Cost-effectiveness of climate regulations depends on non-climate benefits

Abstract

The United States has long pursued regulations that aim to reduce fossil fuel use. However, while potential emission reduction motivates the introduction and enforcement of these regulations, realization of this potential does not obfuscate the need for prudent economic policy. Scrutinizing nearly two decades of climate regulations in the transportation, industrial, and electric power sector, we enumerate their associated cost effectiveness. Our findings are twofold. Firstly, we find that whereas there are instances where climate regulations carry net economic benefits, there are also cases where compliance costs substantially exceed the social cost of carbon (SCC). Aggregated across sectors and subject to the precise SCC leveraged, up to 65 percent of climate regulations have abatement costs that exceed the SCC. This exceedance is particularly profound in the transportation sector where up to 82 percent of regulations reviewed have abatement costs that exceed the SCC. Secondly, we find that whereas the economic benefits of climate regulations generally exceed the economic costs, this exceedance is largely contingent on the presence of non-climate benefits. Aggregated across sectors, climate benefits account for 33 percent of overall benefits associated with a regulation, compared to 18, 46, and 2 percent for public health, private, and other benefits respectively. Furthermore, we document instances where climate benefits account for as little as 1.6 percent of overall regulatory benefits. This finding hints at a regulatory inefficiency and raises the prospect that alternative, non-climate specific regulation may be a more appropriate mechanism for realizing the non-climate benefits associated with these regulations. Collectively, our findings challenge the economic pragmatism of some (but not all) climate regulations adopted by the United States over a period of nearly two decades.