Environmental Economics

Volkswagen executives did a benefit cost analysis of cheating U.S. environmental regulations

New York state has field suit against Volkswagen claiming that not only did someone at Volkswagen designed a system to bypass emissions tests (for which VW has already agreed to pay over $15 billion), but that upper management actually performed a benefit cost analysis on what would happen if they got caught:

Executives even carefully evaluated what the cost would be to the company if they were caught. Reviewing previous cases of violations of environmental regulations by auto manufacturers in the U.S. they predicted that the likely fines posed “only a moderate cost risk.” They cited the highest fine, imposed against Hyundai/Kia as amounting to “barely $91 per vehicle” and added “fines in this amount are not even remotely capable of influencing the share price of a globally operative company such as Volkswagen.”

Oops...and then they apparently tried to cover it up:

The most senior VW officer listed in the indictment is Martin Winterkorn who was CEO of Audi from 2002 to 2007, when the original defeat device was developed, and CEO of VW from 2007 until resigning on September 23, 2015. The day before he resigned, Winterkorn made a video statement that referred to “irregularities” in the diesel engines and said the company would act with “the greatest possible openness and transparency.”

A few weeks earlier, according to the complaint, a senior VW attorney advised multiple employees that a litigation hold was about to be issued, making it impossible to destroy or delete documents. A team of at least eight employees, all in the departments involved in designing the defeat devices, then deleted or removed data from the company records.

“Some, but not all, of the data has been recovered,” the lawsuit said.

At the same time VW’s Management Board, the nine men who had presided over the perpetration of fraud, the cover-up and then a public relations debacle that followed its exposure, were awarded $70 million in executive compensation for 2015 alone.

Oops.

I wonder if someone will say the same thing 100 years from now?

From Science:

Since it was discovered in 1985, the Antarctic ozone hole has been a potent symbol of humankind’s ability to cause unintended environmental harm. But now comes a glimmer of good news: The void in the ozone layer is shrinking. “It’s a big surprise,” says Susan Solomon, an atmospheric chemist at the Massachusetts Institute of Technology in Cambridge. “I didn’t think it would be this early.”

Although the hole will not close completely until midcentury at the earliest, the healing is reassuring to scientists who pushed for the Montreal Protocol. The 1987 international agreement phased out the industrial production of chlorofluorocarbons (CFCs): chlorine-containing chemicals that help trigger the destruction of stratospheric ozone, which screens out cancer-causing ultraviolet light. “You want to be sure that the actions we’ve taken have had the intended effect,” says Solomon, who led the study published online by Science this week.

And here's the money quote:

“The fact that we’ve made a global choice to do something different and the planet has responded to our choice can’t help but be uplifting,” she says.

I missed the EPA's benefit-cost reanalysis of the mercury rule last week

The WSJ Weekly Review reminds me:

EPA Defends Cost of 2015 Mercury Rules in Updated Analysis
by: Amy Harder
Apr 16, 2016
Click here to view the full article on WSJ.com

TOPICS: Environmental Regulation

SUMMARY: The Environmental Protection Agency issued an updated cost analysis, defending its issuance of the first-ever federal regulations requiring power plants to cut mercury emissions and other air pollutants.

CLASSROOM APPLICATION: Students can learn about the estimated costs and benefits of the EPA's new mercury regulations.

QUESTIONS: 
1. (Advanced) What are the benefits to people of reducing mercury emissions? What are the costs?

2. (Advanced) What is the effect of the new mercury regulation on electricity prices? Are households made better off by the combination of the mercury regulation and the higher prices?

3. (Introductory) Is a new regulation justified if the benefits outweigh the costs of the regulation?

Reviewed By: James Dearden, Lehigh University

This link to the article might be ungated. Here is an excerpt:

The Environmental Protection Agency Friday issued an updated cost analysis, defending its issuance of the first-ever federal regulations requiring power plants to cut mercury emissions and other toxic air pollutants.

The agency’s move was prompted by a Supreme Court ruling last year that said the agency hadn’t taken into account the costs to industry, as it was required to do, before deciding to adopt the rules.

The Supreme Court, in a 5-4 opinion last June, said the EPA must reconsider the mercury rules because of that omission. The rules, however, have remained in effect during that process.

The EPA says that power plants are the single-largest source of U.S. emissions of mercury, a neurotoxicant that can be particularly harmful to children and unborn babies.

The EPA initially adopted the mercury rules in 2012 and they took effect in April 2015. The agency initially concluded that costs weren’t a relevant consideration when it was deciding on the need for the mercury regulations.

