EPA Appears Poised To Give Troubling Role to Cost-Benefit Analysis In Setting Rules on Power Plant Cooling Water

When it comes to the use of cost-benefit analysis in setting environmental rules, it looks like President Obama's EPA has taken a big swig of industry’s Kool-Aid. We'll know for sure soon: The EPA has a March 14 deadline to issue its proposed Clean Water Act rule on cooling water intake structures at existing power plants and other facilities. But all signs seem to be pointing toward a highly formalized cost-benefit analysis resulting in a weak rule – and a lot of dead fish.

Lisa Jackson has hinted that the rule will create a relatively toothless case-by-case permitting regime rather than simply mandating the more environmentally protective closed-cycle cooling technology that some plants already use. And the agency’s development over the past six months of an elaborate, controversial, and frankly misguided study to try to divine the dollar value members of the public attach to preserving fish species and aquatic ecosystems suggests that they plan to shackle their decision-making to a highly formalized cost-benefit analysis that will suck up a lot of resources and provoke a lot of controversy, but ultimately fail to produce meaningful results. 

If EPA does weaken the rule on the basis of cost-benefit analysis, it will be particularly disappointing, because when the U.S. Supreme Court ruled on this issue two years ago in Entergy v. Riverkeeper, the high court specifically gave EPA the latitude to jettison rigid cost-benefit analysis from its rulemaking process if it wanted to. Moreover, the Court expressed skepticism about the kind of highly formalized, fully monetized cost-benefit analysis that EPA seems to be headed toward in this rulemaking.

The problem in question is that power plants and other big industrial facilities withdraw billions of gallons of water a day from rivers, lakes and estuaries for use in their cooling systems. When they do that, they kill vast numbers of fish, which get squashed against intake screens or otherwise entangled in the cooling systems’ mechanisms. There are ways to prevent this daily devastation of aquatic ecosystems, however. Some plants use a “closed cycle” cooling system, which, by recycling the cooling water, uses far less of it than the standard “once-through” systems and can reduce fish mortality by 98 percent.

Congress recognized this problem when it passed the Clean Water Act and so included a provision specifically directing EPA to issue rules requiring companies to design these intake structures to “reflect the best technology available for minimizing adverse environmental impact.” That seemingly straightforward provision was at issue in the Entergy case, where industry was challenging EPA’s first stab at a cooling water rule for power plants.

While the high court upheld EPA’s discretion to use cost-benefit analysis if it wants to in setting these rules, it also gave the agency the latitude to choose to forego CBA. The most straightforward reading of the statute’s language, after all, doesn’t point toward a balancing of costs and benefits at all. In past rulemaking, the agency had read the statute as requiring (in the Supreme Court's words) “the technology that achieves the greatest reduction in adverse environmental impacts at a cost that can reasonably be borne by the industry”—a common-sense reading that the Court agreed was “plausible.”

Indeed, EPA’s first version of this rule, back in 2002, used exactly this reading to support a rather modest requirement that just 59 of the largest and most damaging plants (roughly 10 percent) use closed cycle cooling. The agency found that closed-cycle cooling is “the most effective technology” for reducing harm to fish and that its cost was reasonable. (82% of firms would incur compliance costs of less than 0.5 % of revenues, and 91% would incur costs of less than 1%.)

That rule never made it to the Federal Register though. It first had to run the gauntlet at the Office of Information and Regulatory Affairs (OIRA)—the White House office that reviews major federal rules to ensure compliance with Executive Order 12,866’s cost-benefit analysis requirement. When it emerged from OIRA review, the rule had been stripped of the closed cycle cooling requirement, and the agency was citing cost-benefit analysis as the reason. The agency’s dollar estimate of the costs ($413 million) apparently outweighed its dollar estimate of benefits ($146 million).

EPA’s cost-benefit analysis of that 2002 rule offers a perfect illustration of why industry loves cost-benefit analysis so much and environmentalists hate it. Cost-benefit analysis chronically tends to undercount the benefits of environmental protection in relation to the costs because the benefits—things like fish or ecosystems or human lives—are just harder to count and put a dollar value on. For the cooling water intake structure rule, EPA only had data on a small fraction of the species actually impacted (and even with respect to those, the agency chose to count only the two percent that would have actually been harvested and eaten by humans). EPA acknowledged that its calculation accounted for only a small slice of the overall ecological values at stake. But coming up with a non-controversial method for valuing the broader ecological values and what economists call “non-use” values (the fact that I might value the existence of a natural resource or a species without actually putting it to use) proved impossible. EPA tried several methods, but each one drew a firestorm of criticism from both sides.  Eventually, EPA threw up its hands and simply attached no dollar value to these non-consumable fish – the 98% of them – at all. The agency acknowledged that its estimate was grossly incomplete and warned against drawing any conclusions from it, saying: “A comparison of complete costs and incomplete benefits does not provide an accurate picture of net benefits to society.” 

