Beware Environmental Cost Estimates

TW: This dynamic is something to keep in mind as the debates on cap and trade and health care reform heat up. Unbiased economists are making many assumptions when estimating the costs of legislation. Folks with vested interests like industry associations create estimates with one purpose in mind- overstating the harm it will do to their particular industry.

The key observation in the piece is how systematically most environmental regulatory costs have been overestimated even by relatively non-biased observers.

From New Republic:
"In Greenwire today, Anne Mulkern looks at the always-cantankerous debate over how much we can reasonably expect a big climate bill like Waxman-Markey to cost. It turns out to be a surprisingly knotty question. Economists do try to model these policies, but their results depend on lots of slippery variables—the rate of technological advance, say, or how quickly consumers adopt more efficient appliances. (If you want your model to "show" that an environmental bill will have unbearable costs, all you have to do is assume near-zero technological progress, as the National Association of Manufacturers did with a Senate cap-and-trade bill last year.)

Basically, there are always assumptions to quibble with: At the moment, for instance, the EPA is estimating that the House energy bill's cap on carbon emissions will cost the average U.S. household anywhere from $98 to $140 per year through 2020. But that doesn't factor in, among other things, the bill's ambitious new efficiency standards for utilities, buildings, and appliances, which could well lower overall electricity bills for many consumers. On the flip side, these estimates get much, much shakier when you're looking further out, to 2030 or 2050.

One of the more interesting tidbits in Mulkern's story was her glance back at how previous estimates of various congressional policies have actually panned out. They're often wildly askew. The 2003 Medicare expansion, for example, has so far been about 40 percent cheaper than even the rosiest forecasts had hoped. And green regulations in particular have a long history of proving far less pricey than opponents claimed they would be:

When Congress debated what became the 1990 Clean Air Act amendments, both industry and the government overestimated the cost, said David Hawkins, director of National Resources Defense Council's climate programs. ... "The industry estimates were the highest," Hawkins said. "The EPA estimates were lower, but still higher than it turned out in reality."

Early estimates showed that cutting sulfur dioxide emissions to comply with the Clean Air Act would cost utilities $4 billion to $5 billion annually, according to a 1997 Economic Policy Institute briefing paper. But costs shrank due to technological advancements and a switch to lower-sulfur fuel. Utilities actually saved at least $150 million in 1994 through steps taken to comply with the new law, EPI said, citing other research.

When estimating the cost of new policy, Hawkins said, industry and government often underestimate how quickly technology will catch up. And experts are crunching numbers for policies that do not exist.

And it's not just the Clean Air Act's acid-rain program. Back in 1997, economists Eban Goodstein and Hart Hodges scrutinized the history of cost predictions for a whole slew of environmental rules, and a distinct pattern emerged: "Not only do industry lobbyists wildly overestimate the costs of proposed environmental regulations. More surprisingly, academic and government economists do too." The reason, they concluded, is that analysts consistently underestimate the U.S. economy's capability to innovate its way out of limitations."