The People of America's Oil and Natural Gas Indusry

Energy Tomorrow Radio: Episode - 118 The Costs of Ozone Regulation

Jane Van Ryan

Jane Van Ryan
Posted September 28, 2010

In today's episode, I interview Don Norman of Manufacturers Alliance/MAPI and API's Kyle Isakower about the Environmental Protection Agency's (EPA) proposal to tighten ozone standards and its potential impact on jobs and the economy.

Use the audio player below to listen to information about the article and follow along with the show notes. I hope you find the podcast informative.

00:17 The Environmental Protection Agency (EPA) is proposing to tighten air quality standards for ground level ozone from 75 parts per billion to a range of 60 to 70 parts per billion. Now on the surface, regulations that promise cleaner air sound like a good idea, right? Well, not when the new ozone standards could put millions of Americans out of work. Don Norman of Manufacturers Alliance/MAPI and API's Kyle Isakower are in the studio today to discuss this EPA ozone regulation and its potential cost to the economy.

00:55 Don, you recently completed a study on the potential impacts of the new ozone standards. What did you find?

01:02 Mr. Norman: I took a very detailed study conducted by NERA consulting, which was limited to 11 states, and tried to expand the results for the entire nation. I found that the annual attainment cost is estimated to be just over $1 trillion per year between 2020 and 2030. This is equivalent to 5.4 percent of projected GDP in 2020. GDP itself would be reduced by approximately $677 billion in 2020 and further, we'd have significant job losses of jobs, something like 7.3 million based upon current Bureau of Labor Statistics projections for the labor force.

01:50 Those potential impacts on jobs and the economy are really very severe. How is it that a slight change in the ozone standards can generate such large economic costs?

02:04 Mr. Norman: That's a very good question. The answer is pretty straight forward. It turns out that as standards are tightened the incremental cost of achieving each additional increment of cleaner air or water rises exponentially. Based upon some EPA data, that was released in 2007, the cost of achieving cleaner air and reducing ozone really rises very rapidly. One of the reasons is that it's not only based upon current technologies, there's also an assumption that we're going to be able to develop technologies that don't yet exist.

03:01 Mr. Isakower: One of the issues we have with this standard is that it is being set so close to background levels that essentially the only way to reach attainment here is to reduce nitrogen oxides (NOx) down to 60, 70, 80 percent or more of current levels. So you're really talking about virtually shutting down most, if not all, commercial and transportation use in this country. That's what it's going to take to reach attainment in some of these areas that would be put into nonattainment as a result of this lower standard.

03:34 How can the EPA or this administration justify putting millions of people out of work and causing that kind of disruption to the economy for the slight improvement in ozone levels? Doesn't EPA have to consider the costs?

04:00 Mr. Norman: One of the first lessons economics students learn is that consideration of tradeoffs is essential for improved decision making. There really needs to be an assessment of cost and benefits. I'm not sure whether EPA is required to legally take cost into account, but as an economist it implies that EPA, Congress, or someone in the government is not responsible for considering tradeoffs involved when making regulatory rules like ozone standards. Somehow some government entity needs to consider tradeoffs or we could end up with even more stringent standards without any regard as to the cost these standards impose. To carry it to the extreme, the EPA does in fact consider cost whether they admit it or not, otherwise why would they stop at 60 parts per billion. I mean presumably there's some incremental health benefit from going down to 50 parts per billion, so the fact that they don't really tells me, as an economist, that they do in fact consider these costs.

05:09 What's the time frame on this? Kyle, when do you think the EPA is going to finalize these ozone regulations?

05:15 Mr. Isakower: EPA doesn't have a mandated timeline on this and frankly that is one of the concerns we have here. They are moving well ahead of the statutorily mandated timeframe. What they had originally planned to do was to finalize this regulation in August. That deadline has slipped and they now say they're going to put it out in mid- to late-October. However, given the political controversy they may face by putting out such an economically crippling regulation, it would not surprise me if they waited until after the election in November to put out this final rule.

05:53 You mentioned the politics here. Clearly there must be some members of Congress who are watching this and expressing concern over the costs. Do they have the authority to stop these regulations?

