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Accounting switch in Clean Power Plan highlights politics of rulemaking

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

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Accounting switch in Clean Power Plan highlights politics of rulemaking

The U.S. Environmental Protection Agency's decision to switch energy efficiency from the "cost" side of the cost-benefit ratio to the "savings" side has proven controversial, but the change actually highlights both a long-running debate among economists and the manner in which politics often is injected into rulemaking.

The switch, made in the agency's proposal to repeal the Clean Power Plan, is seemingly minor. But the EPA insists that energy efficiency should have been included as a benefit all along, while environmental groups have charged that the tweak allowed the agency to artificially inflate the cost of the regulation in order to justify its repeal.

A regulatory impact analysis released to the public to support the repeal proposal touted up to $33 billion in avoided costs in 2030 that will result from erasing the Clean Power Plan from the books. In contrast, the Obama administration estimated that compliance costs for the regulation would be up to $8.4 billion that same year.

Cost-benefit analyses are a complicated, but necessary, component of rulemaking proceedings across the federal bureaucracy. For every proposed regulation, the EPA must show both how it will benefit the public and what costs it will impose on regulated industries, according to an overview of the agency's economic analysis. Once the numbers are tallied, the government must choose the best way to sell its regulation to the public. The equations used to support environmental regulation often become the subject of complex court battles.

When writing a regulation that includes energy efficiency, regulators have the choice of counting it as a benefit or a cost.

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Energy efficiency was considered inconsistently in cost-benefit analyses during the Obama administration, according to one former EPA official who served under that administration and asked not to be named. The EPA and the White House's Office of Management and Budget disagreed on the proper placement of efficiency, with the EPA generally arguing that it should be a cost reduction since it aids the regulated entity and the OMB insisting that it should be placed on the benefits side, the former EPA official said.

For the Clean Power Plan, the Obama EPA considered energy efficiency as a negative cost. The Trump EPA, however, is proposing to switch it over to the "benefit" side of the equation.

That is a perfectly acceptable way of characterizing energy efficiency, said a policy expert with an efficiency advocacy group who asked not to be named. Under that approach, the cost will go up compared to the Obama administration's estimates, but so too will the value of the benefit.

"Putting it as a negative cost or a positive benefit, it's just an equation. It shouldn't matter," said the advocacy source. "Except ... the devil's in the details. How did they come up with those numbers and did they really move that exact same number from one side of the equation to the other?"

Jack Lienke, a senior attorney for New York University's Institute for Policy Integrity, said the EPA's accounting changes in the repeal proposal do not actually show that the cost of compliance with the Clean Power Plan has gone up in any way. "But what it allows them to do is, instead of saying that the rule costs $5 billion, [they] can say it costs $25 billion, and then they don't mention that the benefits are also $20 billion higher," he added, using hypothetical numbers.

Sara Hayes, manager of the nonpartisan American Council for an Energy-Efficient Economy's health and environment program, said the group does not believe that the EPA is properly considering the health benefits of the Clean Power Plan.

"Energy efficiency reduces pollution from power plants, and that is the point of this regulation and a lot of EPA's activities. It's absurd to exclude those health benefits in this context. We're all for a balanced approach, but that's not what's here," Hayes said.

Tables in the regulatory impact analysis do not make entirely clear whether the EPA took the original estimate of the cost of energy efficiency and simply moved it over to the benefit column or calculated an entirely new estimate, the advocacy source said. The source also noted that the Obama administration claimed energy efficiency was valued at 8 cents/kWh while most other estimates place the value at about 2 cents/kWh to 3 cents/kWh. That made the Clean Power Plan's negative cost value of energy efficiency "ridiculously high," the source said.

The Trump EPA also has criticized the Obama administration's Clean Power Plan analysis.

"The facts are that the Obama administration's estimates and analysis of costs and benefits was, in multiple areas, highly uncertain and/or controversial," EPA spokeswoman Liz Bowman said in an Oct. 6 statement. "The Trump administration is, in a robust, open, and transparent way, presenting a wide range of analysis scenarios to the public."

'A war of rhetoric'

Of course, the economic accounting behind the scenes is not what sells any new regulation to the public. That is where politics come in.

In the case of the Clean Power Plan repeal, a handful of experts say the EPA is carefully citing numbers to justify its desired result. "From a PR perspective ... they now get to say this rule costs up to $33 billion," Lienke said. "That doesn't reflect any new data. They haven't actually done any new analysis, they've just moved some numbers around."

And while the increased costs were touted by the EPA, the commensurately higher benefits of the Clean Power Plan under the new accounting approach were not similarly highlighted in the agency's press release, Lienke said. Typically, the cost and benefit are put together to come up with a "net benefit" that shows the actual cost to the economy that considers both the costs and the benefits of a rule, he added.

"If you ask an economist, all that matters when looking at a rule is the net effect," Lienke said.

The former EPA official said talking about the cost and benefit values separately is not unusual and, in this case, primarily highlighting the higher compliance costs allowed the EPA leadership to make a case that the Clean Power Plan is much more expensive than originally thought.

"There's sort of a war of rhetoric that gets waged, too," the former EPA official said.