Tag Archives: SCC

When Regulatory Agencies Ignore Comments from the Public

A few days ago, the Department of Energy (DOE) finalized a rule setting energy efficiency standards for metal halide lamp fixtures. Last October I wrote a public interest comment to the DOE to point out several problems with the agency’s preliminary economic analysis for the rule. As part of the Administrative Procedure Act, agencies are required to solicit, and respond to, comments from the public before finalizing regulations. Unfortunately, the DOE failed to even acknowledge many of the points I made in my submission.

As evidence, here are some of the main takeaways from my comment:

1)      The DOE claims consumers and businesses are acting in an irrational manner when purchasing metal halide lamp fixtures because they forgo modest long term energy savings in order to pay a low upfront price for lamp fixtures. Yet the agency offers no convincing evidence to support the theory that consumers act irrationally when purchasing metal halide lamp fixtures. At the same time, roughly 70% of the estimated benefits of the rule are the supposed benefits bestowed upon the public when products people would purchase otherwise are removed from the market.

2)      The DOE is currently adding together costs and benefits that occur in the future but that are discounted to present value using different discount rates. It makes no sense to add together costs and benefits calculated in this manner.

3)      The DOE is using a new value of the Social Cost of Carbon (SCC), a way to measure benefits from reducing carbon dioxide emissions, that may be of questionable validity since the analysts who arrived at the estimate ignored recent scientific evidence. Additionally, the DOE is using the new SCC in its analysis before the public has even had a chance to comment on the validity of the new number.

4)      In its analysis, the DOE is including benefits to foreign countries as a result of reduced carbon dioxide emissions, even while the costs of the metal halide lamp fixture regulation will be borne largely by Americans.

Regarding #1 above, the DOE provided no direct response to my comment in the preamble to its final rule. This even though #1 puts in doubt roughly 70% of the estimated benefits of the rule.

The DOE also failed to respond to #2 above, even though I cited as support a very recent and relevant paper on the subject that appeared in a reputable journal and was coauthored by Nobel laureate Kenneth Arrow.

Regarding #3 and #4, the DOE had this to say:

On November 26, 2013, the Office of Management and Budget (OMB) announced minor technical corrections to the 2013 SCC values and a new opportunity for public comment on the revised Technical Support Document underlying the SCC estimates. Comments regarding the underlying science and potential precedential effect of the SCC estimates resulting from the interagency process should be directed to that process. See 78 FR 70586. Additionally, several current rulemakings also use the 2013 SCC values and the public is welcome to comment on the values as applied in those rulemakings just as the public was welcome to comment on the use and application of the 2010 SCC values in the many rules that were published using those values in the past three years.

In other words, the DOE is committed to continuing to use a value of the SCC that may be flawed since the public has the opportunity to complain to the Office of Management and Budget. At the same time, the DOE tells us we can comment on other regulations that use the new SCC value, so that should reassure anyone whose comment the DOE ignored related to this regulation!

All of this is especially troubling since the DOE is required by statute to ensure its energy efficiency rules are “economically justifiable.” It is hard to argue this rule is economically justifiable when roughly 94% of the rule’s benefits are in doubt. This is the proportion of benefits justified on the basis of consumer irrationality and on the basis that Americans should be paying for benefits that will be captured by citizens in other countries. Without these benefits, the rule fails a benefit-cost test according to the DOE’s own estimates.

The requirement that agencies respond to public comments is designed to ensure a level of democratic accountability from regulators, who are tasked with serving the American public. A vast amount of power is vested in these agencies, who are largely insulated from Congressional oversight. As evidence, Congress has only used its Congressional Review Act authority to overrule major regulations once in its history. If agencies ignore the public, and face little oversight from Congress, what faith can we have that regulators will be held accountable for any harms that inevitably arise from poorly designed regulations?

A New Year’s Gift from the Department of Energy

On New Year’s Eve, the Department of Energy (DOE) announced it will be denying a petition brought to the agency by the Landmark Legal Foundation. The petition had requested the DOE reconsider a regulation related to energy efficiency standards for microwave ovens on the grounds that the Energy Department used a new, much higher, estimate of the social cost of carbon (SCC) in the final analysis of the regulation than had been used in the proposed version of the rule. The SCC is a number the Department uses to estimate benefits to society from reductions in greenhouse gas emissions. The public was denied the opportunity to comment on the higher estimate of the SCC since the new estimate was not used until after the time the public was allowed to comment on the regulation.

Here’s some of the DOE’s reasoning for denying the petition:

In the microwave oven rule, the SCC analysis did not affect DOE’s decision regarding the standards that were published in the Federal Register at either the proposed rule or final rule stage because the estimated benefits to consumers of the standard exceeded the costs of the standard, even without considering the SCC values. [emphasis added]

However, as I and others have stated before, these “benefits to consumers” are not benefits at all, and should be excluded from consideration when determining whether the DOE’s energy efficiency standards produce benefits in excess of costs. In a comment I wrote to the DOE as the agency considered this petition, I said:

The preponderance of the rule’s benefits, nearly 80 percent, are not related to reductions in carbon emissions, or even to any environmental effects at all. Instead, these benefits are based on the assumption that consumers behave in an irrational manner when purchasing microwave ovens and that the Department will be able to “fix” this behavior by issuing a regulation, thereby resulting in benefits to consumers. These “savings” should be excluded from the agency’s final analysis of benefits resulting from the regulation.

