In January 2009 I was awoken by the sound of my eldest child wheezing and gasping for air.  We called 911 and emergency personnel arrived to give her some oxygen.  After a short time they determined it was a severe croup episode and not, as I feared, a first asthma attack.  But that is a night I will never forget.  The fear you feel as a parent when your child cannot breathe is intense.  Millions of parents live with that background fear on a daily basis because their children suffer from chronic asthma. The Centers for Disease Control estimate that 7.0 million children (9.4%) have asthma as do 17.5 million (7.7%) adults.[i] Asthma results in 17.0 million health visits per year, 450,000 inpatient hospital stays with an average length of 3 days, and 3,447 deaths.[ii]

What does all this have to do with Environmental Economics?

President Obama recently asked EPA Administrator Lisa Jackson to withdraw a proposed refinement of the National Ambient Air Quality Standards (NAAQS) for ground level ozone that would have lowered allowable ozone levels from 0.84 parts per billion (ppb) to a range of 0.60 to 0.70 ppb.  Ground level ozone (not to be confused with stratospheric ozone which has the big hole) is also known as smog, and is a key contributor to asthma and other illnesses and deaths.

To be fair, the ozone NAAQS will be revisited in 2013, so Obama’s decision really only put off the debate for two years.  But why delay two years when the rule was ready to go forward now?  Must be economics.  Or is it?

In announcing his decision, President Obama said “I have continued to underscore the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover.”[iii] The announcement was made shortly after a bad jobs report was issued which further enhances the appearance that the postponed regulation was a “job killer.”  But the jobs versus environment rhetoric is just that—rhetoric.  It has no basis in economic analysis because economic analysis is not based on counting up jobs!

A good economic analysis compares the costs of complying with the regulation to the benefits resulting from the regulation.  The benefits in this case are the health benefits associated with reduced incidence of asthma and other health impacts.  Compliance costs include costs of purchasing new pollution control equipment, changing fuel sources, changing operational practices, and so forth.  The jobs analysis is really a non-starter.  Could we lose some jobs if we require more regulatory expenditures—certainly.  Could we gain jobs in industries that are selling and developing pollution control equipment–certainly.  Are these exactly a wash—probably not.  But we will also reduce hospitalizations, school days missed, and even deaths from asthma and other illness.  The key is that economic analysis is not “jobs analysis.” We do our best to measure the benefits and the costs of compliance in dollars.  Then we can compare dollars spent to dollars gained and not compare jobs to asthma cases.

So what did the economic analysis of the proposed ozone rule say about the costs and benefits of tightening the standard?  Not a lot that is useful, unfortunately.  This is not because the economic analysis is badly done (although I might quibble a bit on a few points), but rather because there is significant uncertainty over both costs and benefits of the proposed rule.  There are at least three major sources of uncertainty in the economic analysis.

  1. Modeling uncertainty:  Ozone isn’t a pollutant that gets directly emitted from smokestacks or tailpipes.  Ozone is the result of combining two other pollutants, NOx and VOCs, with sunlight.  As a result, you have to model the ozone-generating process and estimate how many counties might not be in compliance when the rule becomes binding in 2020.
  2. Cost uncertainty:  Once you estimate which counties would exceed the standard you need to come up with estimates of compliance.  But for some counties it was estimated that compliance was not possible with known technologies.  Compliance in 2020 relies on technologies that we don’t know about in 2011 and cannot accurately price.  It also relies on estimates of how costs of current technologies may change over the next 9 years.
  3. Benefits uncertainty:  The benefits estimates rely on models of the relationship between ozone levels and deaths and illnesses.  There are several different models available in the peer-reviewed literature including three meta-analyses, yet these models still give answers that vary significantly.

These uncertainties mean that for each of the standards considered there is a large spread in estimated costs and estimated benefits such that the range of possible net benefits (benefits minus costs) always straddles zero.  The figure below captures the highest and lowest benefit and cost estimates for each standard.  You can see that the uncertainty in benefits is greater than the uncertainty in costs at all levels and that the uncertainty in both benefits and costs increases as the standard becomes more stringent.

click image to enlarge

Figure Source: United States Environmental Protection Agency.  Summary of the updated Regulatory Impact Analysis (RIA) for the Reconsideration of the 2008 Ozone National Ambient Air Quality Standard (NAAQS).  January 1, 2010. Available at:  http://www.epa.gov/ttnecas1/regdata/RIAs/s1-supplemental_analysis_full.pdf.  Last accessed, September 7, 2011.

With this much uncertainty in both costs and benefits, reasonable people could certainly disagree about the best course of action. I personally was very disappointed in President Obama’s decision.  I would strongly support an increase in stringency for the ozone standard based on the economic analysis presented in the Regulatory Impact Analysis.

How could I feel so strongly given all the uncertainties?  The reason is that historically we have systematically underestimated benefits from air pollution regulations and overestimated costs.  The retrospective benefit-cost analysis of the Clean Air Act from 1970-1990 estimated total benefits attributable to air regulations between 5.6 and 49.4 trillion dollars with a central tendency of 22.2 trillion.  The total costs were roughly 0.5 trillion.  That means that we are better off by around 21.7 trillion dollars because of these regulations.[iv]

Furthermore, most of the “unexpected” gains in benefits came from regulations of particulate matter.  The proposed ozone rule lowers emissions of NOx which also results in lower emissions of small particles (PM2.5) which are very harmful for health.  So if I had to bet on where we were likely to end up on the “distribution” of net benefits I would place my bet on higher end of the range.  And that means I’m betting that we are better off as an economy with more stringent ozone regulations.  I wish President Obama hadn’t caved to political pressures and supported his EPA Administrator in making that same bet.


[i] Centers for Disease Control and Prevention.  Fast Stats:  Asthma. Available at:  http://www.cdc.gov/nchs/fastats/asthma.htm.  Last Accessed:  September 8, 2011.

[ii] ibid

[iii] White House.  Office of the Press Secretary.  Statement by the President on the Ozone National Ambient Air Quality Standards. September 2, 2011.  Available at:  http://www.whitehouse.gov/the-press-office/2011/09/02/statement-president-ozone-national-ambient-air-quality-standards.  Last Accessed:  September 9, 2011.

[iv] United States Environmental Protection Agency. The Benefits and Costs of the Clean Air Act, 1970 to 1990.  Executive Summary. pp: ES-8.  Available at:  http://www.epa.gov/oar/sect812/1970-1990/812exec2.pdf.  Last Accessed: September 8, 2011.