Tuesday, April 5, 2022

New Emissions Regulations are Coercive Paternalism, not Environmental Science, or even Benevolent Paternalism

Trump's CEA showed, based on credit transactions among manufacturers, that vehicle standards to abate a ton of CO2 cost about $163 on the margin, while even Obama said the abatement was worth only $50.  i.e., tightening emissions regulations fails a cost-benefit test by a wide margin.

Now Biden claims that new stricter standards pass a cost benefit test.  Although this will be cast as an environmental issue, the new conclusion is driven by assumptions unrelated to environmental economics or climate science:

(1) Consumer fuel savings get (mostly) double counted because "behavioral economics."  Specifically, 

"The agency’s analysis assumes that potential car and light truck buyers value only the savings in fuel costs from purchasing a higher-MPG model they expect to realize over the first 30 months they own it. Depending on the discount rate buyers are assumed to apply, this amounts to 25-30 percent of the expected savings in fuel costs over its entire lifetime." (p. 420 of DOT's final rule)

This double counting (100 - 27.5% = 72.5% of $98 billion in fuel savings) is more than quadruple the purported $16 billion net benefit shown in Table VI-11 of the final rule.

[I call it double counting because, by the principle of revealed prevalence, fuel savings is already built into the price and sales of fuel-efficient vehicles; many consumers do not purchase such vehicles because of the relative price and characteristics of competing vehicles.  Alternatively, you could say that DOT ignores benefit of low-MPG vehicles, but the revealed-preference result is the same. 

Following an Economics 301 homework solution from October 2019, in December 2020 Trump's CEA provided a vector proof -- that the market price for GHG credits (i) reflects fuel savings as consumers perceive them and (ii) fully quantifies the industry-level real GDP effects of changing GHG standards, without any additional term for fuel savings -- on the White House website.  See the appendix of this document.]

By comparison, the gross climate benefit is purportedly $27.5 billion.  i.e., they would have to more than double their already inflated "social cost of carbon" to push their thumb on the scale as vigorously as they did with "behavioral economics."  See below for more on paternalism.

(2) Biden says that some tightening comes for free because 5 manufacturers had already signed a pledge with California EPA to so tighten

But this ignores that California rules, when followed by just a subset of manufacturers, do not reduce the supply of federal credits, whereas changes in federal rules do even if the federal rules are not as strict as California's.  The equilibrium credit price is built into the prices paid by purchasers of new cars.

(3) When the above are enough to tilt the scale, all costs and benefits are discounted 3%/yr.  When an extra push is needed, Biden discounts environmental benefits at 2.5% per year while everything else is discounted 3%/yr.

"the use of the social rate of return on capital ... inappropriately underestimates the impacts of climate change for the purposes of estimating the SC-GHG. ... the consumption rate of interest is the theoretically appropriate discount rate in an intergenerational context." (p. 547 of the Technical Support Document.  See also p. 573 of the final rule.)

More on coercive paternalism

Trump's DOT and EPA spoke forcefully against paternalism as a justification for fuel standards.  If people lack knowledge, give them the knowledge rather than imposing a decision on them.  Here is how they said it

"the idea that regulating fuel economy and CO2 emissions can mitigate the consequences of inadequate access to information by placing decisions that depend on access to complete information in the hands of regulators rather than buyers has superficial appeal. Yet commenters do not establish that such a drastic step is necessary to overcome any inadequacy of information, or that requiring manufacturers to supply higher fuel economy will be more effective than less intrusive approaches such as expanding the range of information available to buyers." (85 FR 24608, italics added) 

In contrast, Biden's DOT and EPA say nothing like this, but instead extol the purported virtues of "behavioral economics."  They do not mention less intrusive approaches, let alone show why they would have fewer net benefits.

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