Tuesday, October 13, 2020

Co-Benefits and Regulatory Impact Analysis: Theory and Evidence from Federal Air Quality Regulations

This paper considers the treatment of co-benefits in benefit-cost analysis of federal air quality regulations. Using a comprehensive data set on all major Clean Air Act rules issued by the Environmental Protection Agency over the period 1997-2019, we show that (1) co-benefits make up a significant share of the monetized benefits; (2) among the categories of co-benefits, those associated with reductions in fine particulate matter are the most significant; and (3) co-benefits have been pivotal to the quantified net benefit calculation in exactly half of cases. Motivated by these trends, we develop a simple conceptual framework that illustrates a critical point: co-benefits are simply a semantic category of benefits that should be included in benefit-cost analyses. We also address common concerns about whether the inclusion of co-benefits is problematic because of alternative regulatory approaches that may be more cost-effective and the possibility for double counting.


The EPA regulatory program consistently delivers the greatest monetized benefits and imposes the largest costs of any federal regulatory agency’s actions (e.g., OMB 2019). To provide context for an assessment of co-benefits, Figure 2 illustrates the net social benefits for the CAA regulations in our database. The median rule has about $4.1 billion in net social benefits, based on the average of the lower and upper bounds of benefits and costs for that regulation’s snapshot of a full-implementation year. Every rule has positive net social benefits, with five exceptions: (1) the 1997 NAAQS for ozone (RIN 2060-AE57), with an estimated -$6 billion in net social benefits; (2) the 1997 medical waste incinerator standards (RIN 2060-AC62), with an estimated -$125 million in net social benefits; (3) the 2008 NAAQS for lead (RIN 2060-AN83), with an estimated -$90 million net social benefits15; (4) the 2005 mercury power plant rule (RIN 2060-AJ65), with an estimated -$1 billion in net social benefits; and (5) the 2016 new source performance standards for methane at oil and gas operations (RIN 2060-AS30), with an estimated -$200 million in net social benefits.

We find that co-benefits account for about 46 percent of the monetized benefits on average across all RIAs. As Figure 3 illustrates, this average masks considerable heterogeneity among the rules. Some rules have no monetized co-benefits, such as the 2013 fine PM NAAQS and the 2014 Tier 3 motor vehicle and emissions standards, which targeted both fine PM and ozone. Other rules, especially several of those focused on HAPs, have zero monetized benefits for the targeted pollutant. In these cases, fine PM pollution reductions are the primary, if not exclusive, source for monetized benefits. For the three joint EPA-NHTSA regulations targeting carbon dioxide emissions and fuel economy (RINs 2060-AP61, 2060-AQ54, and 2060-AS16), we consider reduced fuel costs one of the target benefits of the regulation, given NHTSA’s statutory authority. If, however, we were to consider reduced fuel costs a co-benefit from the standpoint of EPA under its Clean Air Act authority, then about $130 billion of benefits over 2011-2016 would shift and several of the dark gray bars at the bottom of Figure 3 would fall substantially.

by Joseph E. Aldy, Matthew Kotchen, Mary F. Evans, Meredith Fowlie, Arik Levinson and Karen Palmer
National Bureau of Economic Research (NBER) www.NBER.org
NBER Working Paper No. 27603; Issued in July 2020

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