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Pulp and paper industry's junk economic analysis of EPA toxic emission standards for industrial boilers

Laurie Johnson

Posted September 12, 2011 in Curbing Pollution

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In response to toxic air pollution standards finalized by the Environmental Protection Agency (EPA) for industrial boilers, the American Forest and Paper Association (AFPA) just released a ‘study’ (conducted by Fisher International Inc.) projecting massive job losses from the proposed standards. However, only a cursory examination reveals gross exaggeration of compliance costs and employment impacts, and a lack of understanding of even introductory-level economics. It is not possible to do justice to the difference in sophistication between EPA’s very detailed and careful analysis (251 pages) versus this industry study (17 pages), but let me offer just a few observations, starting with a comparison between EPA and AFPA estimates.

AFPA’s compliance cost and job loss estimates are way out of line with those of EPA, to put it mildly (well, beyond mildly):

AFPA

Compliance costs

Pulp and Paper

 EPA

Compliance costs

All affected industries

 AFPA

Employment changes

Pulp and Paper

EPA

Employment changes 

All affected industries

Approx

$3 billion

 

$1.4 billion

 

20,541*

 

-3,100 to +6,500*

(+1,700 mid point)

How is it that AFPA estimates compliance costs for one industrial sector are more than twice as high as EPA’s estimates for all affected industries combined? Even worse, how is it that AFPA’s job loss estimate for one sector is almost 12 times as high as EPA’s for all affected industries combined?

Perhaps it’s because EPA is required to justify and document all of its assumptions to economists at the Office of Management and Budget, ensuring independent review by the career economists that evaluate all government regulations. AFPA is accountable to no one.

Behind the shoddy numbers are numerous methodological flaws in the analysis. Here’s three of them:

1) The study makes an arbitrary and unjustified assumption for how compliance costs translate into job losses. Instead of using standard economic methodology, the authors create an arbitrary method that bears no relationship to economic theory.

In order to assess potential decreases in output that might result from pollution abatement costs, three statistics are needed. First, you need to estimate how much of the abatement costs will be passed on to consumers (i.e., how much firms increase the price of their products). Second, you need to estimate the change in demand for products that occurs in response to the price increase (technically, economists refer to this relationship as “demand elasticity”). Third, you need to assess if, and how many, firms cannot afford compliance costs and consequently close operations. (Economists call this type of assessment “incidence” analysis). None of these statistics are used to estimate AFPA’s assumed job losses. Instead, the authors make an ad hoc assumption that a mill will shut down if compliance costs exceed a mill’s profit margin. This assumption, combined with the vastly overstated compliance costs, results in an estimated 14% decrease in pulp and paper jobs. Wow. Drawing upon peer reviewed research, EPA estimates that, industry-wide (i.e. all affected sectors), average domestic production could decrease by only about .01%, and average price increases of only .01%. Jobs are not directly proportional to production levels, of course, but surely AFPA’s estimates cannot possibly be even close to correct.

2) The analysis does not discuss, and thus does not appear to model, where the money formerly spent on pulp and paper products goes.

To correctly estimate the economic impacts of the boiler rules, you have to estimate not only decreases production in directly impacted sectors, but also where the expenditures formerly spent on this output go. Consumers will spend that money on other goods in the economy, increasing output in those sectors. AFPA ignores this obvious consequence altogether, because it’s not convenient to its biased cause.

Furthermore, AFPA fails to account for output associated with the production and sales of pollution abatement equipment. In reality, someone will earn money from producing and selling pollution control equipment, as will the people that transport, install, and maintain it. Together, expenditures on other goods and services and pollution control equipment will generate lots of income and jobs—none of which are acknowledged or estimated in the industry report. Were these accounted for, not only might the net change in employment be zero, it could actually be positive. This would occur if expenditures shift toward more labor-intensive sectors of the economy. And, in fact, the pollution control industry is more labor-intensive on average than the rest of the economy. Consistent with the historical record on jobs and environmental protection, the boiler standard could generate more jobs than any manufacturing jobs it displaces.

3)  The analysis incorrectly converts capital costs to annual costs.

It assumes half of capital costs are funded by equity, which fully expenses the costs in the year they are incurred. This is inappropriate. While equity may require a higher rate of return than debt, it is still amortized over a multi‐year period. This error by Fisher tends to overstate the costs of the proposed rule.

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The methodology employed in this study is the same as the one done by Fisher last year, when the rulemaking was still being drafted. At that time, we asked a respected and widely published economist well known in the environmental economics field to grade their report as if it were an assignment one of his undergraduate courses (Disclosure: we gave him honorarium for his time). (Click here for this and professor grades of other industry studies).

Here was the good professor’s final assessment:

"In sum, the methods used by Fisher are fundamentally flawed. The resulting estimates of job losses are completely invalid.

If I were grading this, I would give it an F. The economics is all wrong (lack of an incidence analysis or acknowledgement of its importance; failure to draw on the relevant literature), which of course would be my main concern. But the paper has some redeeming features ‐‐ the English grammar is decent and typically better than I see on a poor paper. Furthermore, I would want to encourage the student to work harder on the next assignment."

The Bottom Line:

Given highly exaggerated cost estimates, and the lack of any real economic analysis translating these costs into employment impacts, it’s not surprising that AFPA’s analysis is so at odds with EPA’s. But then, EPA’s estimates are heavily scrutinized while AFPA’s are not.

These industry impact estimates were bought and paid for by polluters whose sole aim is producing alarmist numbers and fear mongering. We have seen this pattern time and time again from industry: every time EPA proposes new standards, industry responds with hysterical prognostications. But they never come true, and they won’t here either. No serious economist would consider AFPA’s analysis credible; in fact, it is embarrassing.

Rather than hurting the economy, pollution standards improve society’s well being. EPA has four decades of experience issuing pollution standards that have delivered enormous net benefits. As EPA passed its 40th birthday (December 2, 2010), we can celebrate an economy with a GDP three times its 1970 size, household incomes that are on average 45% higher, the creation of tens of thousands of jobs in the environmental protection industry (click here for a recent blog on the ozone standard, also discussing job creation in the pollution abatement sector), and tens of thousands of prevented chronic illnesses and saved lives (for a discussion of these, see my colleagues’ blogs here and here).

Apologia to my readers for having to repeat text from my other blogs. What else can a poor economist do when industry keeps making the same “mistakes”...

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* These are only direct jobs in the mills themselves and do not include effects in industries that supply inputs to them nor changes in labor income spent economy-wide as workers lose or gain jobs. AFPA estimates 87,299 for this; EPA does not do the calculation beyond the sectors directly impacted.

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