This post was originally published on Legal Planet. Reprinted with permission.
In describing cost-benefit analysis to students, I've often told them that the "cost" side of the equation is pretty simple. And it does seem simple: just get some engineers to figure out how industry can comply and run some spreadsheets of the costs. But this seemingly simple calculation turns out to be riddled with uncertainties, particularly when you're talking about regulating the energy industry. Those uncertainties need more attention in designing regulations.
The U.S. Environmental Protection Agency (EPA) confronted some of these issues recently in its reevaluation of a regulation limiting mercury emissions from coal power plants. (You might wonder why EPA was taking this look backwards; the reason was basically that the U.S. Supreme Court told them to do so.) In 2011, EPA had estimated that the compliance cost would work out to $9.6 billion per year. EPA now believes, however, that it overestimated the cost by billions of dollars.
You'll note the word "believe" in the last sentence. That's because figuring out what the regulation actually cost is tricky. First, the agency needs to figure out which changes in the power sector were due to new technologies, other regulations, or market shifts. Second, the agency needs information about the costs of facility-by-facility changes, such as shifts in how often facilities are used, their fuel consumption, and how pollution controls were operated. This would be especially challenging for the mercury rule, according to EPA, "because the rule regulates hundreds of units within a complex, interdependent, and dynamic economic sector." A lot of coal plants closed after the rule went into effect, but it's hard to say how much difference the rule made, as opposed to factors like plunging prices for natural gas due to fracking.
Several independent experts have attempted to do such a retroactive analysis. One came up with a $2 billion figure (about a quarter of EPA's original estimate); an estimate by an industry group (the Edison Electric Institute) was only slightly higher. Another expert estimate was about one-eighth the original projected cost. It's quite likely that we'll never know the exact answer.
Part of the problem is that the energy sector is especially volatile and dynamic. The best projections of energy use, sources, and prices come from the Energy Information Agency (EIA) in the Department of Energy (DOE), and those projections are often quite wrong. EIA assumes that current trends will continue, but there are often major unexpected developments: an international crisis impacting oil markets; new state and federal regulatory policies; the invention of fracking; and plunging prices for renewables and storage. For example, natural gas production went up by around 50 percent from 2011-2015, displacing a lot of coal-fired generation.
Another problem is that many coal-fired plants apparently found ways to comply without relying on the expensive new equipment assumed in EPA's modeling. As EPA now says, "EPA modeling cannot anticipate in advance the full spectrum of compliance strategies that the power sector may innovate to achieve required emissions reductions, and experience has shown that the regulated industry is often able to comply at lower costs through innovation or efficiencies." There are also situations, of course, where compliance costs turn out to be unexpectedly high — for instance, due to unexpected supply chain issues.
There are several important lessons here. First, while we should take estimates of compliance costs seriously, we should also take a close look at uncertainty. Because the energy sector plays an outsized role in environmental regulation, the heightened uncertainty in that sector is particularly important. Thus, compliance cost estimates should be taken with a grain of salt. This also means that benefit estimates can be uncertain since some of the initial benefits of a proposed rule may end up happening anyway.
Second, as EPA itself notes in its reappraisal of the mercury rule, is the importance of designing regulations to give industry flexibility about methods of compliance. This may generally result in lower costs; it also means greater resilience to unexpected developments.
Third, it's not unusual for a regulatory scheme to have escape hatches for situations where compliance costs turn out to be much higher than expected. It may also be a good idea to include an automatic ratchet, toughening regulatory requirements if compliance costs turn out to be unexpectedly low.
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Daniel Farber | March 22, 2022
In describing cost-benefit analysis to students, I've often told them that the "cost" side of the equation is pretty simple. And it does seem simple: just get some engineers to figure out how industry can comply and run some spreadsheets of the costs. But this seemingly simple calculation turns out to be riddled with uncertainties, particularly when you're talking about regulating the energy industry. Those uncertainties need more attention in designing regulations.