Later, as it was writing the rule, the agency estimated an annual cost to the utility sector of $9.6 billion, compared with public-health benefits of at least $37 billion. The Supreme Court, however, said the agency should have made that calculation earlier, as it was deciding whether to adopt the rules in the first place.

In its updated analysis released Friday, the EPA listed three figures it said supported the case for regulating mercury emissions from power plants. It said utilities’ compliance costs would be a small fraction of their overall sales and their capital expenditures, and wouldn’t make electricity prices rise unduly for customers.

The estimate specifically applied the costs to the ongoing expenses of utilities and consumers. It found that the annual cost of complying with the rules would come to between 2.7% and 3.5% of annual electricity sales (relying on figures from 2000 to 2011). It said the capital costs of complying represent between 3.0% and 5.9% of annual power sector capital expenditures over 10 years. And it said the rules would raise electricity prices 3.1% over 10 years.

Most utilities have already complied with the rule, making Friday’s analysis more important for legal rather than substantive purposes. In one sign that stakeholders have moved on, EPA received just 39 comments as it prepared the updated analysis, compared with nearly one million comments when the rules were being written.

Some industry trade groups had argued that mercury rule would prompt blackouts and skyrocketing electricity prices. Neither scenario has materialized, due largely to the increased production of natural gas, which unlike coal produces no mercury and whose price has dropped sharply since 2008.

Here is a link to a previous post (where you can find more previous posts) on the mercury rule. It seems as if the EPA should have done the benefit-cost analysis ex-ante. But when they did the study the power plants should have said "better late than never" and moved on. The court case and the reanalaysis seem like an enormous waste of money.

But, it's not over:

The updated finding won't put an end to the continuing court fights over the rule, which has helped push dozens of coal-fired power plants to shut down.

The Supreme Court is considering a petition from 20 states led by Michigan that argue the rule should have been scrapped entirely and that a lower court's decision to keep it on the books was illegal.

Last month, the states argued that the move to keep the rule in place "effectively thwarts" the Supreme Court's decision rejecting the mercury rule.

Even if EPA issued its new finding to bring it in line with the Supreme Court's 2015 decision, "EPA never had authority to impose it in the first place," the states wrote (Greenwire, March 18).

The Obama administration's response to the states' Supreme Court petition is due May 6. The justices will then decide whether to hear the states' appeal. They could dismiss the request in a short order.

 Here is EPA's Mercury and Air Toxics Standards website where you can find all of the technical documents. 

The ex-post ex-ante Mercury Rule benefit-cost analysis might appear today!

About a month ago it seemed as if the Supreme Court delayed the Mercury Rule because the required benefit-cost analysis wasn't ex-ante enough. In effect, the Supreme Court ordered the EPA to go back in time and conduct the analysis again:

EPA spokeswoman Melissa Harrison ... confirmed that the EPA next month plans to finalize a fix to the rule to retroactively apply its cost-benefit analysis in the way the Supreme Court said was necessary.

The court ruled last June that the EPA should have conducted a cost-benefit analysis on the regulation before it even decided to start writing it. The agency did so as part of the regulatory process, but the justices said that was not sufficient.

From this morning's overnight energy email:

The Obama administration is one step closer to putting out its fix for its major power plant pollution rule that the Supreme Court said was illegal.

The White House Office of Management and Budget approved the Environmental Protection Agency's (EPA) measure to fix the rule Thursday, a day before the deadline the EPA gave itself.

The problem with the mercury and air toxics rule, the Supreme Court said was that the EPA should have considered costs and benefits before it even started writing the rule, not just in the process of writing it.

So the EPA has proposed to simply apply its existing cost-benefit analysis -- which shows benefits outweighing costs by nearly 10 to 1 -- to the earlier part of the rulemaking process.

Keep an eye out for the fix Friday.

I eagerly await the "Friday fix." 

"The staggering economic cost of air pollution"

Staggering?

Air pollution caused by energy production in the U.S. caused at least $131 billion in damages in the year 2011 alone, a new analysis concludes — but while the number sounds grim, it’s also a sign of improvement. In 2002, the damages totaled as high as $175 billion, and the decline in the past decade highlights the success of more stringent emissions regulations on the energy sector while also pointing out the need to continue cracking down. ...

The new analysis, just published in the journal Energy Policy, did just that. Using an up-to-date model and a set of data acquired from the Environmental Protection Agency on emissions from the energy sector, the researchers set about estimating the monetary damages caused by air pollution from energy production between 2002 and 2011. ...

