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Posted Oct. 9, 2013
Faculty Q&A

Michael Livermore on How a Misreading of the Supreme Court Is Leading to Inefficient Environmental Regulations

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Michael Livermore

UVA Law Professor Michael Livermore co-authored a new paper, "Re-thinking Health-Based Environmental Standards," with New York University law professor Richard L. Revesz.

Cost-blind regulations aren't always better for the environment and practitioners and scholars are misreading a critical Supreme Court case on the matter, University of Virginia law professor Michael A. Livermore argues in a new article co-authored by New York University law professor Richard L. Revesz.

Contact: Brian McNeill

Cost-blind regulations aren't always better for the environment and practitioners and scholars are misreading a critical Supreme Court case on the matter, University of Virginia law professor Michael A. Livermore argues in a new article co-authored by New York University law professor Richard L. Revesz.

Livermore and Revesz, who co-wrote a book promoting the role of cost-benefit analysis in environmental policy, "Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health," say the common understanding of Whitman is mistaken.

"When conducted in a balanced and neutral fashion, cost-benefit analysis often favors strong environmental protection, especially when next-generation regulatory tools — like pollution markets — are used to reduce emissions," Livermore said. "This piece shows that even in an area where cost considerations are broadly believed to favor industry, cost-benefit analysis would actually result in more environmentally protective standards."

Can you describe the Supreme Court decision Whitman v. American Trucking Associations, Inc., and how it was greeted by environmentalists and industry?

Under the Clean Air Act, the Environmental Protection Agency is required to set "national ambient air quality standards" for a number of important air pollutants that have negative environmental and public health consequences. If air quality does not meet the standard set by the EPA, facilities must take aggressive and costly steps to reduce air pollution.

The statute requires that the agency set the standards that are "requisite to protect public health" "allowing an adequate margin of safety."  EPA had always interpreted this language to exclude consideration of costs.

In 1997, the EPA under President Bill Clinton released updated standards for ground-level ozone and particulate matter, both of which are associated with public health problems including premature mortality. Industry challenged the new standards, arguing (among other things) that the EPA’s reading of the statute was incorrect and that the agency could consider costs when setting the air quality standards.

While the industry challengers had some luck in the D.C. Circuit, they ultimately lost in American Trucking. The Supreme Court upheld the EPA’s interpretation of the statute and rejected all of industry’s challenges. Environmentalists view this case as a major legal victory that enshrines the principle that public health and environmental considerations can trump costs. Industry largely views this decision as allowing the agency to impose regulations with senseless costs that are entirely out of line with any social benefit that they produce.

You explain in the paper that the conventional understanding of the decision has led to two problems. What is the "stopping-point problem"?

The problem is that if the EPA only considers the public health effects of a pollutant, there is no coherent way for the agency to determine what level of stringency is sufficient. Many of the air pollutants that EPA regulates are "non-threshold," meaning that there is no safe level of exposure. Even extremely low atmospheric concentrations pose some risk to public health. For these types of pollutants, for any level of stringency that the agency selects, it can always go a little further to curb pollution, and in doing so, decrease public health risks. Given that situation, how does the agency know when to stop?
This paper is not the first to point out the stopping-point problem. In fact, the D.C. Circuit opinion reversed in American Trucking noted it. Our novel contribution on this point is to show that this problem is not limited to non-threshold pollutants, but also applies to threshold pollutants where there is scientific uncertainty and environmental sensitivity is distributed unevenly within the population. 

And the second problem — the "inadequacy paradox"?

The conventional wisdom, which is nearly universally held by environmental law practitioners and scholars, is that American Trucking is a strongly pro-environment decision. The reason for this belief is the view that the EPA would set less stringent standards if it took costs into consideration.

This paper shows this conventional wisdom to be incorrect. Although the EPA does not take costs into consideration when setting the standards, it continues to conduct cost-benefit analysis of its rulemakings for public information purposes. We examine the cost-benefit analyses conducted by the agency of the most recent ambient air quality standards and find a startling result: for four of the five standards where information was available, use of cost-benefit analysis would have resulted in more stringent standards. Relying exclusively on public health and environmental considerations resulted in less protection for public health and the environmental than would be justified by cost-benefit analysis. This is the "inadequacy paradox."

How did this result in "under-regulation" of industries that pollute?

Because of the inadequacy paradox, the EPA sets standards that are too weak from the perspective of economic efficiency. An economist will value improvements in environmental quality according to what people are willing to pay for that improvement. An inefficiently stringent standard is one that requires industry to pay, say, $50 million dollars for pollution control to produce an air quality improvement that people are only willing to pay $20 million to enjoy.  On the other hand, an inefficiently weak standard is just the opposite: It fails to require pollution control that is less expensive than the social harm that is created by the pollution. As it turns out, everyone was worried about the EPA imposing regulations that were too costly, but it turned out that the agency wasn’t pushing industry hard enough.

Can you cite some examples of how applying cost-benefit analysis (vs. the cost-blind standard understood from Whitman) would have resulted in more stringent air-quality standards?

In 2008, the EPA updated its standard for the allowable concentration of lead in the air. Airborne lead is believed to cause a range of harmful health effects, including a reduction in IQ for children who are exposed. EPA considered three levels: 0.4, 0.15, and 0.1 micrograms per cubic square meter. As the proposed stringency increased, so did both costs and benefits. Using the cost-blind standard, the EPA chose 0.15. Under the cost-benefit analysis standard, which subtracts costs from benefits and chooses the level with the highest net benefits, the agency should have selected the most stringent standard, which was 0.1.  The more stringent standard had net benefits of $2.3 billion per year, while the less stringent standard the agency selected had $1.8 billion in net benefits. In essence, the agency left $500 million on the table by choosing an overly lax standard.

You argue that a proper understanding of American Trucking would permit the use of cost-benefit analysis when it would lead to more stringent standards than those derived from health-based considerations alone. How has a misunderstanding of the decision hidden this possibility so far?

American Trucking is taken to mean that the agency can’t ever consider costs when setting air quality standards. But the question that was presented to the Supreme Court was whether the agency could take costs into consideration as a reason to reduce the level of stringency of the standards. The court addressed that question in the negative. But there is a different question of whether costs could form part of a calculus that the agency could use to justify more stringent standards. This question was never presented to the court. Our paper argues that the correct answer to this second question is "yes," based on our analysis of the legislative history of the Clean Air Act. The reason that Congress wanted a cost-blind standard was to ensure that public health was given priority over economic considerations. It would be a mistake, and a violation of Congress’ intent, to require the agency to adopt standards that are inefficiently weak on the basis of statutory language that was meant to elevate public health considerations.

What are you working on next?

I’m currently interested in the relationship between Congress and agencies, which seems to have grown increasingly more dysfunctional over the past several decades. I am looking at the causes of this dysfunction with the goal of identifying reforms that can lead to more productive inter-branch deliberation that ultimately results in improved democratic accountability with less delay and partisan posturing.

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