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Reform the Clean Air Act

by Oren Cass

We should balance pollution reduction with the need for growth

Once every eight years comes a day perfect for hiding the most unpopular and ill-advised policy decisions. It arrives right after a second-term president’s midterm elections, when he will never again face the ire of voters, and right before Thanksgiving, when the nation shuts down and travels home to visit family. And so President Obama chose Wednesday, November 26, 2014, to announce a substantial tightening of the Clean Air Act that will prevent industrial growth across large swathes of the United States. It could become the most expensive regulation in the country’s history.

The action was a stark reminder of the Obama administration’s consistent preference for burdensome regulation over economic growth, but the outrage that politicians and industry groups directed at the president was in many respects misplaced. Such aggressive regulation is exactly what the Clean Air Act — duly passed by overwhelming bipartisan majorities in 1970 and further strengthened by overwhelming bipartisan majorities in 1990 — calls for. Showing disregard for massive costs is exactly what the Supreme Court, in a unanimous opinion authored in 2001 by none other than Justice Antonin Scalia (Whitman v. American Trucking), has instructed the EPA to do as it implements the Clean Air Act. And environmental groups won a lawsuit last April against the federal government for not moving quickly enough to meet requirements set forth in the Act.

The Clean Air Act, by virtue of decisions made and priorities chosen decades ago, is forcing Americans to accept substantial economic sacrifices that they cannot afford, in pursuit of environmental gains that they do not need and that are not worth the cost. Through sheer inertia it is continuing to tighten the screws on industry and energy in pursuit of ever greater environmental quality, even though the broad consensus supporting such a tradeoff has disintegrated and most Americans today see the former as a greater concern than the latter.

Yet as conservatives search for solutions to reverse income stagnation and reinvigorate the middle class, this issue rarely appears on the radar. It should. Rather than launching into paroxysms of rage over each new regulation, the way to move toward a more rational and pro-growth environmental policy is to reform the Clean Air Act itself. The goal should be to preserve the last 40 years of environmental gains while simultaneously prioritizing the need for industrial economic growth. In concrete terms, a major manufacturing outfit that hopes to double its size — doubling its employment, doubling its output, but also doubling its pollution as a result — should be able to do so. Today, too often, it cannot.

The right package of reforms has the potential to maintain environmental quality at or near current levels, reduce regulatory pressure, and produce a huge, market-driven, budget-neutral economic stimulus targeted directly at the energy and manufacturing sectors, which are striving to recharge the American economy.

The year 1970 was a watershed in the history of environmental policy in the United States. While the American economy was enjoying the fruits of a remarkable 25-year run of growth and technological innovation, the public’s concern over pollution was cresting. The prior year had seen a massive oil spill off the coast of Santa Barbara and the infamous Cuyahoga River fire in Cleveland. The first Earth Day was celebrated, the Environmental Protection Agency was created, and, on the last day of the year, President Nixon signed the modern Clean Air Act into law. The Act was, and still is, arguably the most powerful environmental law in the world. Even more than 40 years later, in a recent White House list of proposed regulations that would have an estimated annual cost in excess of $1 billion, the Act accounted for numbers one, two, and three.

The Act takes different approaches to different types of pollution, but its core mechanism works as follows, subject to variations from state to state: The EPA establishes “national ambient air quality standards” (NAAQS), determining the level of acceptable pollution in the air for each major pollutant based on what is deemed “requisite to protect the public health.” For each pollutant, if the air quality in an area of the United States is better than this standard, then the goal must be to “prevent significant deterioration” (PSD). New facilities in that area are required to put modern pollution controls in place. If the area’s air quality is worse than the standard, it is designated a “non-attainment zone” (NAZ), with drastic consequences. Existing facilities must install retrofitted pollution controls, and new facilities must install the best possible pollution controls while also finding other facilities in the area that will make offsetting pollution reductions to compensate for any new emissions. Significantly, major modifications to existing facilities cause them to be treated as “new” facilities.

