Polluted Data: Overestimating Environmental Costs
Goodstein, Eban, Hodges, Hart, The American Prospect
In July, Carol Browner, chief of the Environmental Protection Agency, issued new regulations reducing permissible levels of smog and particulate (fine soot) pollution. The political battle leading up to the decision was fierce, even within the administration. One staff member on the Council of Economic Advisers maintained that the regulations would cost a whopping $60 billion - a figure quickly seized upon by industry opposition. The EPA's own cost estimate was much more modest, between $6 billion and $8 billion. In making her case for the new regulations, however, Browner publicly disavowed even her own agency's cost estimates. She argued that industry would find a way to do it cheaper.
Whom to believe? Confronted with conflicting estimates, most lay people either throw up their hands or choose sides ideologically. But history provides a basis for evaluating these estimates. Not only do industry lobbyists wildly overestimate the costs of proposed environmental regulations. More surprisingly, academic and government economists consistently do too - and for an equally surprising reason. When forecasting the costs of new environmental regulations, economic analysts routinely ignore a primary economic lesson: Markets cut costs through innovation. And innovation can be promoted through regulation. This history is worth bearing in mind as we approach the most important environmental controversy to date - how to deal with the crisis of global warming.
THE ABCs OF OVERESTIMATION
In every case we have found where researchers have calculated actual regulatory costs and then compared them to ex ante estimates, the estimate exceeded the actual cost. We have uncovered a dozen such efforts, ranging from A (asbestos) to V (vinyl chloride). In all cases but one, the initial estimates were at least double the actual costs.
Asbestos. When the Occupational Safety and Health Administration (OSHA) instituted regulations covering exposure to asbestos in the early 1970s, they hired a consulting firm to estimate the cost of compliance. Two later studies found that the original prediction for the cost of compliance was more than double the actual cost, because of overly static assumptions.
Benzene. In the late 1970s, the chemical industry predicted that controlling benzene emissions would cost $350,000 per plant. Shortly after these predictions were made, however, the plants developed a process that substituted other chemicals for benzene and virtually eliminated control costs.
Chlorofluorocarbons (CFCs). In 1988, reducing CFC production by 50 percent within 10 years was estimated by the EPA to cost $3.55 per kilogram. By 1993, the goal had become much more ambitious: complete elimination of CFC production, with the deadline moved up two years, to 1996. Nevertheless, the estimated cost of compliance fell more than 30 percent, to $2.45 per kilogram. And where substitutes for certain CFCs had not been expected to be available for eight or nine years, industry was able to identify and adopt substitutes in as little as two years.
CFCs in automobile air conditioners. In 1993 car manufacturers estimated that the price of a new car would increase by $650 to $1,200 due to new regulations limiting the use of CFCs. In 1997 the actual cost was estimated to be $40 to $400 per car.
Coke ovens. The original OSHA estimate for the cost of complying with the 1976 coke oven standard was more than five times higher than estimates of actual costs. OSHA's contractor suggested that complying with the standard would cost from $200 million to more than $1 billion. However, a Council on Wage-Price Stability study later estimated the actual cost of the standard to be $160 million.
The OSHA consultant estimated that three steel firms in their sample would spend $93 million on capital equipment and $34 million in annual operating costs to comply with the regulations. A later study by Arthur Andersen determined that the three firms actually spent between $5 million and $7 million in 1977 to comply with the standard, and only $1 million to $2 million on capital expenditures. …