POLLUTING THE EPA'S LONG TRADITION OF ECONOMIC ANALYSIS.

• Author: Livermore, Michael A.
• Position: The EPA at Fifty Symposium

CONTENTS INTRODUCTION I. COST-BENEFIT ANALYSIS AND REGULATION II. THE APPROPRIATE-AND-NECESSARY DETERMINATION AND MATS RULE III. INDIRECT COSTS AND BENEFITS IV. EXTRAORDINARY AND UNJUSTIFIED DEPARTURE FROM ESTABLISHED PRACTICE V. COST-BENEFIT ANALYSIS IN A DARK TIME INTRODUCTION

At its best, the system of agency decision-making in the U.S. administrative-law tradition balances two countervailing impulses: democratic accountability and expert decision-making. This balance has largely been achieved over the past several decades through the construction of a set of guardrails that give a limited scope to political influence, while keeping that influence within acceptable bounds. (1)

One of the most important of these guardrails, which has been in place since 1981, is the requirement that administrative agencies conduct cost-benefit analyses of major rulemakings. (2) Cost-benefit analysis creates a formal process for the simple idea that agencies ought to do their best to anticipate and evaluate the consequences of their decisions and seek out rules with the largest possible benefits at the lowest possible cost. The use of cost-benefit analysis to evaluate environmental regulations has a long history in the United States and has been embraced by administration of both political parties for decades. (3)

Over the years, this guardrail has become particularly important as agencies have developed a set of consistent methodologies for carrying out cost-benefit analyses. The peer-reviewed Guidelines for Preparing Economic Analyses, created by the Environmental Protection Agency (EPA), contains a set of best practices that have been painstakingly developed over the years. (4) Another important touchstone for conducting economic analysis that applies more generally is Circular A-4, which was developed by the Office of Management and Budget (OMB) during George W. Bush's administration. (5)

A value of these best practices is in maintaining consistency across agency decisions. One major critique leveled against the practice of cost-benefit analysis is that it is vulnerable to manipulation by agencies that want to create ad hoc rationalizations for policy choices that are based on political expediency. (6) Well-established best practices reduce this threat because they create a clear standard that can be used to hold agencies accountable: if an agency departs from established methods, that raises a red flag, alerting the public to the possibility of manipulation. The larger the departure from established practice, the stronger the reason the agency should be able to provide.

Cost-benefit analyses help protect expert decision-making from undue political influence in two ways. First, it creates the general principle that agencies should examine the positive and negative effects of regulatory proposals and seek out the ones with the greatest net benefits. Agencies' decisions can be held up to that standard in light of the information that is collected and disclosed in their required regulatory-impact statements. Second, consistent methodologies provide a means for the public to understand when politics might be playing too large of a role in an agency's decision-making. When an agency feels the need to depart from standard practices without a very strong justification, the public is alerted to the risk that political considerations may be intruding too far into how an agency is conducting its business.

Although some at the EPA initially resisted the move to cost-benefit analysis, the Agency soon realized that it was better to learn how to conduct strong assessments of its proposals than to try to resist the practice. (7) As a consequence, significant resources at the Agency were devoted to building out a world-class environmental economics team and developing methods that would be able to rigorously analyze environmental rules. (8) In particular, the EPA's rules often protect values that are not directly traded on markets, such as public health and ecosystems. Over the years, the Agency, under administrations of both political parties, has had considerable success in developing techniques to value these non-market benefits. (9)

Part of the reason that cost-benefit analysis works well at the EPA is that there is a clear economic justification for environmental protections. Many of the activities regulated by the Agency generate externalities that are not well-accounted for in markets. Pollution creates costs that are borne by the public, which means that private parties will not appropriately take them into account. The EPA's rules help correct for this market failure. Over the years, the EPA has adopted rules that have truly staggering net benefits for the public--many billions of dollars of value in terms of public health, protected ecosystems, and fuel savings due to energy-efficiency measures. Of course, these benefits come at a cost because companies have to devote resources to pollution control. But the benefits of the EPA's rules frequently swamp the costs, sometimes by orders of magnitude.

