In this episode, host Daniel Raimi talks with Maureen Cropper, an RFF senior fellow and professor of economics at the University of Maryland. To commemorate the 50th anniversary of the 1970 Clean Air Act (CAA), Cropper discusses a recent working paper she coauthored with fellow RFF scholars, which assesses the full benefits and costs of the groundbreaking law’s many programs to protect the environment. While Cropper acknowledges that the CAA has been successful at substantially reducing air pollutants, she also discusses how varying the stringency of regulations across US counties has imposed unforeseen costs on local economies, and how imperfectly competitive markets have limited some of the potential benefits of the Acid Rain Program.
- New insights from a retrospective analysis: “The paper really focuses on the difference between ex ante analysis of the benefits and costs of the Clean Air Act and what we can say ex post … The problem is that ex ante, both the world with the NOx Budget Program and the world without the NOx Budget Program are uncertain. And obviously, before the fact, we can't say whether the benefits that we predict actually were realized.” (3:41)
- Benefits of the Acid Rain Program: “Not everybody's a cost minimizer, but we do find cost savings … That's the important thing. The gains from trade here are about $200 million for the year 2002, and that's about 20 percent of what I would call the total costs of complying with the Acid Rain Program that year. So, there still were savings—significant savings—generated by the Acid Rain Program.” (15:51)
- Adverse consequences of inconsistent regulations: “What the literature [about the National Ambient Air Quality Standards] has shown is that the more stringent standards in non-attainment counties shifted the location of manufacturing, at least in high-emitting industries (like iron and steel, plastics, pulp, and paper) from non-attainment counties to attainment counties. It also reduced manufacturing employment in non-attainment counties … So, this really raises the question—it's great to have stringent emissions standards in non-attainment counties, but why not have the same stringent standards everywhere?” (26:45)
Top of the Stack
- "Looking Back at Fifty Years of the Clean Air Act" by Joseph E. Aldy, Maximilian Auffhamer, Maureen L. Cropper, Arthur G. Fraas, and Richard D. Morgenstern
- Fall 2019 issue of the Journal of Economic Perspectives (vol. 33, no. 4), which focuses in part on the fiftieth anniversary of the Clean Air and Water Acts
- "What Do Economists Have to Say about the Clean Air Act 50 Years after the Establishment of the Environmental Protection Agency?" by Janet Currie and Reed Walker
- "Policy Evolution under the Clean Air Act" by Richard Schmalensee and Robert N. Stavins
- "US Water Pollution Regulation over the Past Half Century: Burning Waters to Crystal Springs?" by David A. Keiser and Joseph S. Shapiro
- Purple Air, a personal monitor for real-time air quality assessments
The Full Transcript
Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week we talked with Dr. Maureen Cropper, distinguished university professor in the Department of Economics at the University of Maryland and Senior Fellow here at RFF. I'll ask Maureen about a new paper she's co-authored on the Clean Air Act. The Clean Air Act has been around for about 50 years now and this new paper reviews how it's been implemented, drawing out key lessons and research questions for the next 50 years. Stay with us.
Okay. Maureen Cropper from the University of Maryland and of course Resources For the Future, we're so thankful to have you as a colleague and so thankful that you've joined us today on Resources Radio.
Maureen Cropper: I'm happy to be here.
Daniel Raimi: So Maureen, we're going to talk today about a recent RFF working paper you've published with a variety of colleagues, but before we do that and we get into some depth on the Clean Air Act, can you tell us how you got interested in environmental topics in the first place?
Maureen Cropper: Sure. I was a monetary economist when I got my PhD from Cornell University in 1973. In fact, my dissertation was bank portfolio selection with stochastic deposit flows, but my first appointment as an assistant professor was at the University of California, Riverside. I went there because my partner and I were both offered jobs at Riverside by Ralph D’Arge, a great environmental economist and one of the founders of the Journal of Environmental Economics and Management, so it was being at Riverside that turned me from a monetary economist into an environmental economist. When I was there, Ralph D’Arge and Tom Crocker were professors, Jim Weiland and Bill Schulze who went on to be great environmental economists were graduate students. I thought the questions they were working on were really interesting and so I stopped working on problems in portfolio theory, and I began working on environmental problems.
Daniel Raimi: Fantastic. That's so interesting. So a variety of podcast guests have mentioned their times in California as reason for getting interested in the environment, but they often talk about the air quality and other sort of scenic nature, but it was really your work environment that got you into it. It sounds like.
Maureen Cropper: Absolutely. Although I must say that the air quality in Riverside, California in the 70s was not the greatest.
Daniel Raimi: Yes, I believe that. And so that leads us right into a very relevant paper that we are going to be talking about today, which you recently co-authored with colleagues, Joe Aldy, Max Auffhammer, Art Fraas and Dick Morgenstern, three of whom have RFF appointments, I believe, and the paper is called “Looking Back at Fifty Years of the Clean Air Act.” It covers a ton of territory and in broad terms it essentially tries to assess what types of policy lessons we've learned over the last 50 years since the Clean Air Act has been implemented. It starts by describing the dramatic declines in a variety of air pollutants in the US since around 1970 including lead, PM2.5, ozone, air toxics like benzene, and other pollutants. And then it asks this really fascinating question, which is: How much of these declines that we've observed were actually caused by the Clean Air Act, and how much should it cost? So can you give us a little introduction into how you and your co-authors go about trying to answer that question in this paper?
