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Commentary By Diana Furchtgott-Roth

The EPA Pours On the Pain With New Ozone Regulations

Economics, Energy, Economics Regulatory Policy

Oil companies are getting thrashed by falling oil prices. Some analysts predict that there will be no new net investment in the U.S. oil and gas industry in 2015, and the possibility of declining investment in 2016. At the same time, the Environmental Protection Agency is pummeling the industry with a new set of National Ambient Air Quality Standards for Ozone (NAAQS), released the day before Thanksgiving.

Congress has little control over oil prices, which are set in world markets, but it does have authority over the EPA. The EPA’s new 626-page ozone regulation, accompanied by a 575-page Regulatory Impact Analysis, would dramatically reduce the amount of ozone allowed in the air from the current standard of 75 parts per billion to a range of 65 ppb to 70 ppb, and EPA is requesting comments on an even tighter standard of 60 ppb.

Ozone is a highly reactive gas that is produced by both natural and man-made sources, and some believe that, in large quantities, it adversely affects people’s health. Some prominent sources of volatile organic compounds are chemical plants and gasoline pumps, while sources of nitrogen oxides are power plants and motor vehicles.

Currently 40% of the U.S. population lives in areas that do not meet the standard of 75 ppb. At 65 ppb, more than half of the United States would be out of compliance. Even EPA suggests that 10 years from now, 68 counties outside the state of California will violate the standard of 65 ppb.

It would make more sense to bring America into compliance with the existing 75 ppb standard before tightening the standard further. But, no, the EPA is moving ahead with a new standard before the country has met the current one.

The EPA has estimated in its Regulatory Impact Analysis (Table ES-6) that the new 65 ppb standard will cost $15 billion in 2025, and have $28 billion of health benefits, for an economic gain of $13 billion. But this gain is not from a reduction in ozone, but from the associated decline in particulate matter that will occur due to the ozone regulation.

In Table 5-1 of the Regulatory Impact Analysis, the agency divides the benefits into those from ozone reduction and those from particulate reduction. The ozone-only benefits are $8.6 billion in 2025, compared with $15 billion in costs. The regulation fails a basic cost-benefit analysis on ozone alone.

This is important because the EPA regulates particulate matter under the 1997 and 2006 Fine Particulate Standards. If the EPA wants to regulate particulate matter further, it can propose additional standards, and perform a cost-benefit analysis to show Americans why the additional standards make sense. But if it wants to regulate ozone, it has to show us that the benefits of regulating ozone trump the costs. It cannot just throw in extra benefits from reductions in other substances.

Industry experts say the costs would be far higher than $15 billion annually. A 2013 NERA Economic Consulting study, prepared for the U.S. Chamber of Commerce, projected that ozone-regulation levels of 65 ppb would cost $26 billion a year and result in 609,000 fewer jobs every year.

However, costs apparently do not matter. The EPA writes in its regulation that its “task is to establish standards that are neither more nor less stringent than necessary for these purposes. In so doing, the EPA may not consider the costs of implementing the standards.” (Italics added.)

So, in practice, there is little point of the 575-page Regulatory Impact Analysis. The EPA says: “Accordingly, although an RIA has been prepared, the results of the RIA have not been considered in issuing this proposed rule.”

The costs are certainly there because, three years after the rule is promulgated, all states must submit a State Implementation Plan to the EPA in order to make sure they comply with the new regulation. In the EPA’s words: “States are to develop and maintain an air quality management infrastructure that includes enforceable emission limitations, a permitting program, an ambient monitoring program, an enforcement program, air quality modeling capabilities, and adequate personnel, resources, and legal authority.”

States will have to reduce emissions to meet the standards. That means reducing energy-intensive economic activity, which has real costs.

The EPA has proposed an expensive rule, told Americans that it may not consider the costs, and ordered states to send implementation plans. But the EPA is trying to pull the wool over eyes of the public with Kafkaesque language, stating that the action has no economic effect, that it does not contain unfunded mandates or federalism implications, and that it will have no effect on energy production. MIT professor Jonathan Gruber would be proud.

EPA Administrator Gina McCarthy wrote: “I certify that this action will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (RFA). The reason is that this proposed rule will not impose any requirements on small entities.”

But by meeting new EPA requirements, states will impose costs on all entities, large and small. Electricity bills will rise. States will limit permits for construction and manufacturing. Small entities will suffer from higher costs and from the reduction in business activity from the large firms that will be displaced.

In a further attempt to mislead the public, the report states that “this action does not contain any unfunded mandate as described in the Unfunded Mandates Reform Act (UMRA), 2 U. S. C. 1531–1538, and does not significantly or uniquely affect small governments.” But the requirements are certainly mandates, and states will not be given funding to put them into place.

The EPA also hides its purpose when it states: “This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.” But it affects federalism because states are not free to opt out.

Even more stealthily, the EPA writes that “this action is not a ‘significant energy action’ because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. ... Such strategies will be developed by states on a case-by-case basis, and the EPA cannot predict whether the control options selected by states will include regulations on energy suppliers, distributors, or users.” But the only way that states will succeed is by reducing production of fossil fuels, which produces most of their energy.

One group of people who can breathe easier, so to speak, is Native Americans, because they are exempt from the requirements. Perhaps the EPA does not care about the health of Native Americans, or perhaps it may wish to spare them economic hardship. Whatever the case, the proposal states: “Tribes are not obligated to adopt or implement any [National Ambient Air Quality Standards for Ozone]. In addition, tribes are not obligated to conduct ambient monitoring for [ozone] or to adopt the ambient monitoring requirements. …”

MIT’s Gruber counted on the “stupidity of the American voter” to pass Obamacare. With energy investments potentially declining due to falling oil prices, will American voters now be stupid enough to let the EPA have its way with new ozone rules?


Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.

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