Consider the hypothetical manufacturing plant that seeks to double in size. The expansion would represent a major modification and therefore lead to a review of the entire facility as “new.” If it is located in a PSD area, it must now install pollution controls where before none were required — in both the “new” part of the facility and the old part. If it is located in an NAZ, it must install the best possible pollution controls and pay to offset its pollution. The plant’s owners had wanted to create new jobs in the same way they always had, but they cannot do so now. An investment that once looked attractive might not go forward at all.

If the goal is to improve environmental quality rapidly and regardless of cost, the Act’s structure is understandable. In practice, it has been quite effective.  Between 1980 and 2013, lead levels in the air fell 92 percent; carbon monoxide fell 84 percent; sulfur dioxide fell 81 percent; nitrogen dioxide fell 60 percent; and ozone fell 33 percent. These are significant achievements, and environmentalists are justifiably proud of the enormous public-health benefits that have followed.

But as the environment has improved, the rules have only gotten tighter. The EPA has repeatedly revised the standards necessary for the protection of public health by expanding the list of regulated pollutants and by lowering the thresholds that areas may not exceed. For instance, the EPA recently reduced the NAAQS for fine-particulate matter (perhaps the most harmful form of air pollution) to a standard more than twice as tight as that used by the European Union. Western Europe may be widely perceived as more environmentally conscious than the United States, but its fine-particulate-matter levels are more than 65 percent higher.

The Obama administration has proposed reducing the NAAQS for ozone, even though the limit was already lowered by the Clinton administration in 1997 and by the Bush administration in 2008, to its current level of 75 parts per billion (ppb). The EPA indicated that it is targeting a new standard of between 65 ppb and 70 ppb, but it will also consider a standard as low as 60 ppb. Environmentalists argue that scientific evidence shows that a 60-ppb maximum is necessary to protect public health, but air quality in most of the country (including in many national parks) exceeds 60 ppb and would violate that standard. As the standard is set ever lower, more areas of the country fail to meet it, become classified as non-attainment zones, and face onerous restrictions on economic growth, especially in the industrial and energy sectors.

The air gets cleaner and cleaner, but industrial operations become costlier and costlier. Researchers at MIT have estimated that Clean Air Act regulations have cost the manufacturing industry alone more than $20 billion annually and reduced the industry’s profitability by nearly 10 percent. Other studies show that hundreds of thousands of jobs in affected industries have been destroyed, and that the income of the average worker in newly regulated industries has fallen 20 percent.

The treatment of new facilities drives much of this cost and amplifies the economic damage. Older, dirtier facilities continue to operate as they have rather than invest in upgrades that might improve their productivity while reducing their environmental impact. Large businesses benefit from barriers to entry that keep newer and smaller firms out, giving them an incentive to advocate regulation that hurts them but hurts potential competitors more. A study reported in the Journal of Political Economy in 2000 found that construction of new plants in affected areas had declined by more than 25 percent. As Robert Stavins, the director of Harvard University’s environmental-economics program, has explained: “Experience over the past 25 years has shown that this approach has been both excessively costly and environmentally counterproductive.” In some cases, shutting out new construction has led to pollution levels that are higher than they would be if there had been no regulation at all.

The Obama administration and its many allies in the environmental movement survey this scene and call for further regulation. In their estimation, as reflected in the cost-benefit analyses they publish to justify each new rule, every turn of the regulatory ratchet produces enormous benefits that dwarf any costs. Thus the EPA reports that its proposal for a new and lower ozone threshold would produce improvements in public health that it values at $19 billion to $38 billion annually, as compared with $15 billion in annual cost for the new standard.

Unfortunately, the EPA arrives at these dollar estimates through the juvenile approach of tallying up every possible benefit it can associate with its rule while ignoring all but the most obvious and immediate costs. The accounted-for benefits of reduced ozone include, for example, the economic output that would result from a parent’s not having to miss a day of work to care for a child who had to stay home from school owing to air-quality-related health problems. Two-thirds of the predicted benefits are not related to reduced ozone levels at all. Instead, they are so-called co-benefits — other environmental benefits that could be achieved as side effects of the regulation.

