Had the EPA succeeded in lowering the primary standard to 70 ppb and introducing a secondary standard of 13 ppm-hours, how much would that have cost industry? Would the benefits of a stricter standard justify that cost?
Here I must confess that I am at a considerable disadvantage. I do not know how to estimate industry costs, although I can report on other people’s claims. If I had all the time I needed, I would interview as many businesspeople I could on how tighter ozone restrictions imposed in 1998 affected them. In particular, I would want to know what new equipment they needed to buy to comply with the new standards. Did the new standards affect their decisions to buy equipment they were going to buy anyway and in what manner? How much more did they feel obliged to spend because of the new standards? Alas, time is short, I’m not getting paid to do this, I have no training in estimating costs, and I feel the need to move on to new topics. But these are still very important questions.
What I really would like is to compare three versions of one state’s State Implementation Plan (SIP). The first version would be designed to comply with the 0.084 ppm standard, the second with the 0.075 ppm standard, and the third to comply with the 0.070 ppm standard. Where are they the same? Where are they different? What are businesses expected to do differently to comply with the stricter standards? What kind of equipment are they expected to acquire under the three standards?
Do the benefits of a stricter standard justify the costs? Critics didn’t think so, such as the organization Americans for Tax Reform quoting a report by Oklahoma Senator James Inhofe:
EPA itself estimated that its ozone standard would cost $90 billion a year, while other studies have projected that the rule could cost upwards of a trillion dollars and destroy 7.4 million jobs.1
A couple of comments on this. The $90 billion a year figure and the trillion dollar figure are not contradictory. If the rule would cost us $90 billion a year for a dozen years, that will cost us more than a trillion dollars. Both figures are the upper limits of ranges, so that $90 billion a year and $1 trillion overall may be worst-case scenarios. According to a chart produced by the EPA which I will present in a later post, going to a 0.070 ppm standard would cost between $19 and $25 billion 2006 dollars by 20202. It is important to note that nobody can know for sure just how much the rule will cost either in money or in jobs. What experts do is estimate a range wide enough so that they think they will be right 95% of the time (95% confidence interval). That is to say, if an expert made an estimate of a range in twenty circumstances, in 19 times the true numbers will fall somewhere within those ranges.
Also, it should be pointed out that lowering ozone limits brings economic benefits in terms of lower medical costs and increased worker productivity (mainly because employees are out sick less). This is brought home by another EPA chart which estimates that if we had gone to a 0.070 ppm standard in 2011, we could have saved 170,000 sick days from work and eliminated 6,600 visits to the hospital and emergency rooms2. That all needs to be subtracted from the economic cost.
And what is the meaning of the destruction of 7.4 million jobs? Does that mean 7.4 million layoffs or 7.4 million people not hired who otherwise would be, or is it a combination of both? How does one determine how many jobs will be lost? (Note that Senator Inhofe is claiming two-digit accuracy: 7.4 million jobs, not 7.3 million or 7.5 million, so he is claiming more accuracy than a mere rough estimate. That kind of accuracy comes from a calculation and not just from a guess.) Do we need to balance that figure against jobs that might be created by the new rule, for example if companies that produce antipollution equipment saw an upsurge in business?
I am not an economist, but I think that the cost to business needs to be put into two categories. There are purchases that companies must make to comply with the new rule. The money doesn’t disappear; it merely goes somewhere else. If businesses buy American pollution control equipment, that is not a loss to the U.S. economy. Then there is the loss of productivity or efficiency that can come with compliance. That really could mean destroyed wealth, although it may be justified by the health and other benefits of the new rule.
Also, it is important to distinguish between capital expenditures, money spent on equipment, and operating expenses, money spent on operating that equipment. Money spent on equipment is a one-time investment, whereas money spent on operating that equipment is an ongoing commitment.
The EPA produced two very important documents that do a thorough cost-benefit analysis: Final Ozone NAAQS Regulatory Impact Analysis, March 2008, and its updated addendum, Regulatory Impact Analysis Final National Ambient Air Quality Standard for Ozone, July 2011. We will discuss these two documents in the next post.