But the Agency's tradition of conducting cost-benefit analyses and delivering massive net benefits to the public cannot be taken for granted. Unfortunately, the Trump Administration has taken a number of steps that represent a radical break with the methodological practices used by past administrations of both political parties. This break does not merely raise a red flag for a single rule--it broadcasts that cost-benefit analysis is no longer playing its traditional role of protecting the Agency from inappropriate political influence.

This Article focuses on one example of this trend. In 2011, the Obama Administration adopted a rule to reduce mercury and other air toxics emitted by the electricity-generating sector. (10) This rule is known as the Mercury and Air Toxics Standard (MATS). When the EPA published that rule, its economic analysis--which used long established methods--projected $9.6 billion per year in compliance costs and between $37 billion and $90 billion per year in quantifiable benefits, in addition to substantial unquantified health and environmental benefits. (11) Under the Trump Administration, however, the EPA has reversed course and issued a proposal to undo its earlier finding that controlling these air pollutants was "appropriate and necessary." (12) If successful, this move would undermine the legal support for the MATS rule. In its explanation for why it seeks to revoke its earlier appropriate-and-necessary determination, the Trump EPA contradicts the relevant guidance and decades of practice by previous administrations (of both political parties) by functionally ignoring the largest class of benefits associated with the MATS Rule: saving thousands of Americans' lives. (13) The result is a biased and misleading estimate that creates the false impression that the MATS rule was not justified in cost-benefit terms.

The grounds that the EPA provides for functionally ignoring these benefits is that they are indirect co-benefits resulting from reduced exposure to particulate matter. These particulate-matter benefits occur as a result of the pollution-control technologies used by firms to comply with the MATS rule. But the OMB's Circular A-f and the EPA's own peer-reviewed guidance on conducting cost-benefit analyses direct the Agency to analyze both indirect costs and benefits. (14) Since President Reagan, the EPA has counted co-benefits in many regulatory contexts, including clean-air rules. (15)

The Agency fails to provide any adequate reason for this extraordinary and abnormal treatment of co-benefits. Nothing in either the relevant case law or the relevant statute requires the Agency to functionally ignore tens of billions of dollars' worth of regulatory benefits. If anything, the relevant case--Michigan v. EPA (16) --interpreted the statute to require the Agency to engage in a broad analysis of the costs and benefits of the rule, exactly the opposite of what the Agency is proposing to do. (17) If finalized and adopted, the EPA's proposal would not only undermine a socially desirable environmental policy, it would create a dangerous precedent of an agency departing from established methods when it is convenient to do so.

Cost-benefit analysis has survived as long as it has because administrations of both political parties were willing to play by the rules. An analogy might be drawn to the prisoners' dilemma, in which two strategic actors are collectively better off cooperating than defecting but short-term incentives push each individual actor towards defecting. By defecting from the long-term agreement to carry out cost-benefit analyses within the range of accepted norms, the Trump Administration has destabilized what was a very beneficial cooperative equilibrium. In doing so, it runs the risk of initiating a downward spiral of norm violations that renders economic analysis incapable of serving its traditional role of pushing back against overly intrusive political influence.

The balance of this Article proceeds as follows. Part I provides a brief overview of the role cost-benefit analysis plays in the regulatory process. Part II describes the procedural history of the MATS rule and the EPA's appropriate-and necessary-determination regarding that rule. Part III describes the role of co-benefits in prior EPA rulemakings as well as in the MATS rule. Part IV discusses the Trump EPA's radical departure from prior practice in its proposal to revoke the previous MATS appropriate-and necessary-determination. And Part V offers some concluding thoughts that contextualize the treatment of co-benefits in the MATS rule within a larger trend of the Trump Administration rejecting long-standing norms governing the role of cost-benefit analysis in agencies' decision-making.

1. COST-BENEFIT ANALYSIS AND REGULATION

   The use of cost-benefit analysis to evaluate environmental regulations has a long history in the...