EPA's Utility MACT Proposal: Negative Economics for What?

By Scott Segal -- March 17, 2011

[Editor note: This new white paper by the Electric Reliability Coordinating Council (ERCC) is summarized by director Scott Segal (full bio below). ERCC is a coalition of power companies that works with labor unions, consumers, and manufacturing and service businesses on clean air issues.]

The U.S. Environmental Protection Agency (EPA) has now signed a proposal to advance a new maximum achievable control technology (MACT) standard for the electric utility industry, known as the Utility MACT.

Back in 1998, the EPA made a finding regarding the need to regulate mercury emissions from power plants. At the time, EPA made clear that there were no incremental benefits associated with addressing any other hazardous air pollutants (HAPs) from the power sector other than mercury. Specifically, no health benefits were found from addressing non-mercury HAPs such as acid gases.

Such controls are extraordinarily costly with profound impacts on electricity supply and price, and job creation. In the intervening years, no additional data has been added to the Agency record that asserts any specific benefits to regulating for non-mercury HAPs. And yet, in the proposal issuing from EPA, the Agency seeks to regulate these non-mercury HAPs at great expense for no incremental benefit.

A Wave of Regulations

EPA admits the pending proposal will cost at least $10 billion, making it one of the most expensive rules in the history of the Agency. And this cost does not include indirect costs nor does the Agency attempt to estimate the total cost associated with overlapping rules due to be adopted at or around the same time. Even focusing primarily on Utility MACT itself, other credible analyses have found direct cost estimates literally an order of magnitude higher than EPA, at or near $100 billion. These other analyses make more realistic assumptions about technologies likely to be required to meet the terms of proposed rule.

EPA has or will promulgate numerous new rules in 2010 – 2012 with compliance deadlines on, before or near 2015. In 2015, due to the timetables established by EPA, the industry will face perhaps its costliest and most pressing challenge in Utility MACT. Other rules include regulations for:

• Greenhouse Gases (GHG) from new and modified sources;
• Ash and other residuals from the combustion of coal either under Subtitle C as a hazardous waste or Subtitle D as a solid waste of Resource Conservation and Recovery Act (RCRA);
• National Ambient Air Quality Standards (NAAQS) for SO2, NO2, Ozone, and PM, including a utility-specific SO2-and-NOx-emissions-limiting transport rule; and
• Cooling water intake structure requirements under section 316(b) and new discharge limiting effluent standards under the Clean Water Act.

Taken together, these regulations will impact roughly 400,000 megawatts of oil and coal-fired generation, which is about 40 percent of the current available capacity in the U.S., and makes up nearly 50 percent of the U.S. total electricity generation.

Jobs, Economic Recovery Compromised

Adaptation to the all the proposed rules, with Utility MACT being the most immediate threat, constitutes an extraordinary threat to the power sector – particularly the half of U.S. electricity derived from coal-fired generation. The industry is concerned about the ability to retrofit environmental controls or build replacement capacity in the three years to comply with the Utility MACT rule (and then other rules).

Construction time frames are also expected to increase due to the logistics of simultaneous installations, industry-wide competition for materials and craft labor, and increasing permitting requirements. The North American Electric Reliability Corporation (NERC) report notes that the “overlapping compliance schedules for the air and solid waste regulations, along with required compliance for rule 316(b) following shortly thereafter, may trigger a large influx of environmental construction projects at the same time as new replacement generating capacity is needed. Such a large construction increase could cause potential bottlenecks and delays in engineering, permitting and construction.”

As a frame of reference, consider the contribution likely to be made by the affected part of the power sector if allowed to continue and to innovate. Adam Rose and Dan Wei of Penn State University set out to estimate the total economic footprint of coal-fueled electric generation by 2015. They found that coal-fueled generation will contribute:

• $1.05 trillion (2005 $) in gross economic output;
• $362 billion in annual household incomes, and
• 6.8 million jobs.

To break it down further, IHS/Global Insight estimates that every $1 billion spent on upgrade and compliance costs will put 16,000 jobs at risk and reduce U.S. GDP by as much as $1.2 billion.

Aside from direct economic impacts to industry and manufacturers, the impact of increased costs on consumers is particularly troubling. Consumer energy cost impacts are likely to be regressive. Bills paid by the consumers with significant coal resources “will rapidly become the most expensive. Electric bills make up the majority of low-income household expenditures today.” In a recent study on Public Opinion on Poverty, it was reported that one-quarter of Americans report having problems paying for several basic necessities. In this study, currently 23% have difficulty in paying their utilities – that is, one out of four Americans.”

Offsetting Economic Benefits? Unlikely

Some have claimed that the suite of power-sector regulations will stimulate new investment in technology of various descriptions, creating so-called “green jobs.” While this may be true, heavy regulatory burdens have never been truly conducive to business confidence, investment and job creation. Data has shown that salaries paid for jobs classifiable as “green” are far below the national average. European experience demonstrated that for every four green jobs created, nine higher paying industrial jobs are lost. At the very least, flimsy or overly optimistic economic benefit analysis can not be the basis for risking millions of industrial jobs and billions of dollars in GDP.

David Montgomery of Charles River Associates, a noted economist with 40 years of work in energy and environmental policy, recently testified that:

The serious debate in environmental policy is about how the costs of new regulations compare to their benefits, and how to design the regulations to minimize cost, uncertainty and disruption. Claims that regulations that raise the cost of doing business will create new jobs are, at best, a sideshow. Such claims only distract attention from the difficult tradeoffs that must be made between costs and benefits. ‘Green jobs’ is not a subject that leading economists have usually taken seriously enough to criticize in professional journals.

