Eye on OIRA: No Room for a More Compassionate CBA in EPA's Coal Ash Rule

James Goodwin

May 24, 2010

“Although the 1976 RCRA Resource Conservation and Recovery Act statute does not require benefit-cost justification of RCRA regulations, this RIA regulatory impact analysis presents a qualitative benefit analysis for compliance with OMB’s 2003 ‘Circular A-4: Regulatory Analysis’ best practices guidance.” This statement comes from the executive summary to the cost-benefit analysis (CBA) that EPA sent to OIRA last October with its original proposed rule for regulating coal ash waste, and it is without a doubt the most important sentence in the entire 165-page document. It is, in its way, a yelp of protest from EPA against being required by OIRA to spend time and resources measuring the likely effectiveness of a proposed regulation by standards not required by statute.

Not surprisingly, OIRA was unmoved. Indeed, a before-and-after comparison of EPA’s original and final CBAs released with EPA’s proposed coal ash rule reveals the extent to which OIRA used the cost-benefit process as a lever to undermine EPA's policy judgments on a host of issues. During the six months that the coal ash rule was under review, OIRA’s number-crunching economists forced EPA to rewrite the document, producing a 242-page CBA containing analysis that goes far beyond what OIRA guidelines require (never mind the law). The incident demonstrates that President Obama’s OIRA is not espousing anything like the kinder, gentler CBA that Cass Sunstein promised at his confirmation hearing a little over one year ago.

As EPA noted, the relevant portion of RCRA does not require CBA, making OIRA’s extensive focus on this document all the more troubling. Instead, the statute charges EPA to weigh eight factors when deciding whether to regulate coal ash waste as a hazardous waste or not—a decision that is referred to as the Bevill determination. Some of these factors relate to environmental and public health considerations, while others relate to costs and technological feasibility concerns. Crucially, RCRA leaves it up to EPA on how to weigh these various factors; for example, the agency could give greater weight to the environmental and public health considerations as compared to cost and feasibility concerns. By imposing CBA, however, OIRA robs EPA of this discretion, essentially forcing the agency to give equal weight to “cost” factors (e.g., feasibility concerns) and “benefits” factors (e.g., environmental considerations). OIRA lacks the expertise and the statutory authority to interfere with these kinds of policy judgments.

EPA had prepared one specific proposal for coal ash regulation in October, but after OIRA's review, EPA released three separate proposals (including two painfully weak ones) earlier this month, leading to a significant delay in actually getting a rule in place. OIRA focused much of its interference on EPA’s benefits analysis, forcing the agency to conduct a crabbed analysis of a small sliver of the benefits for each of the three proposals. Whereas the original CBA contained a thorough qualitative analysis of the various benefits a coal ash rule would produce, the final CBA included only a quantified and monetized assessment of three benefits categories: protection of drinking water from leached contaminants; avoided cleanup costs result from catastrophic surface impoundment failures (such as the one that occurred in Kingston, Tennessee); and induced increases in beneficial reuse of coal ash waste.

These three categories, while important, barely scratch the surface of the benefits a coal ash rule would produce. For example, the final CBA included no attempt to account for the difficult-to-quantify-and-monetize environmental or ecological benefits. Nor was there any attempt to quantify and monetize other benefits, such as avoided economic disruption of communities affected by catastrophic surface impoundment failures, even though such benefits could have realistically been quantified and monetized. As a result, the final CBA paints a skewed picture of the coal ash rule’s benefits that grossly understates the value of a strong rule for regulating coal ash waste.

This problem is compounded by the final CBA’s treatment of one of the rule’s benefit categories: induced increases in beneficial reuse of coal ash waste. (This analysis up over 40 pages.) In most cases, strictly regulating a waste will encourage generators of that waste to try to recycle it as much as possible, a regulatory benefit.

By employing some questionable assumptions, however, OIRA’s economists forced EPA to transform this benefit category into one of the rule’s biggest “costs.” Following its dozens of lobbying meetings with industry while the coal ash review was under review, OIRA’s economists swallowed industry’s argument—hook, line, and sinker—that regulating coal ash as a hazardous waste would attach a “stigma” to coal ash, strongly discouraging its beneficial reuse and costing the beneficial reuse industry billions of dollars in sales every year.

Let’s take a closer look at this argument. According to the final CBA, one of the primary drivers of this decrease would be some hypothetical “fear of liability” by potential sellers and users of beneficially reused coal ash waste. But how do you quantify “fear of liability”? You can't, and the numbers OIRA's economists have come up with to predict human behavior in response to an uncertain fear are arbitrary.

The numbers in the final CBA reveal the absurdity of any attempt to quantify “fear of liability.” For some beneficial reuses, the CBA predicted a 50 percent decrease; for others, it predicted an 80 percent decrease. If those numbers sound arbitrary, that’s because they are. The CBA offers no explanation for their origin, other than they are based on a “worst-case assumption” or that it is “reasonable to assume that the decrease will be significant.” The CBA provides no further explanation for how it transformed “worst-case assumption” into 50 percent or “reasonable to assume that the decrease will be significant” into 80 percent. Indeed, it provides no reasonable explanation for why there would be a decrease at all.

Of course, as EPA explains in detail in the preamble to its proposed rule, it is highly unlikely that some hypothetical fear of liability would ever materialize, much less lead to some predictable decrease in beneficial reuse. Nevertheless, since most people won’t bother to read this explanation, the supposed enormous costs of the hazardous waste stigma will further skew the final CBA against a strong rule for controlling coal ash waste disposal.

For what it's worth, here are the numbers from the CBA. The strongest regulatory option (Subtitle C “special wastes”) had a huge net benefits range:  It runs from around -$252 billion to $82 billion. (As noted above, the huge negative number at the low end of the range is a result of the assumption that the stigma of regulating coal ash as a regulatory waste will lead to a drastic reduction in beneficial reuse.) In contrast, the two weaker regulatory options (the two variations on Subtitle D) have smaller net benefits ranges that fall within the range for the Subtitle C option. Subtitle D’s range is -$7.0 billion to $34 billion and Subtitle D Prime’s range is -$2.7 billion to $14.2 billion. (Because these weak options would not employ a hazardous waste regulatory scheme, the assumption of a stigma-induced reduction in beneficial reuse does apply to these two weak options. As such, the low end of their respective ranges are not nearly as low by comparison.)

The problem is that these very questionable net benefits ranges make any meaningful comparison of the three regulatory options impossible.  Because these ranges overlap, the comparison would be indeterminate—it doesn’t tell us what is the most “efficient” or “smartest” regulation.  If anything, the huge net benefits range for the strong rest regulatory option (without explanatory context) creates the false impression that this option is just as likely to create a huge negative loss for society as it is to create a huge positive gain. This biases against the strong option and in favor of the two weaker options, which are less effective but ostensibly offer society a “safer bet.”

The whole incident involving OIRA’s review of the coal ash rule is discouraging for those of us who hoped that the Obama Administration would bring change in the way business is done in Washington. Clearly, it's still business as usual at OIRA, as the office continues to use strict CBA to justify weakening important environmental, health, and safety regulations.

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