Under the Clean Air Act (as amended by the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007), the EPA sets the annual volume of biomass-based diesel required to meet the agency’s renewable fuel standard. The EPA set the 2013 standard in a new rule, “Regulation of Fuels and Fuel Additives: 2013 Biomass-Based Diesel Renewable Fuel Volume.” The rule increases the applicable volume requirement for biomass diesel fuels by 28 percent, up from the statutory baseline of 1 billion gallons.

Instead of claiming environmental improvements as the primary benefit of this rule (which might be expected from an agency premised on environmental protections), the EPA justifies the rule on the basis of increased energy security, which it values at $41.2 million. In fact, the agency explicitly did not quantify the greenhouse gas reductions that the rule is intended to effect: “While we are not quantifying the GHG [greenhouse gas] emissions impact of this [rule], qualitatively we believe that it will provide a reduction in GHGs.”

It may not be possible to quantify every benefit (or cost), as acknowledged in President Bill Clinton’s Executive Order 12866, and qualitative assessments have their place in regulatory analyses. However, this is where the EPA’s tale of benefits ends.

Higher costs | The agency does, however, quantify a number of costs associated with this rule. The EPA expects that the increased production of biodiesel (which is made from soybeans) as a result of the rule will increase the price of soybean oil by 3 cents per pound, or $66 per metric ton. Considering that the United States produced over 18 million metric tons of soybean oil in 2011, the price tag for mandating increased biodiesel production becomes astronomical. The EPA’s modeling predicts that its biodiesel mandate will increase both U.S. and world commodity prices. Fuel prices are expected to increase by between $253 million and $381 million in 2013 alone, or between $0.90 and $1.36 per additional gallon of biodiesel required by the standard.

As soybean oil is redirected to biodiesel production, U.S. soybean exports are expected to decrease by 135 million bushels over the next decade. At the same time, the United States will increase net imports of ethanol by 248 percent.

Dirtier air and water | But the explicit price tag of achieving the standard is only a portion of the cost. The EPA also estimates that this standard will cause up to $52 million in environmental costs from reductions in air quality, and will have modest but “directionally negative” effects on water quality, water use, wetlands, ecosystems, and wildlife habitats.

A closer look at the emission impacts of the EPA’s proposed rule raises even more questions. As a result of the rule, the agency expects ambient air increases in particulate matter, nitrogen oxides, and sulfur dioxide. As stated in the agency’s Regulatory Impact Assessment, “In addition to the GHG impacts laid out in Chapter 2, we project that the increased use of renewable fuels required by [the new standard] will affect emissions of ‘criteria’ pollutants (those pollutants for which a National Ambient Air Quality Standard [NAAQS] has been established), criteria pollutant precursors, and air toxics.” According to the assessment, the monetized particulate emission costs alone from this rule amount to between 7 and 19 cents per gallon, or $53 million. It is disconcerting that, despite acknowledging this, EPA issued a standard above and beyond the minimum volume required by statute.

It is particularly surprising to see the EPA mandating a technology that increases particulate emissions because, in the context of the NAAQS, the agency takes the position that cost is no object when the goal is to reduce particulate emissions. In fact, the EPA just tightened the fine particulate NAAQS, reducing allowable concentrations by 20 percent. (See “The EPA Implausible Return on its Fine Particulate Standard,” below.)

Despite recognizing these environmental costs, the EPA finalized the rule without identifying sufficient benefits to justify increases in criteria pollutants and consumer prices. Incurring costs to the environment through a rulemaking intended to improve environmental quality is inconsistent with the agency’s approach toward accounting for particulate matter when counting regulatory benefits. When did the EPA’s priorities change regarding environmental protection?

The real benefit | Taking these effects into account, the EPA estimates that in 2013 its new biodiesel rule will incur between $263 million and $425 million in net costs while harming air and water quality. What could motivate the agency to issue a regulation that is more costly than necessary to meet its statutory obligation, increases emissions of criteria pollutants, and raises consumer prices? To answer that question, one need only look to the recipients of these price increases. The rule will deliver concentrated benefits to a very specific special interest: the soybean industry.

Enforcement of this rule will increase the production of soybean oil, from which most commercial biodiesel is produced. The agency estimates that this standard will require the production of 600 million gallons of soybean-based biodiesel and 4,530 million pounds of soybean oil, almost double the 2,550 million pounds of soybean oil produced for biofuels in 2011. The EPA’s biodiesel rule will raise the price of soybeans by 18 cents per bushel, which will yield soybean farmers a $550 million increase in revenues based on 2011 bushel-production figures. The price of soybean oil is expected to rise by 3 cents per pound, adding up to a $1.2 billion increase in revenues for soybean oil producers. Fuel users will bear only a fraction of those higher prices; many other soy products will also become more expensive.

