administrator’s directive), OAR is proposing to change the consideration of co-benefits only within Clean Air Act rules. Of the agency’s program areas, OAR has the most at stake on this issue, since 95 percent of benefits from EPA rules are from air quality rules.

In proposing the OAR rule, the current administration undermines its own use of co-benefits in several of its major actions. The Affordable Clean Energy rule‘s cost-benefit analysis relied on billions of dollars of co-benefits without which its costs could not have been justified. This administration has also used co-benefits related to changes in fuel use and safety impacts in justifying its vehicle emissions standards.

  • Less than a week after the OAR rule was sent to OMB, EPA removed the basis for the Obama administration’s Mercury and Air Toxics Standards (MATS) rule:  the finding under Clean Air Act § 112 that it is appropriate and necessary to regulate emissions of hazardous air pollutants (HAPs, such as mercury) from coal- and oil-fired electric generating units.  Its justification for this reversal was that the cost-benefit analysis for the MATS rule relied too heavily on co-benefits, specifically from reduction of emissions of non-HAPs such as PM2.5.  The MATS rule was projected to provide $33 billion to $81 billion in total benefits, including only $500,000 to $1 million in benefits due to reduction of mercury.  According to the Regulatory Impact Analysis for that rule, “The great majority of the [estimated benefits] are attributable to co-benefits from 4,200 to 11,000 fewer PM2.5-related premature mortalities.”

However, this action did not automatically render the MATS rule ineffective.  Most of the regulated community has already complied with the rule and does not want it to be repealed; in the absence of a mandate requiring the pollution control equipment that was installed in response to the MATS rule, owners of power plants could potentially be precluded from recovering their investments in installing and operating that equipment from ratepayers.  Although this action on the MATS rule will otherwise have little practical effect, EPA Administrator Andrew Wheeler indicated that the rollback foreshadowed the decreased reliance on co-benefits in Clean Air Act rulemakings going forward.

EPA’s interest in removing co-benefits from consideration is also puzzling in that, as with the partial rollback of the MATS rule that electric utilities never asked for, the OAR rule goes further than industry would want.  Contrary to the statement in the rulemaking proposal that commenters indicated that co-benefits “create public confusion about the nature and scope of the statutory authority that provides the basis for the regulation,” comments in the June 2018 rulemaking docket indicate little support from industry for the full revocation of the use of co-benefits in cost-benefit analyses.  For example, while expressing concerns with the current methodology of calculating costs and benefits, the Business Roundtable (whose members include chief executives of Chevron, Duke Energy, ExxonMobil, Marathon, Noble Energy, Phillips 66, Southern Company, TC Energy, and Vistra Energy) pointed out that consideration of co-benefits in cost-benefit analyses is consistent with OMB guidance.  The Business Roundtable stated that co-benefits “play a central role in providing the economic justification for agency rules.”  A comment submitted by the Air Permitting Forum, an industry group headed by lawyers for Hunton Andrews Kurth (former firm of former EPA air chief Bill Wehrum), called for reevaluation of the use of co-benefits but stated that “the Forum does not support the full elimination of co-benefits” from cost-benefit analyses.  The Independent Petroleum Association of America’s 36-page comment did not contain a substantive discussion of co-benefits.  In fact, the only major industry commenters who called for a rule that completely excluded the use of co-benefits were the Utility Air Regulatory Group (UARG) and the National Rural Electric Cooperative Association, which adopted UARG’s comments.  UARG, which was also represented by Hunton Andrews Kurth, has since been disbanded amidst a congressional inquiry into allegations of the group’s influence on the Trump administration.  Murray Energy, Administrator Wheeler’s former client, spoke disparagingly about the use of co-benefits in its comments but did not explicitly request their wholesale exclusion from cost-benefit analyses.

The OAR rule contradicts the basic economic principles upon which cost-benefit analyses were incorporated into the rulemaking process in the first place, by a conservative president intending to protect the interests of industry.  The purpose of a cost-benefit analysis is to determine objectively whether, in dollars and cents, the juice is worth the squeeze.  EPA has provided no rationale for excluding from its cost-benefit analyses any benefits derived from reductions of indirectly regulated pollutants.  Logically, benefits from reductions in PM2.5 should count equally whether the monetary savings are achieved via a regulation targeted at PM2.5 or via a regulation targeted at another pollutant.  EPA has not acknowledged or explained its departure from this fundamental principle. 

EPA has also not indicated that the corollary of co-benefits – indirect costs – will be in any way discounted going forward, which would only make sense if co-benefits are excluded or discounted.  To discount or exclude co-benefits without doing the same for indirect costs would artificially tip the scales against regulation.  However, it is difficult to conceive how as a practical matter EPA could exclude indirect costs from its cost-benefit analyses.  Simply defining indirect costs would lead to absurd results.  If a co-benefit is defined as a benefit ancillary to the intended benefits of the rule, would an indirect cost be a cost that is ancillary to the intended costs of the rule?  Splitting hairs on the cost side illustrates the absurdity of discounting co-benefits.  Regardless of their source, quantified benefits cause a gain in value to society, just as costs cause the loss of value.  If indirect costs cannot be discounted or excluded from a cost-benefit analysis, there is no logical reason to do the same for co-benefits, and discounting one without the other would produce an inaccurate cost-benefit equation.

It is unclear whether the administration will be able to finalize the OAR rule prior to the end of President Trump’s first term; the current timeline calls for finalization in the fall or even winter. In the event of an administration change, the Congressional Review Act could be implemented to jettison any rule promulgated in the last 60 days of the administration.  Thus, the current administration will need to act swiftly to ensure the rule is implemented.  Even if the rule were to escape congressional review, if the rule is embroiled in litigation come January (as is likely to be the case), a new administration could stay and then repeal the rule.  The comment period will close on July 27, 2020.

Kathryn Schroeder is an environmental attorney working in private practice. She was formerly an attorney with the Texas Commission on Environmental Quality, and is a graduate of Temple University School of Law.