The cost side of the ledger, meanwhile, includes only the actual dollars that companies will spend to comply with the regulation — the cost of purchasing, installing, and operating the new pollution-control technologies. Macroeconomic impacts on investment and employment and prices are ignored. So, too, are the broader social costs of crippled industries and unemployed breadwinners, and the lost opportunity of firms never born and innovations never pursued. Meanwhile, because existing technology will not be sufficient to meet the EPA’s new standard, EPA analysts simply assume that better pollution controls will be developed in the future at reasonable cost. So one-third of the cost estimate is tied to existing technologies that companies could actually purchase today, and the other two-thirds comes from a hope that a better but still affordable technology will come. 

This is not a cost-benefit analysis; it is a show trial. And it is business as usual for Obama’s EPA. In 2012, the Obama administration put forward the “Utility MACT” (maximum achievable control technology) rule, mandating tight controls on mercury emissions from coal-fired power plants, and predicted $37 billion to $90 billion in benefits compared with only $9.6 billion in costs. But only $4 million to $6 million (that’s “million” with an “m”) of the projected benefits were to be achieved from the reduction of mercury and other hazardous pollutants. The rest of the regulation’s projected “benefits” came from an expectation that its prohibitive expense would force plants to shut down entirely, a prospect that the EPA relished but was powerless to order directly.

The cleverly worded fact sheet released by the EPA highlighted the health benefits that would be produced by its regulation: “Until now there were no national limits on emissions of mercury and other air toxins from power plants. Uncontrolled releases of toxic air pollutants like mercury — a neurotoxin — can impair children’s ability to learn.” While it is true that uncontrolled releases of toxic air pollution can impair children’s ability to learn, the anticipated improvement in children’s average IQ as a result of the MACT rule was 0.0021 points. Susan Dudley, a former White House administrator who was responsible for monitoring regulatory costs, succinctly summarized the situation in congressional testimony about the rule: “On the benefits side of the equation, EPA quantifies or lists every conceivable good thing that it might attribute to a decision to set new emission limits, while on the cost side, it only considers the most obvious direct and intended costs of complying with the regulation.”

To be sure, properly measuring the full cost of an air-quality regulation is not an easy task. But is it any more difficult than measuring the benefit of having fewer missed school days thanks to improved air quality, or measuring the ease with which not-yet-imagined pollution-control technologies will spring forth? National Economic Research Associates conducted an in-depth study on behalf of the National Association of Manufacturers to create just such an estimate for the new ozone rule, analyzing the true cost of the most stringent of the standards under consideration (60 ppb). Whereas the EPA had projected that this standard would impose direct engineering costs of $39 billion annually, the study predicted that the total economic cost would be more than six times as high: $270 billion per year, and the loss of almost 3 million jobs.

The truth is presumably somewhere between the EPA’s estimate and the industry’s, but under almost any responsible set of assumptions, the costs outweigh the benefits. One could focus narrowly on direct economic factors: On the benefit side of the ledger, count only the prevention of pollution-related property damage; on the cost side, count only the immediate cost of compliance. Or one could set broader guidelines and take into account all public-health benefits of reduced pollution. But then the full economic and social costs of slowed growth must enter the equation as well. Studies also show significant impacts of unemployment on everything from health and life expectancy to family stability to children’s educational outcomes.

Perhaps one can assess the economic–environmental trade-off most easily through a historical lens. In the mid 1990s, under the Clinton administration, annual emissions of air pollutants targeted by the Clean Air Act were twice what they are today. Ozone concentrations in the air were 25 percent higher. That period is rightly remembered for its expanding economic prosperity. It is rarely cited as a time of unacceptable environmental degradation.

Among those who recognize the imperative to prioritize economic growth is President Obama — seeking-to-win-reelection President Obama, that is. When the EPA first attempted to move forward with its new ozone regulation in 2011, the president ordered it to stop, saying, “I have continued to underscore the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover.” Only now, with swing states in the Midwest far from his mind, are regulatory burdens and uncertainty of so little concern.

The Clean Air Act explains in its introduction that “growth in the amount and complexity of air pollution brought about by urbanization, industrial development, and the increasing use of motor vehicles has resulted in mounting dangers to the public health and welfare.” That statement is out of date, and legislation premised on it strikes the wrong balance between environmental and economic concerns. But a federal statute is not a pendulum that will swing back of its own accord. It requires substantive reform.