All of this suggests that the agency’s analysis doesn’t tell the whole story. Consumers will shoulder the burden of this transfer payment to farmers and producers.

While this rule is a bad deal for American consumers, it is highly profitable for the domestic soybean industry. That fact is not lost on Secretary of Agriculture Tom Vilsack, who touted the mandate in Sergeant Bluff, Iowa, while touring a biodiesel plant last September. “A key part of the President’s strategy is the development and promotion of biofuels,” Vilsack said. “[T]oday’s announcement by EPA will ensure that we are continuing to utilize biodiesel to help meet our energy needs, create jobs, and strengthen the rural economy.” While these benefits are concentrated to a specific few groups, the costs are borne by all Americans who buy products incorporating soy, from soap to beef.

Conclusion | The EPA’s biodiesel rule doesn’t live up to the spirit of the agency’s enabling statutes, nor does it live up to the letter of EO 12866, retained by President Obama. According to the order, “The American people deserve a regulatory system that works for them, not against them: a regulatory system that protects and improves their health, safety, environment, and well-being, and improves the performance of the economy without imposing unacceptable or unreasonable costs on society.”

The EPA’s renewable fuel standard falls short of this requirement in two very important ways. First, the rule does not improve public health or the environment; in fact, by the EPA’s own estimate, the rule will cause environmental harm from increases in criteria pollutants. Second, the rule does not improve the performance of the economy and essentially acts as a transfer payment from the public to soybean farmers. This is crony phony environmentalism, and we all deserve better.

The EPA’s Implausible Return on its Fine Particulate Standard

BY SUSAN E. DUDLEY

Susan E. Dudley is director of the George Washington University Regulatory Studies Center and Research Professor in the university’s Trachtenberg School of Public Policy and Public Administration.

Last January 14th, the Environmental Protection Agency published a final rule in the Federal Register updating the National Ambient Air Quality Standards (NAAQS) for particulate matter. The rule reduces by 20 percent the allowable annual concentrations of fine particles less than 2.5 micrometers in size (PM_2.5), from the current 15.0 micrograms per cubic meter (μg/​m³) that was affirmed in 2006, to 12.0 μg/​m³.

According to the EPA, meeting the standard “will provide health benefits worth an estimated $4 billion to $9.1 billion per year in 2020—a return of $12 to $171 for every dollar invested in pollution reduction.” This is such an impressive return on investment that it raises the question why the EPA chose a standard of 12.0 μg/​m³ when, by its logic, a tighter standard would yield even greater returns.

The Clean Air Act directs the EPA administrator to set standards “requisite to protect the public health…, allowing an adequate margin of safety.” The U.S. Supreme Court has confirmed the EPA’s interpretation that this statutory language precludes consideration of any impacts other than direct health effects from pollutant exposure. Thus, the EPA administrator cannot consider the costs of meeting the standard in determining what levels are “requisite to protect public health” with an “adequate margin of safety.”

According to the EPA’s final Regulatory Impact Analysis (RIA) of the new rule, meeting the 12.0 μg/​m³ standard will avoid between 460 and 1,000 premature deaths per year. However, the analysis also indicates that further tightening—going from a standard of 12 μg/​m³ to 11 μg/​m³—would yield additional life savings of 1,040 to 2,300 mortalities per year. Given the EPA’s statutory mandate, it is puzzling that outgoing administrator Lisa P. Jackson chose to set a standard that leaves so many lives unprotected.

Two explanations for this puzzle are possible. One is that, contrary to her statutory directive, Jackson considered the costs of achieving the tighter standard (estimated at an additional $320 million to $1.7 billion per year) and decided they outweighed the incremental benefits. This seems unlikely, however, since the EPA’s RIA claims that achieving the tighter 11 μg/​m³ standard would yield health benefits far in excess of costs and result in net benefits of between $10 billion and $29 billion per year. The net benefit test required by President Obama’s Executive Order 13563 would lead Jackson to the 11 μg/​m³ standard, if not an even tighter one.

The other possibility is that Jackson recognizes these benefit estimates are greatly overstated. The predictions of lives saved are highly uncertain, and they hinge on unsubstantiated assumptions about the causal relationship between exposure to PM_2.5 and premature mortality. Observers have suggested the EPA’s estimates of the mortality effects of PM exposure overstate actual effects by a factor that could well exceed 1,000.

In contrast to these implausible benefits, the costs of achieving the NAAQS are real, with the standards requiring expensive control measures and hindering economic growth and productivity in regions that are designated non-attainment. While the EPA cannot consider the opportunity costs of complying with the standard, it should be more honest in its examination of the health effects the standard seeks to reduce. A more realistic assessment would probably indicate that requiring states to comply with the new standard is not requisite to protect public health with an adequate margin of safety.