Globe

The Political Transaction Costs and Uncertainties of Establishing Environmental Rights

September 24, 2014

By Kerry Krutilla
A key issue in the design of environmental polices is how environmental rights are distributed. Among the options, rights can be grandfathered to polluters or taxed or auctioned to generate public revenue. These alternatives have different political consequences, which impose different economic costs and political uncertainties. This research models political behavior around the rights establishment, and formally determines the associated welfare costs. The model includes parameters for the degree to which environmental rights are distributed between polluters and the government; the benefits of the environmental policy; the compliance costs of the policy; and the relative political power of polluters and environmentalists. The model shows that the economic costs of political behavior can significantly erode the expected value of environmental policymaking when the environmental rights are taxed or auctioned. These costs are not considered in the policy evaluations that recommend structuring environmental policy to raise revenue.

bank

Bank Disclosure and Incentives

August 15, 2014

By Korok Ray
In this working paper, Korok Ray proposes a microeconomic model of a bank that acts as a financial intermediary engaging in maturity transformation, borrowing short-term debt from a market of investors to fund a long term loan to a firm. The bank installs a manager who exerts costly effort to reduce the credit risk of the loan portfolio. Disclosing this credit risk to the market increases the manager’s incentives for risk management. The market rewards the manager’s early efforts to manage risk with a lower future cost of debt. When paid on bank equity, the manager is induced to better manage risk. Disclosure therefore helps resolve the moral hazard problem inside banks.

trees

The Social Cost of Carbon

August 07, 2014

By Susan E. Dudley & Brian F. Mannix
First, we endorse the administration’s effort to arrive at a uniform social cost of carbon (SCC), to help ensure at least internal consistency across a portfolio of policies directed at reducing carbon emissions. Second, we applaud OMB’s effort to seek public comment on its technical support document (TSD), and urge the administration to follow through with scientific peer review and with other measures to ensure transparency in regulatory decisions. Third, we caution that the task of estimating the SCC was undertaken with an apparent bias that needs to be corrected before it can be taken as objective. Finally, the logical next step is not for regulatory agencies to incorporate the SCC into Regulatory Impact Analyses. Rather, the next step is to seek an international consensus on the value of the SCC and to negotiate a coordinated global policy response, which is the only way that the theoretical benefits of government actions to reduce global carbon emissions can be translated into actual results.

Earth

Determining the Proper Scope of Climate Change Benefits

June 04, 2014

By Ted Gayer & Kip Viscusi
This article reviews the norms for the scope of benefit assessment based on executive orders and the laws governing risk and environmental regulations. Recent assessments of climate change policies have shifted from a domestic to a worldwide benefits approach, leading to a substantial increase in the estimated benefits. In 2010 the Obama Administration's Interagency Working Group on Social Cost of Carbon developed the guidelines that provide the basis for the assessment of the benefits associated with reductions in carbon dioxide emissions. Based on the estimates in one integrated assessment model that permitted a U.S. analysis, the estimate of the average U.S. benefit is about 7 to 10 percent of the global benefit. Alternatively, if one does not rely on a direct benefit estimate but assumes that the domestic share of the benefits is proportional to the current U.S. share of the global GDP, then the domestic benefit is 23 percent of the global benefit. This article reviews specific examples of such practices for energy efficiency regulations and the broader benefit assessment guidelines that have been developed for greenhouse gas initiatives, including the CAFE rule for passenger cars and light trucks, the carbon pollution rule for existing power plants, the clothes dryer rule, and the phase out of general service incandescent lamps.

department of energy

Regressive Furnace Fans

April 16, 2014

By Sofie E. Miller
In October, the U.S. Department of Energy issued a proposed rule setting energy efficiency standards for residential furnace fans. The rule is intended to save consumers money and reduce greenhouse gas emissions. However, the DOE’s use of low discount rates when estimating the benefits of the fans results in a proposed rule that would benefit well-off Americans but harm low- and medianincome households. That raises the question of whether the rule is economically justified and would improve social welfare, as required by law.

Susan Dudley with Senator Lieberman

OSHA’s Long-Awaited Crystalline Silica Rule

April 16, 2014

The Occupational Safety and Health Administration recently sought comment on proposed standards to reduce occupational exposure to respirable crystalline silica. The agency faces multiple challenges in devising a regulatory approach that will meet its statutory goal of reducing significant risk. In a comment filed on the public record, University of Alabama law professor Andrew Morriss and I recognize OSHA’s challenges; however, we find that the greatest obstacle to reducing risks associated with silica exposure is not lack of will (on the part of employers or employees), but rather lack of information. Our analysis concludes that the proposed rule will contribute little in the way of new information and, indeed, may stifle the necessary generation of knowledge by precluding flexibility for experimentation and learning.

dudley

Comment on Löfstedt’s ‘The substitution principle in chemical regulation: a constructive critique’

January 02, 2014

By Susan E. Dudley
This commentary on Ragnar Löfstedt’s constructive critique of the substitution principle observes that while the principle is intuitively appealing, it begins to unravel on closer examination. When considering government intervention to effect societal improvements, it is important to be aware of two problems. First, predicting the actual outcome of an intervention is very difficult, and second, people disagree about what constitutes ‘societal improvements’. This commentary examines the substitution principle in light of those problems and offers a set of guiding principles for evaluating and developing alternative policy frameworks that will improve public health and welfare.

forest

Making the Social Cost of Carbon More Social

December 03, 2013

By Susan E. Dudley, Brian Mannix, & Sofie E. Miller
On November 1, 2013, the White House released updated values for the “social cost of carbon” (SCC) to be used by various agencies when evaluating the benefits of emissions regulations, energy efficiency standards, renewable fuel mandates, technology subsidies, and other policies intended to mitigate global warming. Use of a uniform SCC reflects an effort to bring some consistency to a vast portfolio of different policies aimed at reducing carbon emissions from sources ranging from power plants, to cars, to household products.

manufacturing

EPA’s Retrospective Review of Regulations: Will It Reduce Manufacturing Burdens?

