Blog Post

Defining the Unknown: A Look at the Cost of Tighter Ozone Standards

Sep 25, 2015 | Alan J. Krupnick, Joshua Linn, Kristen McCormack

This post is an edited excerpt of a new RFF issue brief—Defining the Unknown: A Look at the Cost of Tighter Ozone Standards.

 

The US Environmental Protection Agency (EPA) is preparing to finalize new air quality standards for ground-level ozone, which is commonly known as smog. Considerable controversy has surrounded the potential costs of these standards, with most circling around how EPA and its detractors value the “unknown” mitigation measures that will be needed to meet tighter standards. We argue that although the costs are, by definition, highly uncertain, they are likely to be closer to EPA’s estimate than some interest groups and studies supported by such groups have claimed.

In 2014, EPA proposed a new standard in the range of 65 to 70 ppb and estimated that the national costs (excluding California) of reaching 65 ppb in 2025 relative to the existing 75 ppb standard would be $15 billion (2011$), with benefits 1.3 to 2.5 times greater than costs (EPA 2014).

In stark contrast, a report prepared for the National Association of Manufacturers (NAM) estimates that the direct costs of achieving a 65 ppb standard would amount to between $75 billion and $85 billion in 2025. (Readers may have seen reference to costs of over a trillion dollars on NAM-sponsored TV commercials. These cost estimates are cumulative costs over the entire program period, not costs in any given year.) The NAM-sponsored study makes different assumptions than EPA about control costs and the quantity of emissions reductions needed.

In addition to debate surrounding the estimation of unknown cost, controversy extends to the effect of the proposed standard on oil and natural gas production. EPA modeling suggests that some rural locations, where gas and oil production raises ozone levels during winter months, may newly exceed 65 ppb. Some have suggested that a tighter standard therefore could harm domestic energy production, and given the growing importance of domestic energy production, these effects could spill into the broader economy.

We focus on the costs, rather than the benefits, of achieving the 65 ppb standard because the costs have been so hotly contested. We conclude the following:

  • Although the Clean Air Act prohibits consideration of costs when setting the standards, costs will be considered when implementing the standards and will continue to play into the public debate. EPA and the states can consider costs when developing implementation plans. The long history of the Clean Air Act and academic literature provide no evidence that EPA has forced states to adopt policies with huge negative economic effects and that, if anything, costs (as well as benefits) tend to be overestimated in RIAs.
  • Setting standards below 75 ppb may raise production costs at oil and gas wells, but Harrison et al. (2014) largely overstate the costs. When analyzing 60 ppb (which is tighter than EPA is currently considering), Harrison et al. (2014) assume in a sensitivity analysis that production will remain at 2020 levels. This overstates costs because a) abatement technologies exist for oil and gas wells, b) low-cost oil and gas resources are available in regions expected to meet the standards, and c) oil and gas extraction does not occur exclusively in areas projected to exceed the standards.
  • Although we take issue with some of EPA’s cost estimation assumptions, we find that the agency’s cost estimates are likely far closer to the mark than those made by Harrison et al. (2015b). Harrison et al. (2015b) inappropriately exclude the Clean Power Plan from their baseline, raising estimated costs by roughly $4.6 billion per year. They also arbitrarily exclude some known controls identified by EPA. In addition, evidence from the recent literature and modeling of the power sector suggest that the costs of reducing NOx emissions are likely much lower than assumed by Harrison et al. (2015b). Using our preferred assumptions to estimate the costs of implementing EPA’s unknown controls reduces the Harrison et al. (2015b) estimate by more than 50 percent. Our estimates are fairly close to those of EPA and Fisher et al. (2015).

 

Read the full RFF issue brief—Defining the Unknown: A Look at the Cost of Tighter Ozone Standards.