While the study doesn’t delve into the exact causes behind these shifts, the authors have some theories. They point to the EPA’s development of the Clean Air Interstate Rule (CAIR) and later its replacement, the Cross-State Air Pollution Rule (CSAPR). The anticipation of these rules, despite the fact that CAIR was never fully implemented, led many facilities to begin writing mitigation policies and installing abatement devices. ...

Certain economic shifts may have also briefly had an effect. The authors suggest that the Great Recession in 2008 caused demand for energy fuels to dip for a few years. And the expansion of renewable energy during the past decade likely also played an important role. ...

There were a few other clear trends in the study to pay attention to. Out of the four sectors included in this study, power generation accounted for the vast majority of all the damages caused. And regardless of sector, sulfur dioxide was the most damaging of all the emissions. Those observations suggest that future regulations should focus on these areas to have the highest impact on air pollution.

That social cost amounts to about $500 for each person that lives in an urban area. I'm not sure if that is "staggering," but still it adds up.

Here is the source: Jaramillo, Paulina, and Nicholas Z. Muller. "Air pollution emissions and damages from energy production in the US: 2002–2011." Energy Policy 90 (2016): 202-211.

Has the SCOTUS ordered the EPA to conduct an ex-ante benefit-cost analysis ex-post?

Fire up the time machine!

Supreme Court Chief Justice John Roberts rejected a plea Thursday to block a contentious air pollution rule for power plants in a big victory for the Obama administration.

Roberts’s order came despite his court’s 5-4 decision last year ruling that the Environmental Protection Agency’s (EPA) regulation, known as the Mercury and Air Toxics Standards, is illegal.

Michigan led a group of 20 states last month — empowered by the Supreme Court’s recent unprecedented decision to halt the EPA’s carbon dioxide rule for power plants — in asking the court to live up to its ruling last year and block the regulation’s enforcement.  

“Unless this court stays or enjoins further operation of the Mercury and Air Toxics rule, this court’s recent decision in Michigan v. EPA will be thwarted,” the states wrote in a Feb. 23 filing with the court.

“A stay or injunction is appropriate because this court has already held that the finding on which the rule rests in unlawful and beyond EPA’s statutory authority.”

The EPA responded that no judicial stay is necessary since it’s working to fix the problem the court identified by next month, and the states would not suffer irreparable harm in that time.

“The requested stay would harm the public interest by undermining reliance interests and the public health and environmental benefits associated with the rule,” the government said. “The application lacks merit and should be denied.” ...

The mercury pollution standards, made final in 2012, are a separate regulation from the more controversial and costly carbon dioxide limits for power plants that are also being litigated in court. ...

EPA spokeswoman Melissa Harrison said on Thursday the agency is “very pleased” with Roberts’s order.

“These practical and achievable standards cut harmful pollution from power plants, saving thousands of lives each year and preventing heart and asthma attacks,” she said, adding that the agency’s calculations show $9 in health benefits for every dollar in compliance costs for the regulation.

Harrison confirmed that the EPA next month plans to finalize a fix to the rule to retroactively apply its cost-benefit analysis in the way the Supreme Court said was necessary.

The court ruled last June that the EPA should have conducted a cost-benefit analysis on the regulation before it even decided to start writing it. The agency did so as part of the regulatory process, but the justices said that was not sufficient.

via thehill.com

Following the first link: 

The Supreme Court ruled last year that the Obama administration should have completed a cost-benefit analysis before it even started the regulatory process for the mercury and air toxics (MATS) standards. ...

The EPA is working to fix the regulation by retroactively writing a cost-benefit analysis. It already completed such an analysis as a later step in the regulatory process, and it’s planning to apply that now.

Here is the link to the benefit-cost analysis: https://www3.epa.gov/ttnecas1/regdata/RIAs/matsriafinal.pdf. Can they simply change the date on this from December 2011 to sometime "before it even started the regulatory process"?

Was the Acid Rain Program as successful as we thought?

The February NBER Digest summarizes a July, 2015 NBER working paper that takes another look at the EPA's Sulfur Dioxide Cap and Trade Program (Acid Rain Program) and finds good news and bad news.  The good news, there were significant cost savings from the Acid Rain Program.  Economists Rejoice.  The bad news: the cost savings were not as large as previously estimated, and the health costs of the Acid Rain Program were much higher than previously considered.  Much higher.  Off-the-charts-higher.  Economists cry.   

