EPA Reconsiders its Use of Co-Benefits in Cost-Benefit Analysis

In the last days of 2018, EPA invited comment on a proposal (the revised Supplemental Cost Finding for the Mercury and Air Toxics Standards) that could change the way regulatory benefits are calculated for some of its biggest rules. The immediate reach of the proposal is narrow. But it raises important questions about the proper consideration of regulatory costs and benefits, and its implications should be considered carefully.

For decades, Executive Orders issued by Presidents of both parties have required federal agencies to maximize net benefits when they decide whether and how to regulate behavior consistent with law. And at least some statutes also require agencies to weigh a potential rule’s costs against its benefits. But which benefits count in this analysis—just the direct benefits of the regulation, or also ancillary benefits that are incidental to the purpose of the rule? And if ancillary benefits (or “co-benefits”) are fair game, how attenuated can their connection be to the purpose of the regulation?

Adjusting EPA’s cost-benefit methodology to exclude certain classes of co-benefits could significantly limit the kinds of regulatory burdens that the Agency is able to impose, because EPA’s calculation of co-benefits sometimes far exceeds a rule’s direct benefits. Many costly environmental regulations have been cost-justified on the basis of incidental reductions of non-targeted pollutants, including so-called “criteria pollutants” that EPA already regulates under a separate provision of the Clean Air Act.

Perhaps the most striking example of such a regulation was the Obama Administration’s Mercury and Air Toxics Standard (MATS). The rule was projected to generate relatively small quantifiable mercury-related benefits—only $4 to $6 million per year—despite annual compliance costs of $9.6 billion. But EPA’s regulatory impact analysis also included $37 to $90 billion in ancillary benefits from incidental reductions of particulate matter precursors that would be trapped by the control technology the industry would adopt to limit the mercury and air toxic emissions targeted under the statute.

The outsized role of co-benefits raised some eyebrows at the Supreme Court when it heard industry’s challenge to the MATS rule. During oral argument, Chief Justice Roberts said, “It’s a good thing if your regulation also benefits in other ways. But when it’s such a disproportion, you begin to wonder whether it’s an illegitimate way of avoiding the different—quite different limitations on EPA that apply in the criteria program.”

Ultimately the Court did not decide whether EPA could rely on co-benefits to justify the MATS rule, because the Agency had eschewed any cost-benefit analysis at all when it decided to regulate mercury emissions from power plants. Justice Scalia’s opinion for the Court held that ignoring costs was improper, because the statute required EPA to set “appropriate and necessary” standards. And it is not “rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.” The Court expressly reserved the question whether “the Agency could have considered ancillary benefits when deciding whether regulation is appropriate and necessary.”

On remand in 2016, the Obama Administration issued a Supplemental Finding concluding that the MATS rule was cost-justified, because its co-benefits exceeded the costs of the rule.

On December 27, 2018, the Trump Administration proposed the revised Supplemental Cost Finding for the MATS Rule. If finalized, the new rule would rescind the Obama Administration’s finding that the mercury standard was “appropriate and necessary.” To determine whether the mercury standard satisfies that statutory requirement, EPA now proposes to weigh the costs of compliance against the direct benefits of controlling mercury emissions—without considering ancillary reductions of criteria pollutants. Because costs vastly exceed benefits under that methodology, EPA proposes to find that the MATS standard is not “appropriate.”

Although the proposed rule raises important questions about the proper consideration of regulatory costs and benefits, its immediate reach is limited:

First, the proposal does not repudiate the use of co-benefits in traditional regulatory impact analyses (RIAs) conducted pursuant to Executive Order 12,866, which requires agencies to “assess all costs and benefits of available regulatory alternatives” (emphasis added). Rather, the proposal notes that reporting co-benefits in RIAs “is appropriate for informing the public about the potential effects of the regulatory action.” EPA’s proposed methodology is confined to the immediate statutory context, which requires EPA to consider costs in determining whether hazardous air pollutant (“HAP”) standards are “appropriate and necessary.”

Second, the proposal does not imply that all co-benefits are necessarily irrelevant to the appropriateness analysis. Rather, the proposal focuses on the fact that PM and both of its precursor pollutants (nitrogen oxides and sulfur dioxide) are “criteria pollutants that are already addressed by the cavalcade of statutory provisions governing levels of these pollutants.” In a separate memorandum to the docket, EPA explains that it is particularly concerned about the prior Administration’s decision to treat all PM reductions alike, even if they occur in areas that have already attained the PM standard. In theory, EPA could adopt a different approach to co-benefit reductions of pollutants that are not already regulated under separate statutory authority.

Third, EPA’s proposal does not even rule out the possibility that under different circumstances, a HAP standard-setting rule could give some weight to co-benefits from reductions of criteria pollutants like particulate matter. EPA reasons only that it is “appropriate not to give equal weight to non-HAP co-benefits” (emphasis added). Thus, in a future rule whose costs do not “vastly outweigh[] the monetized HAP benefits,” EPA’s appropriateness determination might give some weight to non-HAP co-benefits that do not risk usurping the Agency’s “primary focus” on HAP benefits.

Finally, EPA is not proposing to repeal the Obama Administration’s MATS standard itself, though the Agency is accepting comment on whether it may or must do so if it determines that regulation is not “appropriate or necessary.”

The proposed rule, which has not yet been published in the Federal Register, is sure to attract comments from energy generators, environmental organizations, and other entities with a stake in EPA’s future regulation of mercury and other HAPs. But academics, think tanks, and public policy organizations with an interest in good governance will also have something to say about EPA’s treatment of co-benefits. The methodology that EPA adopts in this proceeding could have repercussions not only for future HAPS rulemakings but for all regulatory schemes that explicitly or implicitly require a regulator first to count the cost.