National Association of Manufacturers: Thin Air

This content originally appeared as a blog post by NRDC Alum Laurie Johnson.

The National Association of Manufacturers (NAM) published a report last week showing a purported cost of $2 trillion per year to the economy caused by federal regulations. The audacity of the release was impressive. For the most part, it essentially repackaged an analysis from a 2010 report that was widely ridiculed the first time it was published. The latest report already has received deserved criticism and ridicule (e.g. click here, here and here).

An equally bad report that has gotten much less attention warrants the same treatment: NAM’s analysis of the Environmental Protection Agency’s (EPA) forthcoming proposed rulemaking for more protective ozone pollution limits. This time, NAM commissioned the National Economic Research Associates (NERA), regular clients of the fossil fuel industry (more below), to do its bidding.

EPA’s proposed standards will set a health standard for acceptable levels of smog—the pollution that envelops our cities and creates “bad-air days.” These lead officials to warn Americans, particularly children and the elderly, to avoid going outside or to restrict their daily activities.

Depending on the stringency, a stronger ozone health standard could prevent millions of restricted outdoor activity person-days; avoid tens of thousands of asthma attacks; and prevents thousands of premature deaths, every year.

The NAM report ignores these benefits altogether. As my colleague Frank Ackerman put it, “[In] cost-benefit terms, they are answering [a] senseless question: ‘If there were no resulting health and environmental benefits, would it be worth engaging in environmental regulation?’ The negative answer is not surprising, and is also not informative. If you don't need food, is it worth spending money in a supermarket?”

That’s the first level of bias and misrepresentation in NAM’s report. There are only costs. Hyper-inflated costs.

But beyond this basic premise, the methods and assumptions in the report are deeply flawed. The authors employ a series of misleading techniques that by design cascade into huge economic losses, resulting in a report lacking any credibility. Here are just some of the many flaws in NAM’s:

First, the analysis relies on an extreme cost curve and applies it to all imagined emission reductions at the most stringent standard possible:

Because technologies and methods polluters ultimately use to comply with standards can be unknown in advance (that is why standards are needed), it is usually necessary to develop a methodology to estimate what they might cost. EPA typically does this based upon the cost of existing, known control methods which, although available, are insufficient to achieve all required pollution reduction.

EPA has made a good faith effort to do this in prior cost estimates. Indeed, in this analysis, the agency developed a methodology that produced 40 to 70 percent higher cost estimates (depending upon stringency) than the approach recommended by its own Scientific Advisory Board (a fixed cost of $17,300 per ton reduced (2013$)). And evidence and historic experience suggest that in the aggregate, EPA’s compliance cost estimates may be on the high side.

In sharp contrast—indicating the bias that pervades the NAM report—NAM’s consultant developed a methodology to create grossly unrealistic cost estimates. The first part of its analysis is easiest explained in steps:

  1. Pick an emission source that emits almost none of the pollution you are trying to eliminate.
  2. Estimate the tons of reduction needed to meet the standard by replacing that source.
  3. Estimate the cost per ton of doing that.
  4. Construct a cost curve from that.
  5. Assume the cost curve applies to all emission reductions undertaken to meet the standard (beyond the known controls).
  6. Pick the standard that requires the most emission reductions.

NERA created a cost curve such that each ton becomes increasingly more expensive to eliminate the larger the percentage reduction from baseline pollution levels. That seems reasonable enough, and EPA’s methodology uses a similar logic.

The problem is that for the upper end of this curve, NERA estimated pollution reduction expenses based upon what it costs to replace old cars with newer, less polluting ones. It finds that replacing an old vehicle will eliminate 0.0022 tons annually of NOx emissions, an ozone pre-cursor. Put another way, to reduce one ton of NOx, you’ll need 45 new cars. After accounting for the scrap value of the old cars you throw away and the benefits of new ones, this calculation gives you a cost of $500,000 per ton reduced (2013$). This cost end point—which the report contends still will only achieve 75% of the needed emission reductions—creates a very steep and unrealistic cost curve that drives the report’s inflated costs.

Just a little research on pollution sources and emission rates reveals how crazy and even disingenuous this approach is:

Take one of the “known” control sources EPA identifies, medical waste incinerators. First, to reduce NOx emissions from this source only requires an add-on pollution control. You don’t have to scrap the whole thing. Second, these types of incinerators emit upwards of 84 tons of NOx per year (calculated from here and here).  Using “selective non-catalytic reduction” technology, you can reduce NOx emissions by 45% from an incinerator in a year, at a cost of about $8,200 per ton (2013$).

With its contrived cost curve, the report authors next assume that the standard EPA sets will be 60 ppb (parts per billion), in order to apply its cost curve to as many tons as possible. The report doesn’t even estimate costs for two other alternatives EPA is considering (70 and 65 ppb).

But there is something even more pernicious about this approach to predicting the cost of future, unknown ozone pollution controls. You need not be an economist or air quality specialist to understand how senseless it is.

NERA adopted a single “cost curve” to apply to all future, unknown ozone control measures, across all potentially regulated sectors of the economy: industrial, manufacturing, energy producers, passenger and commercial vehicles, etc. This is a silly premise: different economics, control technologies, incentives and options are available to these sectors.