October 30, 2013

By Sofie E. Miller
Through a series of Executive Orders, President Obama has encouraged federal regulatory agencies to review existing regulations “that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.” This paper examines the initial results of that review to understand whether actions pursued under this initiative are likely to be successful at reducing regulatory burden. Since reports suggest that the manufacturing sector bears greater regulatory burdens than other sectors,1 and that regulations issued by the Environmental Protection Agency (EPA) impose particularly high costs on this sector, the focus here is on the expected effects on the manufacturing sector of EPA’s identified reforms.

fruit

Small Farms, Big Costs

September 10, 2013

By Sofie E. Miller & Cassidy B. West
The Food and Drug Administration recently extended to November 15 the deadline for public comment on its proposed rule, Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption. This is the second extension, providing the public an unusually long 304 days to comment on the proposed regulation and offer suggestions for its improvement. It is also a welcome opportunity, as the draft rule does not meet statutory and executive requirements and may needlessly harm consumers as well as small farmers domestically and abroad.

electric car

Questioning NHTSA’s ‘Noisy Electric Cars’ Rule

July 09, 2013

By Sofie E. Miller
Early this year, the National Highway Traffic Safety Administration published a proposed rule that would require hybrid and electric vehicles to make a sound while being operated at speeds slower than 18 miles per hour. Because they use an electric motor, hybrid and electric vehicles generate less noise than conventional vehicles with internal combustion engines (ICEs), and legislators and regulators alike are concerned that pedestrians could be injured by a vehicle that they can’t hear coming. Under the 2010 Pedestrian Safety Enhancement Act, NHTSA must conduct a safety standard rulemaking to establish an “alert sound” for hybrid and electric vehicles. The act requires that the noise made by a hybrid or electric vehicle could allow a pedestrian, especially a sightimpaired pedestrian, to identify the direction of the vehicle. NHTSA is also operating under the National Traffic and Motor Vehicle Safety Act, which requires NHTSA safety standards to “be performance-oriented, practicable, and objective, and meet the need for safety. In addition, in developing and issuing a standard, NHTSA must consider whether the standard is reasonable, practicable, and appropriate for each type of motor vehicle covered by the standard.”

office of management and budget

OMB’s Reported Benefits of Regulation: Too Good to Be True?

July 09, 2013

By Susan E. Dudley
Since 1997, the Office of Management and Budget has reported to Congress each year on the benefits and costs of federal regulation. These reports, which generally conclude that the benefits of regulation are an order of magnitude greater than the costs, are used to refute concerns that regulations may be hindering economic growth and to suggest that smart regulation can provide large net economic gains. For example, the Democratic National Committee’s 2012 platform defended President Obama’s regulatory record against Republican criticism by repeating the president’s claim that regulations issued over his first three years produced “more than 25 times the net benefits of the previous administration’s regulations.” The OMB’s draft 2013 report estimates that regulations issued over the last decade have aggregate benefits of between $193 billion and $800 billion, compared to costs ranging from $57 billion to $84 billion.

manufacturing

EPA’s Retrospective Review of Regulations: Will it Reduce Manufacturing Burdens?

May 17, 2013

By Sofie E. Miller
Through a series of Executive Orders, President Obama has encouraged federal regulatory agencies to review existing regulations “that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.” This paper examines the initial results of that review to understand whether actions pursued under this initiative are likely to be successful at reducing regulatory burden. Since reports suggest that the manufacturing sector bears greater regulatory burdens than other sectors, and that regulations issued by the Environmental Protection Agency (EPA) impose particularly high costs on this sector, the focus here is on the expected effects on the manufacturing sector of EPA’s identified reforms.

los angeles smog

The EPA’s Implausible Return on its Fine Particulate Standard

April 10, 2013

By Susan E. Dudley
Last January 14th, the Environmental Protection Agency published a final rule in the Federal Register updating the National Ambient Air Quality Standards (NAAQS) for particulate matter. The rule reduces by 20 percent the allowable annual concentrations of fine particles less than 2.5 micrometers in size (PM2.5), from the current 15.0 micrograms per cubic meter (μg/m3) that was affirmed in 2006, to 12.0 μg/m3.

According to the EPA, meeting the standard “will provide health benefits worth an estimated $4 billion to $9.1 billion per year in 2020—a return of $12 to $171 for every dollar invested in pollution reduction.” This is such an impressive return on investment that it raises the question why the EPA chose a standard of 12.0 μg/m3 when, by its logic, a tighter standard would yield even greater returns.

epa

Crony Environmentalism

April 10, 2013

By Sofie E. Miller
The benefits and costs that regulators highlight when announcing a rule can say a lot about a regulation’s composition—and sometimes the benefits (or costs) that are omitted are the most important part of the story. For the Environmental Protection Agency’s new biodiesel standard, the stated costs and benefits don’t even begin to tell the whole story: by the agency’s own estimates, the rule achieves neither economic efficiency nor improved environmental quality, and it leaves the public paying the price. What could have caused regulators to finalize a rule that causes harm to the environment at such a great cost to the public?