A new balance, appropriate to America’s current challenges, would secure the widespread gains in environmental quality to date while prioritizing economic growth over further environmental improvement. It would accept the additional pollution that naturally follows from the increased industrial output that is the explicit policy objective of both political parties. To shift the Act’s fulcrum and strike a new balance, the discriminatory treatment of new facilities should be eliminated, so that companies can make new economic investments under the same rules that apply to existing facilities.

Imposing heightened requirements on new pollution-emitting facilities is one of the Act’s primary mechanisms for improving air quality. Particularly in those areas of the country where air quality is worse than the EPA-established standard, those heightened requirements can be extraordinarily onerous and in many cases can shut off new investment. Removing the heightened requirements would allow existing industrial and energy-producing facilities to expand and would also allow new facilities to be built under the same rules that older plants must meet. The EPA would continue to set air-quality targets as it saw fit, but progress toward those targets would proceed more slowly. If that hypothetical factory wanted to double its size, it would be able to do so. If another firm wanted to build a competing factory with similar technology, it would be able to do that, too. States would retain the authority they have today to impose tighter regulations if their particular circumstances or policy preferences warranted such a course.

These reforms would be the economic equivalent of removing a dam. The current discrimination against new investments holds back a reservoir of capital that would surge forward were it not for the costs and restrictions now imposed. American industry sits downstream, eager to grow and create jobs but restricted in its ability to do so. An action such as the new ozone regulation raises the dam wall that much higher.

Eliminate the impositions on new investments and, as quickly as analysts could revise their models, a host of construction projects previously considered infeasible would become attractive. Upgrades to existing plants, which had been shelved for fear of triggering new requirements for the plant, would go back on the drawing board. Plans for new plants, which had been rejected because the plants could not operate profitably, would suddenly find willing investors. Entirely new businesses, which had been deemed unlikely to succeed while established businesses enjoyed a sizable cost advantage, would begin hiring. Competition would increase, economic efficiency would improve, and prices would fall. New areas of the country would open up for energy exploration. And manufacturers would find themselves better positioned against international competition.

Because the policy change would remove obstacles instead of creating a new program, it would entail none of the drawbacks commonly associated with a fiscal or monetary stimulus. There would be no cost to the government and no asset bubbles created by easy money or overinvestment in government-chosen sectors. No government bureaucracies would be empowered, and no markets would be distorted; to the contrary, regulations and market distortions would be removed.

For even greater impact, the elimination of discriminatory treatment could perhaps be structured as a five-year suspension of the current new-source rules. A new project started within the five-year period would benefit from the existing-source rules, and then, when new-source rules potentially returned, they would not apply to what would by then be an existing source. Firms would therefore have an even greater incentive to make investments quickly. Revisiting the rules after five years would also give policymakers the opportunity to evaluate the economic and environmental impacts of the change and determine whether they were achieving a satisfactory balance.

The effects on air quality would follow directly from the objectives of the reform. There would be no change from the existing facilities that are the vast majority of pollution sources. New and modified facilities would not operate free of all regulation; they would simply be subject to the standards that now apply to existing facilities. Thus, while one would expect improvements in air quality to slow, overall quality could degrade only as the result of much-needed economic growth. Meanwhile, the competitive pressure to cut costs through improved energy efficiency would continue to usher in technological improvements that tend to reduce pollution, though lessened regulatory pressure might slow that progress.

Perhaps as a final touch, the introduction to the Clean Air Act could be amended to note that in recent decades America has seen not “growth in the amount and complexity of air pollution,” but significant declines instead; that it does not face “mounting dangers to the public health and welfare,” but rather welcomes great improvements; and that to further the welfare of the nation, the Act will now focus on ensuring the continued use of existing pollution controls while encouraging economic development.

The point is not that federal environmental efforts have failed, or that environmental quality is unimportant. To the contrary, the Clean Air Act is a victim of its own success. Precisely because America has made so much environmental progress, a marginal investment in further economic growth now offers a far greater societal return than a marginal investment in further environmental quality.

– Mr. Cass was the domestic-policy director of Mitt Romney’s presidential campaign.

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