Policy commentary

Making Sense of Ozone

Sep 19, 2011 | Nathan Richardson, Randall Lutter

Recently, the White House decided not to strengthen the ozone air quality standards, citing concern over the economic costs of meeting the higher standards. The media portrayed the decision as a victory for industry, but the victory will probably be short-lived as the standards will be revisited in 2013. The decision raises the broader issue that ordinarily, costs aren’t considered in setting the standards, but including the costs would improve policy.

On the Friday before Labor Day, the White House announced it would abandon its promised and controversial strengthening of Bush-era ozone air quality standards. Media reports describe this as a defeat for environmentalists and a victory for industry. But President Obama made the decision, at least ostensibly, not to pick sides but based on the predicted effect of the new regulation on the economy, noting “the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover.” In so justifying his decision he has taken an unprecedented (if legally unique) step, and perhaps shown the need for a reassessment of how air quality standards are set.

The White House had originally planned to strengthen the ground-level ozone standards, issued by the Bush administration, which environmental groups argued weren’t protective enough because the U.S. Environmental Protection Agency (EPA) had illegally ignored the advice of its scientists. These groups sued, but agreed to hold off after the new Obama administration promised to revisit the standards and adhere more closely to that advice. EPA issued a proposed revision for public comment in 2010 and recently submitted a final rule to Office of Management and Budget (OMB) review before the president pulled the plug. The environmental groups understandably cry bait-and-switch.

However, tightening of the standards is probably inevitable—for environmentalists, the president’s decision is not a loss but victory delayed. The Clean Air Act requires EPA to review air quality standards every five years, revising them based on the best available science. The 2008 Bush ozone standards belatedly revised the 1997 standards, but the aborted Obama revision was an unusual “off-cycle” review. EPA must still review the 2008 ozone standards by 2013.

Over the last 30 years, these revisions have consistently led to more stringent standards. One reason is the law itself—the Clean Air Act prohibits consideration of costs or even feasibility in setting the standards. This means that uncertainty and variability of health risks can be considered, but burden, cost, or technical feasibility cannot. Another reason is institutional—EPA’s clean air advisory committee plays a key role in shaping standards and includes expert researchers funded largely by the agency. Its makeup in 2013 will be similar to what it is today, so its future recommendations will likely also be similar.

If President Obama remains in office, EPA will probably issue 2013 standards that look much like its 2010 proposal, backed by more up-to-date science. Environmental groups are also likely to resume their litigation against the 2008 standards, which may yet be revised if they are successful. Any victory for industry looks short-lived.

But it is still worth examining the president’s decision. Despite the Clean Air Act’s 40-year-old prohibition on considering costs or feasibility in setting national air standards, economists look to estimates of likely benefits and costs to evaluate them just like any other policy.

What effects would the revised standards have had on the economy? Professor Michael Greenstone of MIT, former chief economist of President Obama’s Council of Economic Advisers, has studied the effects of national air quality standards on employment and economic output. He found in 2002 that from 1972 to 1987, counties subject to more stringent regulations (because they did not meet the standards) lost approximately 590,000 jobs, $37 billion in capital stock, and $75 billion (in 1987 dollars) of output in polluting industries relative to other counties. Greenstone did not address the extent to which jobs shifted to other areas, and his research analyzes standards for several pollutants using older data, so its applicability to the current decision is unclear.

To evaluate the withdrawn revision, one typically looks first at EPA’s own analysis. Two alternatives in the proposed rule would probably have bracketed the final decision— 60 parts per billion (ppb) and 70 ppb, each averaged over 8 hours. EPA’s estimates of benefits and costs spanned a wide range. Estimated net benefits in 2020 for the 70 ppb standard range from $18 billion to negative $14 billion; for 60 ppb, they range from $48 billion to negative $22 billion.

But such estimates should be treated with caution. EPA, like all executive agencies, estimates the benefits and costs of its regulations to comply with an executive order. However, courts have interpreted the law to forbid cost considerations when setting air standards. EPA economic analyses therefore serve only to inform Congress, the states, and the public about the likely effects of the rule. More precisely, they communicate EPA’s view on a rule’s effects while attempting to satisfy OMB requirements.

In this case, EPA’s economic analysis of the withdrawn ozone standards suffers from three notable flaws:

  1. EPA makes optimistic cost assumptions in four metropolitan areas where current emissions control technologies are insufficient to achieve the standards. In these areas, unspecified future technologies or policies account for most of the costs necessary to meet even the Bush standards. For more stringent standards this problem is even worse. Relying on such unspecified actions raises questions of feasibility.
  2. EPA’s estimates exclude Los Angeles and the San Joaquin Valley, which EPA notes are not expected (read: able) to attain the less stringent 1997 standard until 2025. Leaving these problematic areas out increases the estimated net benefits of EPA’s proposal.
  3. EPA inappropriately assumes that all reductions in emissions of nitrogen oxides (NOx), a precursor to ozone, lower concentrations of a third pollutant (fine particulates). This matters because lower fine particulate concentrations are the biggest source of estimated benefits. In fact, some studies suggest that in key urban areas, small NOx reductions can increase fine particulate concentrations and therefore damages from air pollution. While this effect’s significance here is unclear, EPA’s analysis does not even consider it.

These flaws indicate that EPA’s analysis may have overstated the net benefits of its proposed standards. The analysis is also incomplete: it does not address a separate “secondary” standard that EPA was expected to issue to “protect the public welfare,” which EPA interprets to mean protecting visibility, crops, vegetation, and buildings. Under OMB’s standards for economic analysis, EPA should have analyzed the benefits and costs of such a secondary standard.

But even if EPA’s economic analysis for the 2013 review is improved, it remains legally irrelevant to the agency’s decision regardless of its implications. The irrelevance of economics in setting air standards has led some environmentalists to criticize the basis for President Obama’s action, even suggesting the move is illegal. This is unlikely—the decision to do an off-cycle revision was discretionary, and the decision to abandon that revision almost certainly was too.

But the president’s unprecedented consideration of cost, however unusual the circumstances, raises a larger question. If it is appropriate to delay the standards because they are expected to have adverse economic effects, why is it a good idea to ignore those effects in regular revisions? If considering economic effects helps make better policy here, why pretend these effects don’t exist the rest of the time?

Environmentalists will counter that some past estimates of costs of air quality regulation have been shown by experience to be too high. This is true: for example, costs of the sulfur dioxide cap-and-trade program have been much lower than were estimated when it was launched in the 1990s. But this does not mean we should ignore benefit-cost analysis entirely any more than the existence of real costs and benefits means we should slavishly follow it. Just because economic analysis is imperfect (and will always remain so) does not mean it is useless. The process of setting air quality standards is unusual in its complete rejection of costs and even feasibility as a consideration. President Obama’s decision shows that reconsidering that restriction might lead to better policy.