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Is Air Pollution Regulation Too Stringent?

Today’s post is co-authored with Reed Walker.

The benefits of additional air pollution regulation exceed the costs to industry by ten to one on average, according to a new analysis.

This month marks the 50th anniversary of the 1970 Clean Air Act Amendments (CAAA), the most dramatic expansion of air quality regulation in US history.

Source: https://en.wikipedia.org/wiki/Clean_Air_Act_of_1963#Clean_Air_Amendments_of_1970.

Since the 1970 CAAA, ambient concentrations of many targeted air pollutants have fallen by more than 90 percent. These decreases in pollution have improved health and welfare, including preventing hundreds of thousands of premature deaths.

The costs of cleaning up pollution, however, generally become more expensive with each additional unit of pollution reduction. Given past progress, it is natural to ask, have regulations pushed too far or not far enough?

Economists disagree on many policy questions, but one point of consensus is that environmental policy should continue to reduce pollution until the costs of additional pollution reductions exceed the benefits to society. If the benefits to society of reducing pollution emissions by one additional ton exceed what it costs the economy to make this reduction, then from society’s perspective, that ton of pollution reduction would more than pay for itself.

Debate over the magnitude of the costs and benefits of additional air pollution regulation has persisted over the last half century. For example, just last week the Trump Administration announced it would not strengthen ambient standards for particulate matter pollution, an announcement criticized by environmental and public health organizations who believe the additional benefits would exceed the additional costs.

A Novel Approach to Measuring the Cost of Cutting Pollution

Our new working paper speaks to these debates. This research provides a novel approach to measuring the costs of additional air pollution regulation for industrial pollution sources under the CAAA. This research finds that while additional air pollution regulation has large economic costs to firms, it creates even greater economic benefits—about 10 times larger on average.

We reach this conclusion by studying a provision of the CAAA that essentially caps pollution emissions from stationary sources in the counties with the dirtiest air (“nonattainment areas”). When a firm wants to open a large, new industrial pollution source like a factory, it must pay an existing local polluter to reduce its emissions by the same amount it will emit. These transactions, called “offsets” (or legally, Emissions Reductions Credits), have led to the creation of over 500 markets for pollution offsets across the U.S. These offset markets are distinct from pollution cap-and-trade markets that are often discussed.

Counties with Offset Markets for NOx and VOCs

The prices of these pollution offsets help reveal the costs of additional pollution reductions. If a company’s cost of reducing its pollution is less than the price of offsets in the market, then the company has an incentive to invest in pollution control and sell offsets. Conversely, if a new firm sees offset prices are much less expensive than potential emissions reduction strategies, that firm should choose to buy offsets rather than seek to further reduce emissions.

Consider the case study of the Scan-Pac company in Houston, Texas, which manufactures industrial materials used in agriculture, construction, and transportation. Scan-Pac realized that it could install a type of pollution control technology, a thermal oxidizer, that would reduce its emissions of volatile organic compound (VOC) pollution at relatively low cost. In 2013, when Scan-Pac installed this technology, a detailed analysis by the regulator confirmed that it reduced VOC emissions by 21.8 tons per year, and Scan-Pac received an offset certificate for this reduction (see image below). Scan-Pac later sold this offset to Enterprise Products, an oil and gas company, for $3.6 million. Enterprise used the pollution offset in part to build a processing plant in Houston to make propylene.

Scan-Pac’s decision is an example of where the cost of additional pollution reduction to a firm was less than the prevailing price of pollution offsets, and thus the firm increased its profits by decreasing pollution. More generally, wherever offset markets exist, firms have an incentive to seek out opportunities to clean up pollution up until the cost of additional decreases in pollution equals the price of offsets (just like with a cap-and-trade program). A similar idea applies to new firms. This illustrates how offset prices provide information on the cost of additional pollution reduction.

In our paper, we assemble data on offset transactions from 16 states that collectively represent 60 percent of economic activity in all US air pollution offset markets. We compare these offset prices to existing estimates of the incremental benefits of pollution reduction from a variety of peer-reviewed integrated assessment models (e.g., AP3). The estimated benefits of cleaning up pollution differ across each US county and pollutant, depending on population density, atmospheric chemistry, and other demographic, economic and scientific factors. In part these reflect the mortality damages of particulate matter, which we quantify using a range of analyses by economists (from studies in the US and China) and epidemiologists (here and here).