So the DOE is partly right. The new SCC really doesn’t make a difference in this particular case. However, this is because the regulation produces net costs to society with or without the higher estimate of the social cost of carbon. Thus, the rule can’t be justified on a cost-benefit basis even with the new social cost of carbon number the DOE uses. As I explained in my comment:

Given that the primary estimate of the total benefits resulting from this regulation is estimated at $294 million per year (2011$), and total costs are estimated at $66.4 million per year, subtracting the consumer “irrationality” benefits of $234 million produces net costs to society of $6.4 million per year (2011$).12 If DOE used a lower value of the SCC, like the estimate used in the proposed version of this regulation, that net cost figure would be even higher. The problem is further compounded if benefits to other countries are excluded from the estimates.

The DOE made no effort to respond to this particular critique in its response to the Landmark Legal Foundation petition. The agency does not view the questionable nature of its estimated benefits to consumers as within the scope of the issue it sought comment on. Perhaps this is so. However, there will be more such regulations in the future where this controversial technique is employed by the DOE. Indeed, at Mercatus we have already commented on such regulations. Additionally, the agency’s decision to slip this notice out on New Year’s Eve leads one to question the degree to which the agency is committed to transparent practices. As a result, an inefficient regulation will be implemented and Americans will be made worse off.

 

Do We Need Greater Congressional Oversight of Agency Rulemaking?

Katherine McFate, president of the Center for Effective Government, writes in the Hill that all regulations are based on congressional law, implying that efforts aimed at greater oversight of agency rulemaking are unnecessary. Technically, she is correct – agencies cannot regulate unless they are authorized to do so by congressional statutes. But her assertion is highly misleading. In fact, agencies have considerable discretion to determine policy and to publish rules that fit their as opposed to Congress’s agenda. Thus, Congress is fully justified in its efforts to push for greater agency accountability.

Scholars have long realized that the traditional rulemaking model (or the “transmission belt” model as Richard Stewart called in his seminal article) in which Congress determined policy through legislation and agencies simply filled in the details was far from reality. While constrained by congressional statutes, agencies nonetheless can substantively shape the policies within their jurisdiction.

Agencies have two sources of power in the rulemaking process: the first mover advantage and expertise. Congress over time delegated considerable policymaking powers to agencies through broad open-ended statutes, which meant that agencies did not need to seek congressional approval in order to regulate. In many cases, they can point to existing statutes as a source of their authority. Rather than initiate policy, Congress ends up reacting to the bureaucracy’s regulatory actions. Yet, given how difficult it is for Congress to agree on any legislation, it may be an uphill battle for Congress to overturn a regulation, letting agency decision stand by default.

Expertise is the second source of agency power. Congress defers to agency expertise on many complex regulatory issues. However, agencies engage in what Wendy Wagner called “the science charade” – masking policy decisions as matters of science. As she explains in her article and an edited volume, scientific analysis often drives policy decisions. Through selective use of evidence or assumptions, agencies can push the scientific analysis towards the answer that would yield their preferred policy alternative.

The EPA’s and DOE’s use of social cost of carbon (SCC) in their rulemaking estimates demonstrates the point. The SCC is an estimate of economic damages caused by greenhouse gas emissions. Agencies use the SCC to estimate the benefits of rules aimed at reducing greenhouse gas emissions and consequently to decide whether the rules’ benefits justify the costs. Higher SCC estimate would justify more expansive and costly regulations.

Even though the agencies claim that they derived the SCC through scientific analysis, critics point to policy choices embedded within the analysis that pushed the estimated cost higher. For example, the agencies chose to estimate global rather than domestic impacts of carbon. Similarly, they omitted from their analysis the recent scientific literature, which pointed to a lower impact of greenhouse gases on climate. These and other choices pushed the SCC higher (almost double the previous estimate), allowing agencies to push for more stringent and costly regulations.

Despite the major policy impact of the SCC’s use in rulemaking, the agencies did not have to consult Congress. They could chose to use the SCC estimates under the powers already delegated to them, even in the face of stiff opposition from Congress. In the meantime, congressional efforts to reassert its authority on the major environmental policy issue have stalled. The GOP-led House passed a bill that would prevent the EPA from factoring in the SCC in its economic analysis. Yet, the measure’s fate in the Senate is uncertain and it would still face the presidential veto.

Contrary to McFate’s assertion, agencies do not simply implement congressional policy. As the SCC example demonstrates, agencies can drive major policy decisions without congressional approval. Thus, Congress needs better tools for more effective oversight of agency regulations.