July 9, 2015

Michigan v. EPA: Costs and Benefits Matter

  • In Michigan v. EPA, the Supreme Court remanded the EPA’s Mercury and Air Toxics Standards rule to the D.C. Circuit because EPA failed to consider cost as a factor when deciding to promulgate the regulation.

  • The ultimate fate of the MATS rule will make little difference for power companies and energy consumers since it has already forced coal-fired power plants to shut down.

  • The ruling may force EPA to justify their regulations with more reasonable cost-benefit analyses in the future.

On June 29, the Supreme Court ruled that the Environmental Protection Agency acted unreasonably when it wrote its Mercury and Air Toxics Standards rule. The agency failed to consider cost as a factor when making its threshold determination that the rule was “appropriate and necessary” under the Clean Air Act. The court remanded three consolidated cases – referred to as Michigan v. EPA – to the D.C. Circuit, where the MATS rule will be reconsidered. Even if the appeals court vacates the MATS rule, it will make little difference for power companies that have already shut down coal-fired power plants to comply with the rule. It will also do little to help energy consumers who now face higher electricity rates and reduced electric reliability. Nonetheless, the ruling may force the EPA to justify their regulations with more reasonable cost-benefit analyses in the future.

States with Units Closing - EPA Regulations

Cost includes more than the expense of complying with regulations

The court said that the EPA must consider cost when deciding whether it is “appropriate and necessary” to regulate emissions of hazardous air pollutants from power plants under section 112 of the Clean Air Act. “Read naturally in the present context, the phrase ‘appropriate and necessary’ requires at least some attention to cost,” wrote Justice Scalia in the majority opinion. “One would not say that it is even rational, never mind ‘appropriate,’ to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.” Scalia noted, “By EPA’s logic, someone could decide whether it is ‘appropriate’ to buy a Ferrari without thinking about cost, because he plans to think about cost later when deciding whether to upgrade the sound system.”

The court found that the statute does not unambiguously require the EPA to conduct a formal cost-benefit analysis when making its preliminary estimate. Instead, the court found that the agency itself must decide how to account for cost at this stage, “as always, within the limits of reasonable interpretation.” While the court therefore reaffirmed that it would defer to the agency’s discretion on what costs to consider, it showed an interest in determining what types of costs are reasonable to include in an analysis. In doing so, the court seemed to open the door to future litigation targeting the reasonableness of the EPA’s cost analysis.

The court made it clear that the EPA “must consider cost – including, most importantly, cost of compliance – before deciding whether regulation is appropriate and necessary.” But it also found that cost “includes more than the expense of complying with regulations; any disadvantage could be termed a cost.” The court continued: “EPA’s interpretation precludes the Agency from considering any type of cost – including, for instance, harms that regulation might do to human health or the environment. The Government concedes that if the Agency were to find that emissions from power plants do damage to human health, but that the technologies needed to eliminate these emissions do even more damage to human health, it would still deem regulation appropriate. No regulation is ‘appropriate’ if it does significantly more harm than good.”

In a June 18, 2012, letter a group of Senators asked President Obama to require the EPA to consider exactly this type of additional cost when justifying the MATS rule and other environmental regulations. “The EPA should immediately stop pushing expensive regulations that put Americans out of work and into the doctor’s office,” the Senators wrote. “We respectfully ask that your agencies adequately examine the negative health implications of unemployment into the cost/benefit analysis of the numerous regulations that are stifling job growth, before making health benefit claims to Congress and the public.” They cited a March 2012 report evaluating public health costs of unemployment created by environmental regulations.

The court may even be willing to consider opportunity costs as part of the cost-benefit analysis. “Consideration of cost,” the court said, “reflects the reality that ‘too much wasteful expenditure devoted to one problem may well mean considerably fewer resources available to deal effectively with other (perhaps more serious) problems.’” 

Ancillary benefits questioned

The court noted, “Some of the respondents supporting EPA ask us to uphold EPA’s actions because the accompanying regulatory impact analysis shows that, once the rule’s ancillary benefits are considered, benefits plainly outweigh the costs.” But the EPA conducted the regulatory impact analysis of the MATS rule well after it had decided to issue the rule. So that analysis played no role in the preliminary “appropriate and necessary” finding. Accordingly, the court held that “[e]ven if the Agency could have considered ancillary benefits when deciding whether regulation is appropriate and necessary – a point we need not address – it plainly did not do so here.”

