In April, the Environmental Protection Agency (EPA) announced that it will use its authority to require two-thirds of new cars sold in 2032 to be zero emission, forcing American vehicle purchases toward electric vehicles (EVs). If it surprises you that the EPA has the authority to dictate what kind of car you can buy, you are not alone. But the EPA argues that this is simply an extension of its existing regulatory powers. It asserts that because it has the authority to regulate air pollution from vehicles, it can prevent people from buying combustion-engine vehicles. Further, the EPA claims to be justified in this action by its estimated $1 trillion in long-term economic savings from health, fuel and climate costs. Regulators may act as though they have limitless authority so long as the benefit of regulation is large enough, but their cost-benefit analyses are often flawed.
Regulatory Accounting Exercises
A well-designed regulation will save money by capturing a public benefit that exceeds the private cost. A good example is the Acid Rain Program (ARP). Acid rain is bad, and it’s estimated that the ARP, which began in 1990, yields a health benefit of more than $100 billion every year while costing about $3 billion, which is less than half its initially estimated cost. The ARP is a market-based cap-and-trade program, and it has cut sulfur dioxide emissions by 93% and nitrogen oxide emissions by 87% since 1990. Because the benefits exceed the costs, the ARP has been a boon to the economy.
But there are scenarios in which the ARP would be a poorly designed regulation. For example, what if we flipped the figures, and it only delivered $3 billion in benefit but cost $100 billion to comply with? Obviously, the program would no longer seem worthwhile, and despite the health benefits, it would be a net economic drag. Or, if we implemented a second ARP today, could we capture another $100 billion of benefit? The answer is clearly no, because now that acid rain is no longer a problem, the marginal benefit of further pollution reduction would be much smaller. On top of that, the cheapest ways to cut acid rain were already implemented as part of the ARP, so if there were a second acid rain regulation, the costs would be much higher because the remaining opportunities to cut pollution would be more expensive to implement.
This example shows that environmental regulations have diminishing returns: Once some benefits are achieved, future benefits are smaller. Therefore, just endlessly regulating is not necessarily good economic policy. And yet, new energy and environmental regulatory burdens have been enacted to the tune of $603 billion since 2005. In fact, the most expensive year was President Biden’s first in office, costing $178 billion.
And this regulatory pace hasn’t slowed at all, partly because regulators have gotten more creative in estimating the benefits of their rules. Regulators increasingly use lower discount rates when calculating the present value of future benefits, which allows them to claim that more of a future benefit is achieved today, justifying higher cost regulation. Regulators will also claim credit for cost savings to individuals, alleging that people only make wise long-term investments in their appliances or light bulbs because a regulation forces them to do so. And regulators also use very pessimistic projections of the status quo, which inflates the regulations’ alleged benefits. For example, the never-implemented Clean Power Plan’s projected baseline was so far off that we now have lower emissions than the regulation would have provided, and years sooner.
Ultimately, tension is increasing between regulators, who have an incentive to find every way to magnify the benefits of their rules, and skeptics, who worry that the costs of many new regulations outweigh the benefits. And indeed, regulators seem to be losing in court a lot lately, with regulations like the Clean Power Plan, Mercury and Air Toxics Standards and Waters of the United States all being taken to task for regulators’ overly rosy interpretations of their authority and rulemaking quality. We may see this with the EPA’s EV rule as well.
In the proposed rule, the EPA is claiming that a forced transition to EVs through the new emission standards would have a net benefit of up to $1.6 trillion, with big benefits coming from particulate matter reduction ($280 billion), fuel savings ($890 billion), avoided climate damages ($330 billion) and vehicle maintenance savings ($280 billion). Even though the EPA acknowledges up to $280 billion in higher vehicle costs, it claims these costs are outweighed by the benefits.
But even a rudimentary overview reveals problems with the accounting. The EPA regulators believe their regulation will result in lower battery costs despite higher demand, which is the opposite of what economic wisdom would suggest. They also assume electric vehicles will be cheaper to maintain, but this is because they exclude the highest maintenance cost of an EV, which is battery replacement. When it comes to the EPA’s EV mandate, you can be assured that regulators are going to claim every conceivable benefit to the greatest degree possible, while defending the lowest cost estimates, to argue that the rule’s benefits outweigh the downsides of its significant intervention in the economy. But whether these estimates are accurate is still an open question.
Making Bad Rules
We know regulators conduct their analyses in ways that always make their rules seem like grand slams. But why do they promulgate rules that don’t seem to meet the exacting standards one would expect in the making of significant policies? One explanation can be found in President Barack Obama’s famous quote, “I’ve got a pen and I’ve got a phone.” Essentially, Obama was saying that if Republicans in Congress wouldn’t play ball and implement the policies he wanted, he would just use his executive authority to regulate when Congress wouldn’t. This approach was novel; presidents had always used executive orders to dictate how their administration would carry out the law, but Obama was asserting that Congress had given him far more authority than past presidents had utilized.
Some might object that the executive branch does not have the power of Congress to effectively legislate, but when it comes to promulgating regulations, the president has typically been viewed as having that power. Ever since a judicial doctrine called Chevron deference was adopted in 1984, regulators have had enormous latitude to interpret their own authority—provided Congress hasn’t weighed in. A case that’s likely to get reviewed next year may end up constraining Chevron deference, but in the meantime the doctrine means that, so long as Congress is divided on the extent of a regulator’s authority, the president is free to fill the gap. And unlike elected officials that cycle out of office if they displease their constituents, regulators are unelected bureaucrats, selected by the president.
What this means is that if the president wants to attempt sweeping regulations, even if they may get shot down in court later, he can do so. Not only that, but he has an incentive to do so, because the uncertainty of whether a regulation will pass judicial scrutiny can already be enough to force the market to comply. For example, with the Mercury and Air Toxics Standards, even though the Supreme Court ultimately sent the rule back to the drawing board, its decision came only after the power sector had made investments to comply with it.
And even if some rules get shot down in court, the president can continue to regulate. Even after West Virginia v. EPA clearly established that the Clean Power Plan exceeded the EPA’s regulatory authority, the agency is producing new similar rules, because why not?
Implications of the EV Rule
The EPA’s EV rule is such a broad interpretation of the agency’s regulatory authority that, if it stands, the government could regulate pretty much anything to any degree, provided the regulation reduces air pollution. Could the EPA limit American consumption of beef by citing its emission intensity? Could there be restrictions on how powerful a computer someone buys, or how big a TV?
These questions are so important because it is the dynamism of the U.S. economy that spurs growth. The more regulations are used to restrict consumer choice, the less utility consumers can expect from their purchases, and the less competition there will be among producers. Less competition means less innovation, and less innovation means slower productivity growth. Regulations always carry a cost, but as with the ARP, these costs are supposed to be outweighed by measurable, definable public benefits. The less certain we are of regulators’ accuracy in calculating the costs and benefits, the less likely the regulations are to be net beneficial, which is why we see so much skepticism around the EPA’s EV rule.
At the end of the day, regulators have an incentive to keep regulating and pushing the boundaries of their authority, so we should not expect that just because regulators say they will do something, it will happen. But the whole dynamic of regulators having broad, relatively unchecked authority to de facto legislate so long as they claim big enough benefits is at odds with the intent of environmental regulations to achieve excellent levels of air and water quality without breaking the proverbial bank.
If Americans really want to see policy return to what most expect—their elected representatives debating and compromising on policy rather than being at the mercy of unelected bureaucrats—Congress will have to step in and define regulators’ authority.