Alexandra Klass, Hannah Wiseman | March 21, 2022
The U.S. system for regulating electricity divides responsibility among too many players, assigns too many overlapping or competing tasks, and creates too many distorted incentives, a group of law professors says. They propose reforms that would break down governance silos to ensure greater collaboration in the clean energy transition.
Catalina Gonzalez | March 16, 2022
State officials in California are leading an extensive multisector planning effort to develop the 2022 Scoping Plan, the third update to California’s climate mitigation strategy. The new plan will outline a pathway for statewide action toward reducing greenhouse gas emissions by 40% by 2030 and reaching net-zero emissions no later than 2045.
Daniel Farber | March 15, 2022
On March 11, there were two seismic shocks in the world of gas pipeline regulation. The Federal Energy Regulatory Commission (FERC) has spent years resisting pressure to change the way it licenses new gas pipelines. The whole point of a natural gas pipeline is to deliver the gas to users who will burn it, thereby releasing carbon dioxide into the atmosphere. FERC has steadfastly refused to take those emissions into account. The D.C. Circuit held that position illegal in an opinion released last Friday. That same day, by coincidence, FERC published guidelines in the Federal Register explaining how it proposed to consider those emissions.
Sidney A. Shapiro | March 14, 2022
When it comes to historically marginalized groups, an “out of sight and out of mind” approach has too often infected agency policymaking. Agencies have responded with outreach to marginalized communities, but regulatory policymaking is hardly inclusive. Last January, President Biden required the government to increase engagement “with community-based organizations and civil rights organizations,” and the Administrative Conference of the United States responded with a multiday forum on underserved communities and the regulatory process. Addressing the lack of participation by marginalized communities in regulatory decision-making is crucial, but there is another fundamental issue. The input of marginalized communities will not matter if agencies ignore or devalue it because these insights are not expressed using the standard narratives of policymaking.
Allison Stevens | March 9, 2022
Judge Ketanji Brown Jackson, recently nominated to succeed retiring Justice Stephen Breyer, has received the endorsement of over 200 Black law deans and professors.
David Driesen | March 8, 2022
Arguments and judicial reasoning in administrative law cases usually focus on the case at hand. Indeed, the Administrative Procedure Act (APA) commands that narrow focus. The APA does not give the courts any role in shaping the laws governing administrative agencies, for that is what Congress does. Instead, it gives the courts a modest, albeit difficult responsibility: They may determine whether a particular agency action is arbitrary and capricious or contrary to law. Therefore, parties challenging an agency rule they disapprove of generally argue that the agency has violated some restraint stated in the statute or exercised its discretion in an arbitrary way. But in the U.S. Supreme Court case heard last week about the scope of EPA's authority to regulate greenhouse gas emissions (West Virginia v. EPA), coal companies relied heavily on a "parade of horribles" argument — a listing of bad things that might happen in future cases if the Court upheld EPA's interpretation of the Clean Air Act in the case before the Court.
Karen Sokol | March 4, 2022
Last fall, on the same day that the parties to the Paris Agreement gathered in Glasgow for their first day of their annual international climate meeting, the U.S. Supreme Court announced it would review an appellate court decision about the U.S. Environmental Protection Agency's authority to regulate greenhouse gases from fossil fuel power plants under the Clean Air Act. Fast forward half a year: On February 28, the day that the U.N. Intergovernmental Panel Climate Change issued its sobering report on climate adaptation and harms to human and planetary well-being, the court heard oral arguments in the case -- West Virginia v. EPA. Once again, it was a split-screen reality.
Ian Campbell | March 3, 2022
Employers prefer to deal with their workers one on one. But workers have shown throughout history they will not abide by this unfair practice. They organize, they work together, and, when their employers refuse to deal with them all at once, they strike. Workers engaged in, and prospered from, collective action long before passage of the National Labor Relations Act. The law merely sought to regulate this action for the public good, to replace strike with negotiation, conflict with cooperation. History is now repeating itself; labor strife is increasing, thanks in part to the rise of legal contracts that force workers to settle disputes in a rigged system of arbitration rather than an impartial court of law.