A Politico Pro analysis suggested that while Scalia “did not reject the inclusion of those ‘co-benefits’ in future rule calculations, he could be foreshadowing that possibility.” The article noted that the justice “pointedly” did not include ancillary benefits in his estimation of the value of the rule. It quoted one attorney who said that the majority was “very skeptical of co-benefits to justify the rule” even though it did not resolve the issue. It quoted another attorney saying that the court might require EPA to consider co-costs of a rule – like higher electricity costs for the manufacturing sector – if it allows the agency to consider co-benefits of a rule. A separate analysis from E&E agreed, suggesting that “the justices held different opinions about whether the benefits of the rule outweighed the costs.” It pointed out that the “majority focused on the $6 million benefit from reductions in mercury pollution, while the minority’s dissenting opinion frequently referred to the much higher figure that includes particulate matter benefits.”

Even though they played no role in the preliminary “appropriate and necessary” determination at issue in this case, the court did spend time discussing the EPA’s findings about the costs and benefits of the MATS rule. The court noted that the regulatory impact analysis found that the rule would impose direct costs of $9.6 billion on power plants but generate direct benefits of only $4 million to $6 million per year from hazardous air pollutant emissions reductions. “The costs to power plants were thus between 1,600 and 2,400 times as great as the quantifiable benefits from reduced emissions of hazardous air pollutants.” Taking ancillary benefits into account would dramatically increase the quantifiable benefits of the MATS rule to $37 billion to $90 billion per year.

During oral arguments, Chief Justice Roberts, who joined the majority opinion, questioned Solicitor General Verrilli about the role of ancillary benefits in justifying the MATS rule. He pointed out that the solicitor general had explained away the “dramatic disparity” between the costs of $9.6 billion per year on power plants and the benefits of $4 million to $6 million per year from hazardous air pollutant emissions reductions with an alternative calculation that added $37 billion to $90 billion per year of ancillary benefits from criteria pollutant emissions reductions to the cost-benefit equation. “In other words, you can’t regulate the criteria pollutants through the HAP program, so you get, okay, here we’ve got this tiny bit of mercury … and that’s how we’re going to get additional regulation of the criteria pollutants. And so it’s sort of an end run around the restrictions that would otherwise … give you less control over the regulation.” The chief justice continued: “So I understand the idea that you can have – you know, it’s a good thing if your regulation also benefits in other ways. But when it’s such a disproportion, you begin to wonder whether it’s an illegitimate way of avoiding the different – quite different limitations on EPA that apply in the criteria program.”

More reasonable cost-benefit analyses in the future?

The ultimate fate of the MATS rule in the wake of Michigan v. EPA will make little practical difference for the coal industry, power companies, and energy consumers since irreversible damage has already been done. Even EPA admitted this when it stated, “EPA is disappointed that the Court did not uphold the rule, but this rule was issued more than three years ago, investments have been made and most plants are already well on their way to compliance.” Nonetheless, the ruling could support future litigation over the reasonableness of agencies’ cost-benefit analyses. This could pose serious challenges to federal regulations.

Power plants had to make decisions about shutting down while the MATS case worked its way through the courts, which may have damaged the economy. Opponents of another EPA rule – governing carbon dioxide emissions from existing power plants – can now point to this case to argue that a federal court should delay implementation of the CO2 rule until all legal proceedings are complete. They can now also point to Michigan v. EPA to question the reasonableness of the EPA’s cost-benefit analysis for its CO2 rule. The EPA’s regulatory impact analysis claims that the CO2 rule would generate $31 billion in climate benefits in 2030. But Americans would see only $2.2 billion to $7.1 billion of those benefits. Even that estimate of climate benefits is questionable, since it depends on the administration’s controversial “social cost of carbon.” It is much less than the estimated $8.8 billion in compliance costs for the rule. That cost estimate is probably low, since it does not include costs associated with other disadvantages created by the rule, like harm to human health from increased unemployment. Moreover, the EPA puts its thumb on the benefits side of the scale by also including $24 billion to $62 billion in ancillary health benefits in 2030 – 95 percent of which come from reducing exposure to particulate matter, which the court questioned in Michigan v. EPA.

Last summer, in the case Utility Air Regulatory Group v. EPA, the court warned the EPA not to exceed its statutory authority in rulemakings. Scalia, who delivered the majority opinion in that case as well, wrote: “When an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism. We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast ‘economic and political significance.’” On June 25, in the case King v. Burwell, the court cited that passage when electing to base its ruling on its own reading of the statutory language instead of deferring to the Internal Revenue Service’s interpretation of an Obamacare provision. It explained that Congress would not have intended such an implicit delegation of authority to the IRS on such a “question of deep ‘economic and political significance’ that is central to the statutory scheme.” In doing so, the court demonstrated its willingness to narrow its deference to agency interpretations of federal statutes in the future. On June 29, in Michigan v. EPA, the court continued to lay the groundwork for constraining the EPA and other federal agencies by painting a target on the reasonableness of cost-benefit analyses used to justify federal regulations.

Issue Tag: Energy