January 10, 2019Client Alert

EPA Takes New Position on Calculating Ancillary Benefits of Regulations

On December 27, 2018, the U.S. Environmental Protection Agency (EPA) announced a new method to consider benefits when conducting a cost-benefit analysis for a regulation. This proposal could make it harder for the agency to justify the expense of future environmental regulations. Specifically, EPA found that the agency erred when it considered ancillary benefit – benefits that are a side effect of regulating, not the pollutant targeted by the regulation – when providing a justification for the Mercury and Air Toxics Standards (the MATS rule).

When the MATS rule was published in 2012, EPA calculated minimal direct benefits from reducing mercury pollution and instead found that ancillary benefits from coincidental reductions in particulate matter emissions would provide tens of billions of dollars in health benefits for the public, justifying the cost of the regulation. However, this calculation of costs was challenged by several states and the utility industry, and ultimately struck down by the U.S. Supreme Court decision in Michigan v. EPA, 135 S. Ct. 2699 (2015). There, the Supreme Court determined that the EPA erred by not appropriately considering cost when EPA initiated the MATS rulemaking. Following the decision, the Obama Administration issued a subsequent finding that concluded that the cost of the MATS rule was justified based upon the combined direct and ancillary benefits.

After taking office, the Trump Administration determined it was necessary to reexamine the cost-benefit analysis and the subsequent finding for the MATS rule because, in the new administration’s view, the former EPA had misinterpreted the decision in Michigan and the subsequent finding failed to meet the Clean Air Act’s mandate to consider costs when deciding to regulate a pollutant.

This proposal would reverse EPA’s prior interpretation and not provide any consideration to ancillary benefits. Under the revised proposal, EPA has found that the utility industry has spent between $7.4 billion and $9.6 billion to comply with the MATS rule, but the direct benefits of reducing mercury pollution only amounted to between $4 million and $6 million. As such, EPA has proposed that it is not “appropriate and necessary” to regulate hazardous air pollutants (HAP) emissions from coal- and oil-fired power plants under Section 112 of the Clean Air Act because the costs of such regulation grossly outweigh the quantified benefits.

If finalized, this change would set a precedent that prevents EPA from calculating positive health effects that come from reducing pollutants other than those targeted directly by the regulation.

The proposal could impact utility companies attempting to recover the costs of complying with the MATS rule. Because state public utility commissions, who are charged with setting electricity rates for consumers, require power companies to prove that any compliance costs passed onto customers are “prudent,” a change or revocation of the MATS rule could result in the commissions determining that compliance costs are ineligible for rate recovery.

Other Issues Addressed in the Proposal

EPA has also determined coal- and oil-fired electrical generating units (EGUs) should remain on the list of affected source categories for regulation under Section 112 and that the 2012 MATS rule should stay in place. However, EPA will accept comment on whether the agency has the authority or obligation to remove coal- and oil-fired EGUs from the Clean Air Act list of affected source categories and rescind the MATS rule.

The proposal also includes a risk and technology review of the MATS rule, which the Clean Air Act requires EPA to conduct every eight years. Based on the risk assessment, EPA has determined that the residual risks due to emissions of HAPs from the coal- and oil-fired EGUs source category are acceptable and that the current standards provide an ample margin of safety to protect public health. EPA also did not identify any new developments in HAP emission control technology that would achieve additional cost-effective reductions. As such, EPA found that no revisions to the MATS rule are warranted at this time.

Additionally, EPA is considering establishing a subcategory for emissions of acid gas HAP from existing EGUs firing eastern bituminous coal refuse.

EPA will accept comments on these changes for 60 days after the proposal is published in the Federal Register, which is expected later this year. EPA also plans to hold a public hearing to receive stakeholder feedback on this proposal. Details about the public hearing will be available in a future Federal Register notice.

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