This comparison helps assess whether the benefits of additional pollution reduction outweigh the costs. In other words, we compare the costs of removing one ton of pollution emissions to the benefits to society of reducing the same one ton of emissions.

Benefits of Cutting Pollution Emissions Substantially Exceed Costs

The graph below shows estimates of the benefit of reducing one additional ton of nitrogen oxides (NOx) pollution in each of several large markets (red diamond). It also shows the average price of one ton of pollution offsets in each market, which provides an estimate of the marginal cost of reducing one additional ton of pollution (blue circle). Scanning through each market shows that the marginal benefits of additional pollution reduction substantially exceed this estimate of the marginal costs to reduce pollution. Our research also finds similar patterns for three other pollutants – volatile organic compounds, particulate matter, and sulfur oxides – though particulates and sulfur have fewer offset markets.

Mean Offset Prices Versus Benefits of Additional Reductions in NOx Pollution Emissions                                                                                                                                             

For example, we estimate that an existing firm in the San Francisco Bay Area would receive almost $1,500 in offset value from lowering its nitrogen oxides emissions by one ton. This decrease in emissions, however, is worth over $50,000 in societal benefits, due primarily to reduced premature mortality. We find that, on average, the benefits of additional pollution regulation are about ten times the additional costs.

This is true in nearly all the 115 markets where we have data. The main exception is Houston, where the cost of additional regulation of volatile organic compound emissions appears to exceed the benefits. The price of pollution offsets in Houston has been high over the last decade in part because cheap natural gas spurred by fracking has led to high demand by petrochemical companies to open new plants in Houston. This has increased the industrial demand to emit pollution in Houston, which has increased the price of pollution offsets.

Looking ahead, analyzing the marginal costs and benefits of tightening pollution standards will be just as important to an effective EPA in the next half-century as it has been in its first half-century. We hope that regulators and policy makers will continue to think “on the margin” when deciding whether additional regulation is worth it. Happy birthday, EPA!

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Shapiro, Joseph and Walker, Reed“Is Air Pollution Regulation Too Stringent?” Energy Institute Blog, UC Berkeley, December 14, 2020, https://energyathaas.wordpress.com/2020/12/14/is-air-pollution-regulation-too-stringent/

6 thoughts on “Is Air Pollution Regulation Too Stringent? Leave a comment

  1. Like Renewable Energy Credits (RECs) in California and 25 other states, pollution offsets amount to a con – a clever shell game that magically doubles the value of carbon reductions achieved through the program.

    How? Let’s again consider the case study of Scan-Pac / Enterprise Products. Scan-Pac’s investment successfully reduced VOC emissions at the company by 21.8 tons/yr. Scan-Pac was then awarded a certificate which, after buying it, allowed Enterprise to claim a non-existent pollution reduction of 21.8 tons/yr.

    Total pollution reduction = 21.8 tons/yr, total credited pollution reduction = 43.6 tons/yr.

    It’s unclear whether the claim “benefits of cutting pollution emissions substantially exceed costs” is using 43.6 tons or 21.8 tons as a value for emissions cuts; either way, offsets add no environmental benefit to Scan-Pac’s original purchase.

    Rest assured that both companies, and the states in which they do business, are taking full credit for the same 21.8 tons/yr of emissions cuts, and that neither is accepting responsibility for the 21.8 tons/yr of VOC emissions Enterprise continues to dump into the atmosphere. In that sense, pollution offsets are doing considerable harm to the environment, by attributing to participants’ efforts a grossly-inflated value.

    • Scan-Pac gave up the claim to the 21 tons in emission reductions beyond what it was required to do under the air pollution regulations. There is no double counting. Most environmental regulations recognize that zero pollution is impossible so they set a maximum level in some form. Firms that reduce beyond that maximum level are then able to sell that extra reduction to another firm if such trading is allowed, and in most cases the trading ratio discounts the value of the original reduction, e.g., 1.5:1, so that Enterprise is able to only claim 14 tons of reduction. The physical result is actually better than if both firm just controlled to the maximum emission level for each. So instead of having 42 tons of VOC between the two, its only 35 tons.

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