How EPA Calculates the Cost of Environmental Compliance for Electricity Generators

three power plant chimneys emitting vapor cloud
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graphic link to the landing page for The Full Cost of Electricity

People pay for electricity directly, out of pocket, when they pay their electric bill. But they may also pay in an indirect way, when they bear the environmental and health costs associated with pollution from electricity generation. With a new EPA administrator recently installed, how these costs are calculated is under new scrutiny. The University of Texas Energy Institute’s Full Cost of Electricity Study includes estimates of these environmental pollution costs as one part of the full system cost of electricity.

There is a well-established body of literature at the intersection of toxicology, epidemiology, and economics; it’s one that also governs how the Environmental Protection Agency estimates the benefits of regulations that reduce pollution from power plants. As part of the University of Texas Energy Institute’s Full Cost of Electricity (FCe-) Study my colleagues and I took a deep dive into the cost of these environmental externalities. Our goal: Describe in detail how the EPA estimates the dollar value of pollution reductions.

Whenever the EPA proposes a major new rule, it undertakes a rigorous analysis, comparing a benefit estimate with its estimate of the societal costs of complying with the proposed rule. Our analysis [PDF] illustrates how the EPA completed this kind of analysis for three recent and major rules targeting fossil-fueled power plants: the Cross State Air Pollution Rule (regulating pollutant transport to downwind communities), the Mercury and Air Toxics Rule, and the Clean Power Plan (regulating greenhouse gas emissions).

In each of these three rulemakings, the EPA concluded that the health and environmental benefits greatly exceeded compliance costs, even though in some cases compliance costs were in the billions of dollars.

These analyses are not without controversy. Many dispute the dollar value that the EPA places on a premature death, and many others disagree with the value assigned to a ton of carbon emissions. For the mercury rule and the greenhouse gas rule, benefits dwarf costs only because of so-called co-benefits—reduction of pollution other than the pollutant targeted by the rule.

These and other measurement issues are laid out in our white paper, “EPA’s Valuation of Environmental Externalities from Electricity Production” [PDF].

David Spence is a professor at the McCombs School of Business and School of Law, part of the University of Texas at Austin.


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