06:07 Mr. Isakower: There are nine Senators who have signed on to letters to EPA that have requested that EPA back off on moving forward in such an accelerated timeline. Gov. Joe Manchin (D-W.Va.) has also put in writing his concerns about EPA moving forward. That being said, Congress does not have the authority to stop enforcement of this regulation. They do, however, through the appropriations process, have the ability to withhold funding for EPA to implement the new tighter standard if EPA does indeed finalize it.

06:53 Let's talk about the states for a moment. Don, in your study, don't you talk about how some states could be more affected by this new regulation than others?

07:02 Mr. Norman: Yes, actually I have estimates for all 50 states and the District of Columbia. And not surprisingly, states like California, Texas, Louisiana, Illinois, Ohio, Michigan and Pennsylvania, which all have a considerable amount of manufacturing activity and/or energy production and refining, are really going to bear the brunt of this new ozone standard.

07:29 Kyle, since refiners are going to be affected by this new regulation, where does the oil and natural gas industry stand on this?

07:36 Mr. Isakower: We think this is a huge mistake on EPA's part. Keep in mind, as I mentioned before, this action is not mandated by the statute. The EPA has five years after the last review of the standard before it must complete another review of the standard. Their last standard review was completed for ozone in 2008, so it's only been two years. It's also important to understand that they have no new data to for development of this new standard. They are using the same data they used in 2008 and they're doing it on an accelerated timeframe. We think this is a huge mistake, as I said before. What the agency should be doing is working to implement the standard they already have and starting the technical review that's necessary to complete this next standard review that's due in 2013.

08:28 Mr. Norman: Tighter ozone standards really impose cost on manufacturing requiring additional investment. The feasibility of meeting a 60 part per billion standard is problematical given that it's premised on technologies that are presumed to be developed. This additional investment is going to make U.S. manufacturing less competitive in the world markets and it's also going to raise energy costs so that the energy-intensive industries within the manufacturing sector will find their competitive position further eroded.

09:06 Kyle, you had mentioned this bipartisan group of nine Senators. I did read an article the other day in which one Senator says he sees this regulation as part of a trend that could basically regulate the economy to a standstill. Do you share that concern?

09:22 Mr. Isakower: Absolutely. We see this standard being set so low, again, as I mentioned before, very close to background levels that you're going to see many areas of the country in nonattainment. Even national parks like Yellowstone National Park could actually be put in nonattainment with the standard set at 60 parts per billion. This is going to create a very difficult challenge for urban areas especially. It's going to be virtually impossible for them to meet this standard. This seems somewhat symptomatic of an EPA which has been characteristic of regulatory overreach for the last year and a half. We've seen a number of regulations, the Renewable Fuels Two standard, for example, where EPA is applying very stringent rules retroactively. Next year in January, they're going to be regulating greenhouse gas emissions under the Clean Air Act despite not having any statutory mandated timetable to do so. Here we're talking about another standard that is well ahead of any timetable. They are moving ahead with a standard that will be so difficult to attain and cost trillions of dollars without any regard for the economic impacts. At a time when we are just trying to pull ourselves out of a recession, this seems like a terrible idea. We would be regulating ourselves into an even worse economic situation.

11:05 Don, what are your thoughts on that?

11:07 Mr. Norman: I'd like to offer another thought. First, as I mentioned earlier, consideration of tradeoffs and a balancing of costs and benefits is essential for rational decision making. Second, even when these tradeoffs are taken into account, it's important that the costs of regulations are not underestimated and the benefits are not overestimated. Unfortunately, this occurs. Estimates that are generated by proponents of new regulations tend to bias the comparison so that the standards can be justified. It's really important that the estimates of cost and benefits are reviewed to ensure that the regulations are in fact reasonable. Otherwise the economy can be regulated to a standstill, much the way a car can be brought to a stop by applying the brake.

11:58 Well, you've given all of our listeners quite a bit to think about in answering these questions about the forthcoming ozone regulations. Thank you for joining us today on Energy Tomorrow Radio.