EPA’s MATS Economic Analysis Omits Economy from Analysis

by David Bier on April 24, 2012

in Blog, Features

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The Environmental Protection Agency concedes that its recently finalized Mercury and Air Toxics Standards rule, also known as the Utility MACT, would cost $10 billion annually. Industry estimates are much, much higher. Even EPA’s (likely lowball) figure makes the MATS rule one of the most expensive direct regulations ever.

Despite these evident costs, EPA claims that the regulation will not only save the environment, but also benefit the economy. EPA Deputy Administrator Robert Perciasepe testified, for example, “Our analysis shows, particularly on these utility rules, that it will create jobs.” Head Administrator Lisa Jackson has repeated the same claim. “Every model that we run,” she said last year, “shows… that it would actually create jobs.”

But these claims are entirely disingenuous. EPA analysis does not show that the Utility MACT will result in net job creation, only that it will create jobs in the coal industry and those industries that produce pollution abatement equipment. The wider economic implications are ignored. As EPA’s Regulatory Impacts Assessment (RIA) states, “the Agency has not quantified the rule’s effects on all labor in other sectors not regulated by the [mercury standard].” In other words, “every model” Jackson ran cooked the books in favor of EPA’s conclusion.

In economics, such analysis is known as a “broken-window fallacy,” which views only a narrow range of effects of a particular action. “There is only one difference between a bad economist and a good one,” wrote 19th century economist Frederic Bastiat. “The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” EPA focuses on the “seen”—the workers required to install pollution controls—while it ignores the unseen—the workers who lose their jobs or are forced to take pay cuts due to higher electricity prices.

Nevertheless, EPA continues to promulgate this myth that the Utility MACT will benefit the economy. But consider what it means to benefit the economy. As Bastiat writes, economic development “diminishes the ratio of effort to result… that is, [it] lessens the effort needed to have a given quantity.” EPA regulations do the opposite. The agency’s RIA notes, “regulation leads to more labor being used to produce a given amount of output.” In other words, it increases the ratio of effort to result—it increases the effort needed to have a given quality. In sum, unnecessary regulations do not develop an economy—they impoverish it.

The goal of a utility is not to create jobs but to create wealth in the form of electricity. Even if more jobs are created in the coal industry from this regulation, this is bad for all coal workers because the profits from each megawatt of production are divided among around 50,000 more workers. (according to EPA’s RIA). This makes each worker’s labor less valuable and therefore, causes wages to decline. Under all economic models, environmental regulations harm workers.

EPA’s focus on industry-level employment ignores downstream costs to consumers from increased electricity costs. These adverse impacts will fall disproportionately on industries like manufacturing that rely heavily on electricity. Darren MacDonald, Director of Energy at Gerdau Long Steel North America, recently testified, for example, that “the steel sector is concerned about increased electricity costs and reliability issues that may result from [the Utility MACT]. This is for the simple fact that all of the compliance costs and reliability risks will ultimately be passed on to us, the consumers.”

Economic research supports this position. American University professor Michael Hazilla and RFF’s Raymond Kopp note “a point often made by economists but largely ignored by regulators:  regulations affecting production sectors that supply important intermediate products can have significant secondary impacts.” They write that “while pollution control investments were required in only 13 sectors, the cost of production increased, and output and labor productivity fell, in all production sectors.” Lower labor productivity means lower wages for workers, which again means that by ignoring downstream costs, the EPA is really ignoring the welfare of the majority of workers in the economy.

EPA wants Americans to believe something we all intuitively know is false: that higher costs create jobs, that higher electricity prices are economic stimulus, that with a wave of hand, a regulator can create tens of thousands of more jobs than an entrepreneur. In a way, these claims are true. The Utility MACT will stimulate the phony, government-created markets, and it will create jobs for engineers, but they will be making useless equipment for illusory benefits rather than in productive but unfavored industries like manufacturing, and if this type of regulation continues, it will certainly create more jobs than entrepreneurs who will abandon the U.S. for freer-markets abroad. If Congress wants to create productive jobs and build this economy, it must stop EPA.

Read my analysis of EPA’s argument that coal regulations create coal jobs here.

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