Clean Air Act:

NERA Consulting's Montgomery says EPA misleading public on economics of air rules

Is U.S. EPA exaggerating the economic benefits of using the Clean Air Act to regulate emissions? During today's OnPoint, David Montgomery, senior vice president at NERA Economic Consulting, discusses a new report that analyzes the cost-benefit analysis used by the Obama administration for EPA's Clean Air Act regulations. He explains why he believes EPA is misleading the public about the economics of air regulations.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is David Montgomery, senior vice president at NERA Economic Consulting. David, it's nice to see you again.

David Montgomery: Thank you, it's very good to be here with you.

Monica Trauzzi: David, you recently authored a new report that analyzes the cost-benefit analysis used by the Obama administration for EPA's Clean Air Act regulations. And the report finds that EPA exaggerated the economic benefits of using the CAA to regulate emissions. How did you come to that conclusion?

David Montgomery: Well, because really there are two reports contained in one document. One claims a $2 trillion economic benefit from the cumulative past Clean Air Act regulations. The other estimates something between an economic loss of $100 billion and a gain of about $5 billion. They're both in exactly the same report. The difference is that the estimate of a loss of 100 billion to a gain of maybe 5 billion is done by actually looking at the effect of the Clean Air Act regulations on the ability of the economy to produce goods and services that satisfy people's needs. The $2 trillion is based on what are called concepts of willingness to pay and it represents no real output of goods and services in the economy.

Monica Trauzzi: So how does EPA then make the case for the monetary benefits of the Clean Air Act? Do they just focus on health benefits?

David Montgomery: The health - yes, the $2 trillion is a number for 2020 and 97 percent of the benefits come from these willingness-to-pay measures and just about all of that comes from just one source, which is avoided mortality from PM 2.5, the fine particulates which EPA is just now announcing an new ambient air quality standard for, but which they claim have been significantly affected by past regulations.

Monica Trauzzi: But wouldn't that be kind of a big deal in terms of economics if there are fewer health issues in the United States?

David Montgomery: It would be a big deal if there -- I mean it's certainly a big deal to see an improvement in life expectancy, there's no question about that. And when you go through all of the numbers, that $2 trillion is associated with an increase in average life expectancy of about 7/10 of a year. So, one set of questions is how do you get to $2 trillion from 7/10 of a year? But to answer your question, it has absolutely nothing to do with the actual operation of the economy, because EPA did take into account the additional size of the labor force if people live longer and reduced expenditures on health care. All of that went into its macro-economic modeling and it still found that in the most optimistic case for the size of those real economic benefits, you know, real effects on the economy, it was only a benefit of 5 billion, not 2 trillion.

Monica Trauzzi: Are there than any economic benefits to using the Clean Air Act to regulate greenhouse gas emissions?

David Montgomery: Yes, the question is the scale and how they compare to what we normally think of as the costs, which is what the macro-economic study really did. The $2 trillion is simply a different way of looking at things and it's probably the wrong number. I mean it's an exaggerated number for even what it's trying to measure. But what it's trying to measure is essentially what would somebody be willing to pay for a very small reduction in mortality risk? And there are two ways of finding that out. One is asking people and that's been demonstrated to be very unreliable. The other is comparing wages in occupations that have different kinds of mortality risk, coal mining, skydiving, mountain climbing, auto racing, sitting at your desk, driving a truck. And the thing is those studies are done normally for very, very small differences in risk and when you scale it up to something as large as what EPA is dealing with, what they claim the 7/10 of a year improvement in life expectancy, it just doesn't work, because that $2 trillion - because when you do that, you find that you're claiming that people are willing to spend three or four times their entire lifetime income in order to avoid 100 percent chance of dying. Well, you can't do that. There's not enough resources available. So the same thing shows up with the $2 trillion, 7/10 of a year, 10 percent of GDP. Well, suppose they had estimated four or five years, that would've been just about 100 percent of GDP. So what it's saying is people would be willing to starve in order to avoid the risk of dying. No, it doesn't make sense. The 2 trillion is too big, but it's really because they're extrapolating too far from these willingness-to-pay measures.

Monica Trauzzi: So, if the numbers don't line up then, is EPA misleading the public?

David Montgomery: I think they are. I think they're misleading them because there is so much focus on jobs and the economy right now. Every program is being justified based on jobs. The president announced that I am going to go through regulations and I am going to do something about the regulations that are killing jobs and slowing the economy. So everybody wants to claim that they're creating jobs. And so EPA, they're not saying something that's technically incorrect, but what they're doing is they're putting things together in a way that creates exactly the wrong impression. And I hate the word deconstructing, because I'm not very fond of postmodern ways of looking at things, but that's really the only way of looking at it. What's EPA trying to accomplish when they talk about - when the administrator says there is a $2 trillion benefit and can point to how it was calculated, and we find that there are, you know, that a healthier and more productive workforce leads to a stronger and faster growing economy? Well, both those statements are literally true, but the $2 trillion had nothing to do with the faster growing economy, that's 5 billion.

Monica Trauzzi: EPA has recently put the brakes on several of the air regulations that they were expected to roll out this year. How much of this do you believe is influenced by the economics of it all?

David Montgomery: You know, technically the economics is not supposed to have anything to do with that, because many of these regulations are done under authorities that say you don't consider the cost. But EPA has always, over the past 30, 40 -- 30 years of Clean Air Act regulations, going back to the very beginning of the Clean Air Act, adjusted things by going slow when it looked like it was going to be really costly to go fast and judging the political climate, because there is a - I mean, there's a balance between pushing so far that Congress decides it really needs to change the law. And it probably really does need to change the law. There are some things that just can't be dealt with under Clean Air Act authorities.

Monica Trauzzi: Big debate here in Washington. All right, we're going to end it right there. Thank you for coming on the show.

David Montgomery: You're welcome, thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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