Given this track record, environmentalists were understandably dismayed when the Supreme Court gave EPA the discretion to use cost-benefit analysis as the basis for its decision, but simultaneously hopeful that the Obama Administration's EPA would use its discretion to instead conduct the best-technology-available analysis that the Court had also endorsed.

Environmentalists also found reason for optimism in another aspect of the Court’s opinion. The Justices seemed to understand that there’s cost-benefit analysis and then there’s cost-benefit analysis. The version that the Court seemed to endorse was not the kind of highly formalized, comprehensively monetized, dollar-to-dollar comparison that sunk the closed-cycle requirement in EPA’s original 2002 rule. Rather, the Court seemed to envision a rough, qualitative, apples-to-oranges approach that doesn’t try to pinpoint the exact proportion of costs to benefits, but instead seeks to ensure that costs are not “grossly disproportionate to” benefits. Indeed, the Court expressed considerable skepticism about a more formal type of CBA. Justice Breyer (concurring) wrote that EPA should “describe environmental benefits in non-monetized terms,” and “avoid lengthy cost-benefit proceedings and futile attempts at comprehensive monetization.” And Justice Scalia (for the majority) suggested that more “rigorous forms of cost-benefit analysis” might actually be precluded by the statute.  

In light of the court’s expressed skepticism toward formal cost-benefit analysis and in light of the history of this rulemaking, it is particularly discouraging to see signs that EPA is not only choosing to pursue cost-benefit analysis, but also apparently moving in the direction of making it even more formalized, more monetized, and more elaborate. This is a mistake on a number of levels.

For this latest round of rulemaking, the agency has designed what economists call a “stated preference survey” aimed at divining how much people value the preservation of various fish species and aquatic ecosystems by . . . well . . . asking them. It’s a tricky business designing a survey like this because, among many other problems, people may not really know how much they value certain species and ecosystems because they may not know much about them. Survey designers try to get around these problems by including educational materials at the beginning of the survey, but that, of course, provides endless fodder for controversy (What “facts” are included? Can they be contested on scientific grounds? Are the educational materials biased toward a particular outcome?) Riverkeeper lawyer Reed Super, who is arguing for a strong cooling water rule, pointed out a further problem in his comments to EPA: such surveys are systematically skewed toward lower valuations of environmental goods because they ask people how much they’d be willing to pay to save fish populations rather than how much money some one would have to pay them to give up their right to healthy fish populations. (The answer to the second question is invariably higher.)

Predictably, the survey that EPA has devised has already elicited howls of protest from industry, which attacks both the specific design of the survey and, more broadly, the legitimacy of the “stated preference” method itself. And this is, of course, precisely the reason that industry loves cost-benefit analysis. When you commit EPA to an utterly impossible task, like setting a dollar value for species and ecosystems and other immeasurables, then no matter what approach they take, you can always object. And when there’s no right answer, chances are that those with the loudest voices and the strongest political muscle will get their way. Unfortunately, EPA appears to be playing right into industry’s hand.

At his confirmation hearings, Cass Sunstein, the head of the White House Office of Information and Regulatory Affairs, which rides herd over agency use of cost-benefit analysis, said that cost-benefit shouldn’t be used to put regulations in an "arithmetic straitjacket.” The irony is that it may well be pressure (or anticipated pressure) from Sunstein’s office that is driving EPA to do just that. Rather than accepting the Supreme Court’s invitation to sidestep the cost-benefit charade, EPA has decided to play the game, jumping through all sorts of hoops to try to monetize immeasurable values. We can’t say at this point exactly what numbers they’ll come up with, but it is safe to say that whatever they are, they won’t have much meaning. That’s not likely to be good news for the fish or for those of us who hope that the rivers, lakes, and estuaries we pass on to our children and grandchildren are healthy, vibrant sources of life, not still, stagnant graveyards.