As most economists agree, a policy of “regulating ourselves to prosperity” seems suspect at best.

Double Counting (Alleged) Health Benefits

The generation of sufficient, affordable and reliable electric power is a complex business. Policy makers in the past have established a balanced approach that allows both health benefits and energy policy goals to be realized. Contrary to the statements of some in the environmental community, this balanced approach has resulted in substantial reductions in critical air emissions.

The U.S. electric power sector has reduced air emissions substantially under existing programs. The industry has cut sulfur dioxide (SO2) and nitrogen oxides (NOX) emissions by 57 percent emissions between 1980 and 2008. The power sector also has cut emissions of mercury by about 40 percent through efforts to reduce other pollutants. Electricity use increased 85 percent during this time period. While demand for electricity has tripled the industry’s coal use between 1970 and 2005, emissions have declined significantly, and continue to decline thanks to emissions-reducing programs enacted by electric companies.

As was noted above, EPA found benefits attributable only to mercury reductions and has not supplemented the record specifically regarding non-mercury HAPs. Industry, for its part, is committed to working with EPA on sensible mercury regulations in order to achieve those benefits properly identified. So why then does EPA cite benefits to reducing non-mercury HAPs that form the basis for overblown claims by environmental organizations? The answer may surprise you. Rather than identifying any incremental benefit associated with very costly actual reductions in non-mercury HAPs, the Agency uses reductions in particulate matter, or PM, as a surrogate or a stand-in for real data that might be relevant. The trouble with this approach is that the control of PM has already been addressed by Congress and EPA in specific programs designed to focus on PM directly – like the national ambient air quality standard for PM.

As in 1998, the Agency still can find no direct or incremental health benefit associated with reduction of non-mercury HAPs. The only real “attribute” of such controls is to increase the cost of power generation while decreasing its reliability. The “benefits” that are alleged – from the control of PM – are already the product of existing, specifically targeted parts of the Clean Air Act unrelated to the MACT program. This is the same kind of double accounting that, frankly, corporations are forbidden to do in their own affairs.

What Can Be Done? Follow the President’s Executive Order on Regulations

President Obama himself embraced the need to closely scrutinize the cost and economic impact of new agency regulations. His January 18th Executive Order laid out the new review process for regulations, stated that an agency should “tailor its regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations.” The accompanying memo issued with the Executive Order sought to clarify the order, by highlighting a basic tenet of the Order; Agency’s must “consider costs and how best to reduce burdens for American businesses and consumers.” We believe Congress and the EPA should honor the spirit of the President’s position and address the timeframe and content of overlapping rules for the power sector, beginning with the Utility MACT.

Taking into account the multiple and overlapping rules facing the power sector, the spirit of the President’s Executive Order should force EPA to choose a formulation of the proposed Utility MACT that imposes the “least burden” on society. Where EPA has the capacity for flexibility – such as in the control of non-mercury HAPs, sub-categorization, determination of the MACT floor, and other areas, EPA should do so, particularly in light of the high costs and weak incremental benefit analysis. The Agency has a long distance to travel from the options suggested by the current proposal.

---

NERC, 2010 Special Reliability Scenario Assessment: Resource Adequacy Impacts of Potential U.S. Environmental Regulations, October 2010.

Adam Z. Rose and Dan Wei, The Economics of Coal Utilization and Displacement in the Continental United States, 2015 (July 2006).

HIS/Global Insight, The Economic Impact of Proposed EPA Boiler/Process Heater MACT Rule on Industrial, Commercial, and Institutional Boiler and Process Heater Operators, Report to the Council of Industrial Boiler Owners, August 2010.

Statement of Daryl Bassett, Director, Empower Consumers, Panel on Allocation Policies to Assist and Benefit Consumers, Subcomm. on Energy and the Environment, House Comm. on Energy and Commerce, April 23, 2009.

Editorial, “How Green Is Your Lost Job?,” Investor’s Business Daily, March 1, 2011(citing green jobs data from Denmark, Germany, Scotland and Spain).

Senate Committee on Environment and Public Works, Subcommittee on Green Jobs and the New Economy hearing entitled, “Green Jobs and Trade,” February 15, 2011.

EEI, Cleaner Air: Great Progress Has Been Made, Even As Demand for Electricity Increases, 2011, available at http://www.eei.org/ourissues/ (citing EPA Clean Air Trends data).

The history of federal PM regulation from 1971, including revisions in 1987, 1997, and 2006 are discussed at EPA, PM Standards, last updated October 28, 2010, available at http://www.epa.gov/pm/standards.html.

E.O. 13653, 76 Fed. Reg. 3821, published Jan. 21, 2011

—————-

Scott Segal, Director of the Electric Reliability Coordinating Council, is a partner in the Government Relations and Strategy Section of Bracewell & Giuliani, LLP. For the last twenty years, Scott has focused on environmental and energy policy development in Washington, D.C., representing a range of industry and non-profit interests. He also is widely published and quoted on Clean Air Act issues and has argued several major Air Act cases before the Circuit Court of Appeals for the District of Columbia.

He graduated from Emory University with a BA received his JD from the University of Texas School of Law. He lives in Washington, D.C.