The New "Benefits" of Environmental Regulation

The American Energy Alliance released today a new study authored by  Scott Beaulier and  Daniel Sutter that closely examines the purported “benefits” of environmental regulations. The following summary outlines the details of the study’s findings: 

• The number of new regulations and estimates of the value of regulation have grown in recent years. Proponents of regulation say the private and coincidental benefits of regulation are high. We disagree and say arguments for large private and coincidental benefits are weak and supported by an extreme point of view in microeconomic theory.
• To say private benefits from regulation are large contradicts basic teachings of microeconomics, where people are engaging in rational, profit maximizing economic activity. If the benefits of a new technology, such as more fuel efficient automobiles, are large, then consumers, will invest in the new product; if not, they will rationally choose not to consume.
• The literature on large co-benefits from regulation is on shaky scientific ground. Many regulations can only be justified by the inclusion of co-benefits and some rely almost entirely on large co-benefits. Furthermore, many attempt to draw on the same “pool” of co-benefits (e.g., particulate matter reductions) without making any assumptions about the pool eventually being exhausted by so many beneficial regulations.
• If the new regulatory approach wants to include co-benefits, a term we call “co-costs” should also be included. These are the unforeseen costs of regulation, such as less innovation, regulatory capture, and higher prices for consumers.

Click here to read the full study: The New “Benefits” of Environmental Regulation

Executive Summary

Although the U.S. economy has been slow to recover from The Great Recession, the nation has experienced a boom in regulation, in both the number of significant regulations and the estimated net social benefits.  Environmental regulations have, as usual, accounted for the majority of the reported benefits.  A closer examination reveals that the rapid increase in claimed regulatory benefits has resulted from the inclusion of private benefits and co-benefits of recent EPA regulations.  These categories of benefits differ substantially from the traditional externality benefits of environmental protection.  Private benefits arise when regulation forces firms and consumers to invest in technologies regulators think make them better off, but which people do not believe are valuable.  Co-benefits are spillover benefits and result when a regulation to address one pollutant reduces a second pollutant.

We examine in this paper the economic arguments for private benefits and co-benefits and consider some costs of regulation ignored in recent EPA cost-benefit analyses.  Arguments for the existence of private benefits likely to be captured through regulation are weak.  Failure to purchase the most energy efficient products on the market is not a sign of irrationality requiring government action.  The substantial co-benefits of recent EPA regulations are highly dubious.  The existence of substantial co-benefits from incidental reductions of fine particulate matter is troubling given the existing air quality standard for this pollutant.  If the air quality standard for fine particulate matter has been set properly, there cannot be thousands of avoidable deaths available as co-benefits of other regulations.  And while the EPA has diligently included co-benefits, negative side effects or co-costs have been downplayed or ignored.  Some omitted co-costs include the value of personal autonomy compromised by paternalistic regulations, reduced productivity due to regulation, and the increase in auto fatalities due to fuel economy regulations.

Cost-benefit analysis properly done provides evidence on whether the social costs of an externality are worth addressing through regulatory action.  The emergence of private benefits and co-benefits in environmental regulation indicates that the EPA is moving away from the traditional externality justification for regulation and into uncharted waters.