Since his infamous declaration that “I have a pen, and I have a phone”, President Obama has been attempting to circumvent the Congress and implement his policy agenda through regulatory fiat. In a 5-4 decision (Michigan v. EPA released on Monday June 29th) the U.S. Supreme Court has sent the Obama Administration an important message: regulations cannot be imposed without weighing the potential benefits against the expected costs.

At issue was the EPA’s limits on mercury and other hazardous air pollutants from power plants. Justice Antonin Scalia, writing for the majority, said that it was not appropriate for the EPA “to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.” The decision requires any Administration to consider the costs created by potential regulations at the outset of regulatory deliberations – the regulation’s costs cannot be raised as an after-thought.

The EPA’s regulations have burdened the energy industry and consumers with an estimated $9.6 billion in higher costs. These costs diminish the energy industry’s vitality and increase the prices families will have to pay for electricity. Low income consumers are particularly vulnerable because heating, cooling, and electricity costs are a much higher burden on their budgets than for wealthier families.

With the regulations creating such a large economic burden it would seem obvious that the EPA would account for these costs at the outset of their deliberations. Yet, the costs of the regulations were not raised until much later in the process – almost as an afterthought. Performing a high-quality cost-benefit analysis is typically standard operating procedure in economics, as well as many other fields. Take medicine.

Medical professionals are often, similarly, faced with difficult decisions when it comes to treating patients. For instance, treatment options for cancer patients will often include chemotherapy. While chemotherapy is an important therapy to treat many forms of cancer, it also causes side effects from the uncomfortable (such as pain and nausea) to the dangerous (such as heart problems and risks of other cancers forming). Doctors consider each individual patient’s potential benefits from chemotherapy and balance these potential benefits to the potential risks. If the benefits outweigh the risks, then the doctor will recommend the treatment. If not, then the doctor and patient will explore other options.

One of the prime responsibilities of the EPA is to regulate hazardous pollutants, such as mercury and other hazardous air pollutants. Accurate cost-benefit analyses provide a formalized structure that informs regulators whether the regulatory cure is more harmful than the disease it is designed to address, and is akin to the fundamental ethical precept that guides medicine: primum non nocere (first, do no harm).

The Supreme Court decision recognized that effective regulations cannot be implemented without a methodologically sound cost-benefit analysis at the outset of the regulatory process.

The ruling does not fully address the problem, however. While the decision can address the requirement of a cost-benefit study, it does not speak to the quality of the analysis.

In the case of these EPA regulations, the cost-benefit study that was eventually performed contains assumptions that appear to over-inflate the benefits from the regulation in order to ensure a pre-ordained outcome that the benefits should exceed the costs. As the Wall Street Journal noted:

Though the direct benefits from reducing mercury only amount to $4 million to $6 million [compared to $9.6 billion in costs], the EPA conjured “co-benefits” of $37 billion to $90 billion on reality-free assumptions. As an example of how the EPA rigs such analysis, it claims that 15% of pregnant women in Wisconsin catch and eat 300 pounds of lake fish a year and thus fewer newborns would be exposed to the toxic substance in utero. That’s a lot of fishing by pregnant women.[1]

Cost-benefit studies are like most things in life: if you put garbage-in, you get garbage-out. While there are environmental concerns, such as the impact from mercury in fish on pregnant women, ad-hoc assumptions regarding the benefits do not help the EPA implement effective regulations.

The EPA’s mercury regulations went into effect in April, and billions of dollars have already been spent for compliance. Due to the uncertainty regarding the cost-benefit results, it may make sense for many companies to continue to act “as if” the regulations will be promulgated and continue complying with the regulations.

Implementing sound regulations is an important responsibility that will only be effective if it is guided by sound economic analyses. Michigan v. EPA is an important reminder of this fact for the EPA and government regulators more broadly.

 

Wayne Winegarden, Ph.D is a Sr. Fellow at the Pacific Research Institute, and Editor of EconoSTATS a project of George Mason University, and a Partner in the consulting firm Capitol Economic Advisors.

 

 




[1] (2015) “The Mercurial Court: The Supremes Rebuke the EPA but decline to rein in its abuses” the Wall Street Journal: Review and Outlook June 30; www.wsj.com/articles/the-mercurial-court-1435614498.

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