Worse is the genesis of the cost curve, a 2009 federal automobile scrappage program popularly known as “Cash for Clunkers.” The NAM report estimate[s] the cost per ton of reducing NOx emissions through a vehicle scrappage program in an illustrative future year of 2020, asserting those costs will be $500,000 per ton. From the perspectives of economics and actual ozone pollution control strategies, this assertion and the methodology behind it are embarrassing. But it is Exhibit A for the bias at the heart of NAM’s report.

“Cash for Clunkers” was a 2009 economic stimulus program adopted as a partial congressional response to the U.S. recession that began 2007-2008.

It was included in a 2009 Supplemental Appropriations Act, and the provision actually was tacked onto supplemental war funding in the bill’s final conference report. The program was never intended to be an ozone control strategy. There was zero discussion in Congress or elsewhere that Cash for Clunkers would be a cost-effective strategy for reducing a ton of NOx emissions from vehicles relative to other NOx control strategies. That was never its intent.

No state or locality since has used the Cash for Clunkers program as a centerpiece or even a reference point for cost-effective NOx emission reductions. We are not even aware of any state or locality seeking emissions reduction credit in their state implementation plans (SIPs) for any marginal NOx emissions reductions from Cash for Clunkers.

So why would the NAM report make “Cash for Clunkers” the foundation for the cost of additional, unknown control measures—far and away the highest portion of its projected costs—not just for passenger vehicles, not just for motor vehicles, but for all ozone-polluting activities across the entire American economy?

Because this cost-curve decision drives asserted costs for NOx emission reductions to extreme levels, leading to the NAM report’s conclusion that compliance costs for more protective ozone standards will run into the trillions. By way of comparison, some of the most cost effective NOx emission reductions were $500 per ton in EPA’s 2011 “Cross State Air Pollution Rule” for power plants. That’s 1,000 times less than the $500,000 per ton cost NAM uses to create its cost curve. It is impossible not to conclude that NAM chose the obscure Clunkers program because it wanted to generate the biggest, most frightening-sounding compliance cost estimate possible.

Proven ozone control technologies, and measures in use today, will be the very first ones deployed by jurisdictions newly declared to be out of compliance with a safer standard. These measures are cost-effective, and any rational company or regulated entity is going to take advantage of them.

For good reason, NAM’s “Cash for Clunkers” ploy has been dubbed “insane” by senior advisor Michael Livermore, at New York University’s Institute for Policy Integrity, an independent think tank. He adds “the foundational cost estimates are unmoored from any economic reality.”

The second step in NAM’s analysis is to make a radical assumption that 1/3rd of coal electricity generation will shut down, in order to raise electricity prices.

The NAM report goes on to arbitrarily assume that 1/3rd of the coal fleet will need to retire to meet a portion of the required ozone emission reductions, and that these retired units will be replaced by new power plants. Effectively, the report assumes another scrappage program. That is an absurd proposition. The NAM report does not present a remotely plausible scenario that bears out its assumption.

But it is critical to the NAM agenda that the analysis generates high electricity prices because these, in turn, increase the costs of all goods and services (since electricity is a basic production input).

Combining the two scrappage programs, it’s easy to see how the NAM report generates unrealistically high compliance costs to pass on to households. But what about jobs?

Finally, NAM’s consultants have to create a methodology to make up false job loss estimates, because their model doesn’t show any.

NERA has to create scary job loss numbers out of thin air, because its model assumes full employment. How does it accomplish this?

Conveniently, the coal power plant trick outlined above gives NERA a three-fer. When households have to pay more for electricity, these higher energy prices also result in less output per worker. This allows NERA to bake into its model lower workers’ wages, of about 1.2%, because workers  are less productive in that scenario. Then, because workers earn less, some voluntarily choose to work less (in the model). This acts to further lower labor income by 0.7%, for a total of 1.9%.

Finally, NERA divides its estimated lost labor income by the average wage, and then claims this lost income represents actual job losses. (The NAM report cannot even bring itself to call these “job” losses, so it calls them “job-equivalents”). What looks like a somewhat modest decrease in salaries (in relative terms, even accepting the authors’ implausible assumptions) appears much worse when fashioned into a job loss metric: from its lost income assumptions, NERA calculates an average annual loss of 2.9 million jobs.

There are more corpses in the NAM report, but the ones just discussed are responsible for much of NAM’s wildly inflated compliance cost estimates.

It’s a shame time has to be spent debunking industry-funded studies like this, but it is important that the public not be misled into thinking they must sacrifice their economic well-being to protect their health. There is simply no evidence for this. Under the Clean Air Act, air pollution has been reduced by about 70 percent on average, at costs well below gains in environmental and public health benefits—all while the economy has more than tripled in size.

The consultants chosen by NAM for its report have conducted numerous regulatory analyses at polluters’ behest over the years (e.g., see herehere and here for studies conducted for the National Association of Manufacturers, the American Petroleum Institute, and the Electric Power Research Institute, respectively, and previous critiques of mine here and here). In 2010, NERA also produced a state-by-state analysis (see hereand here) fueling industry attacks on strengthened ozone standards. (And see here and here for critiques of a study that relied upon this analysis, by Professor Richard Howarth of Dartmouth College and me, respectively).

The purpose of most of these reports is to protect fossil fuel profits that are heavily subsidized by the illnesses, deaths, and environmental destruction their economic activities cause, for which they bear no cost. But the National Association of Manufacturers is not serving the interests of most of its members or Americans, who benefit from a healthier work force, and an economy that operates under the rule of law. EPA’s ozone standards will not bring the economic costs fabricated by NAM; but they will save lives, increase productivity, and improve our quality of life.

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