Since the passage of the Clean Air Act of 1990, the federal government has pursued a variety of policies designed to reduce the level of sulfur dioxide emissions from coal-fired power plants and the associated acid rain. In The Market for Sulfur Dioxide Allowances: What Have We Learned from the Grand Policy Experiment? (NBER Working Paper No. 21383), H. Ron Chan, B. Andrew Chupp, B. Andrew Chupp, Maureen L. Cropper, and Nicholas Z. Muller evaluate the cost savings and the health consequences of relying on a cap-and-trade sulfur dioxide allowance market to implement emissions reductions.

...

To study the cost savings associated with the Acid Rain Program, which allowed such trade, the authors model the cost of abatement for individual coal-fired power plants. They estimate how firms choose between the two leading technologies for sulfur dioxide abatement, burning low-sulfur coal and installing flue-gas desulfurization units. They use these estimates to compare abatement decisions corresponding to the Acid Rain Program and standards that achieve the same aggregate reduction in emissions by making uniform requirements on coal-fired plants, with no trading allowed. They find cost savings in 2002, with the Acid Rain Program in full swing, of approximately $250 million from trade in emission allowances. This is less than half of the previously estimated saving from tradable permits. The data suggest that many generating units were not complying with the Clean Air Act in the most economical manner.

...

The researchers find a greater level of particulate air pollution and associated premature mortality under the Acid Rain Program than under a hypothetical no-trade scenario in which units emitted SO₂ at a rate equal to 2002 allowance allocations plus observed drawdowns of their allowance banks. They estimate the cost of health damages associated with observed SO₂ emissions in 2002 under the Acid Rain Program to be $2.4 billion higher than would have been the case under the no-trade scenario. They conclude that the health impact of a cap-and-trade program depends on how the program is structured and on the correlation between marginal abatement costs and marginal damages across pollution sources.

via www.nber.org

RFF on the Issues: The VW Scandal and Diesel Fuel Cars

From the inbox:

The Volkswagen emissions scandal is putting pressure on many countries to take a closer look at their vehicle emissions testing for cars that run on diesel fuel. It seems that such engines are actually worse for the environment than previously thought, and this issue is particularly important in Europe, where about half of new vehicles run on diesel fuel.

RFF’s Joshua Linn and Virginia McConnell conclude that “meeting strict standards for nitrogen oxide emissions from vehicles alone might not be so difficult.” Diesel-powered cars emit less carbon dioxide but more nitrogen oxides than gasoline-powered cars, and reducing both nitrogen oxides and greenhouse gas emissions “will be challenging for vehicles, and especially for diesel vehicles.” Illustrating this tension, Linn’s research, “Explaining the Adoption of Diesel Fuel Passenger Cars in Europe,” suggests that many consumers are attracted to diesel-powered cars because of their higher fuel economy. RFF’s Casey Wichman weighs in in a new blog post, “Valuing Private Goods with Public Benefits: Confessions of a ‘Clean’ Diesel Owner,” noting: “The weight I initially placed on the environmental bona fides of my car is now more of a burden than a benefit.”

"Volkswagen Says 11 Million Cars Worldwide Are Affected in Diesel Deception"

This story continues to boggle the mind:

A scandal that has battered Volkswagen’s image in the United States spread to the automaker’s core market in Europe on Tuesday, when the company said that 11 million of its diesel cars were equipped with software that could be used to cheat on emissions tests. That was more than 20 times the number of cars previously disclosed.

The company also said it would set aside 6.5 billion euros, or about $7.3 billion — the equivalent of half a year’s profits — to cover the cost of making the cars comply with pollution standards. ...

Volkswagen said on Tuesday that the scandal would cut deeply into this year’s profit. And the company’s shares plunged again, ending the day 35 percent below the closing price on Friday, before news of the diesel deception broke. As a result, the company’s stock market value has declined about €25 billion in two days of trading.

via www.nytimes.com

Do the finance folks still do event studies? If so, here is a dissertation chapter!

Footnote that may only interest me: why the unequal treatment of the euro?

• 6.5 billion euros
•  €25 billion

VW Quote of the day

From yesterday, actually (I accidentally saved this one as a draft):

“I feel totally ripped off,” said John Decker, 55, a photographer from Sacramento, who owns a 2013 Jetta SportWagen with the diesel engine. “It just reeks of fraud and that they intentionally misled the buyers of their vehicles into thinking these were clean diesels, environmentally good cars, that were fun to drive.”

via www.nytimes.com