Maureen Cropper: Sure. The paper really focuses on the difference between ex ante analysis of the benefits and costs of the Clean Air Act and what we can say ex post after the fact. I think I can illustrate this pretty well with an example of looking at the benefits of the NOx Budget Program. So this was a cap-and-trade program that operated between 2003 and 2008. The goal was to reduce NOx emissions from power plants in the Eastern US. It operated only in the summer because that's the ozone season. And if you wanted to analyze that program, ex ante, you'd have to predict emissions with and without the NOx Budget Program. You would use an atmospheric chemistry model to translate those that change in emissions into a change in ambient air quality. Then you turn to the literature on air pollution epidemiology to estimate health effects. So the problem is that ex ante, both the world with the NOx Budget Program and the world without the NOx Budget Program are uncertain. And obviously before the fact we can't say whether the benefits that we predict actually were realized.
Daniel Raimi: Right.
Maureen Cropper: So ex post, we can actually estimate the emission reductions that were achieved by the program, and we can also relate the program to health benefits. So there's a great ex post analysis of the NOx Budget Program by Olivier Deschenes, Michael Greenstone, and Joe Shapiro. And what they do is first of all to observe the actual change in emissions at these utilities during the summer, before and after the program. But of course they have to worry about the fact that other things were going on besides the program. So as a control for this observed before and after change, they actually look at how the emissions of these plants changed in the winter when the program wasn't operating.
Daniel Raimi: Hmm. Interesting.
Maureen Cropper: Yeah. And they actually can use a second set of controls because plants in the Western US were not subject to the program. So what they do is to estimate the impact of the program on NOx emissions, they find that it reduced NOx emissions by about 40 percent. It reduced mean ozone concentrations only by about 6 percent, but it reduced the number of high ozone days by about a third. What's also really nice about the study is they can go on and look at the impact of the program on health impacts on premature mortality and also on people's expenditures on drugs, things that they would be taking to protect themselves from the health effects of air pollution. So when they do this, they find the program reduced deaths by about 2,000 people each year and also reduced pharmaceutical expenditures by about $800 million each year. So these are great findings and frankly, these are causal estimates. We know now exactly what the program achieved and that's the value of an ex post study.
Daniel Raimi: Right. And so the paper really kind of wraps in a variety of ex post studies, looking at various aspects of the programs that have been implemented under the Clean Air Act. You know, one thing that listeners who aren't super familiar with the Clean Air Act might not know is that the Clean Air Act itself doesn't necessarily establish all of these programs. What it does is it authorizes the EPA to regulate in a variety of ways. And the EPA has used a variety of tools to try to achieve the emissions reductions that we've been talking about. One of those tools is a cap-and-trade program that you just talked about, but the EPA has used other tools. One of them is called the National Ambient Air Quality Standards, or NAAQS. One of them, the EPA uses basically emission standards for vehicles. It uses emissions and technology standards for industrial sources like power plants or large manufacturers of steel or oil refineries, and this paper really tries to capture results across those different programs that EPA has implemented.
I think it would be great if we could focus in on one of those programs in particular, which is the sulfur dioxide cap-and-trade program, so another cap-and-trade program but regulating a different pollutant. And we've talked about this program a little bit before on the show with Rob Stavins when he was on, and when we look at ex ante studies of that program—and ex ante for those of you who are not in the economics world, ex ante is a study that's carried out before any program or any activity has actually occurred, so it's trying to estimate what's going to happen in the future. And so when we look at those ex ante studies of the SO₂ program, it estimated that the program would reduce emissions essentially at very low cost. But in 2018 an ex post study, Maureen, that I believe you are an author on found that those costs ended up being quite a bit higher than we might've expected before the fact. So can you give us an overview of what you found in that particular analysis?
Maureen Cropper: Sure, Daniel. Well, first of all, in terms of the costs of the Acid Rain Program, the big issue is really how much costs were reduced by having a cap-and-trade program compared to controlling SO₂ with a uniform performance standard. So what the ex ante literature is estimating is really the cost saving from trading versus the cost of achieving the same cap of approximately nine million tons of SO₂ by imposing an emission standard that would've been the same for every utility.
Daniel Raimi: I see.
Maureen Cropper: So the reason why we think that the cap-and-trade program would actually be cheaper is the uniform standard is forcing all utilities to reduce their emissions to the same number of pounds of sulfur dioxide per unit of heat input. But what's going to happen is the marginal cost of doing that will vary greatly across utilities. And what we know from economic theory is that if the utilities that can reduce their emissions at a lower marginal cost reduce their emissions more than average and they sell the right to emit to firms that are very high marginal cost abettors, then that's going to reduce the total costs of meeting the cap.
Daniel Raimi: Right. That's the trade part of the cap-and-trade program?
Maureen Cropper: Exactly, and in fact you want trading to happen until the marginal cost of reducing another ton of SO₂ is the same for all utilities. So I should also say that people assumed that with this cap-and-trade program, the utilities that would be reducing their emissions a lot would be utilities that were closer to the Powder River Basin where low sulfur coal is located, they would be the sellers of permits. The buyers of permits would be utilities in the Northeastern part of the US farther away from the Powder River Basin.
Daniel Raimi: Right. Powder River Basin for those who might not know is in Wyoming and stretches into the part of Montana I think.
Maureen Cropper: So there are indeed several ex ante studies that estimate the gains from permit trading compared to the command and control uniform performance standard. In fact, one of those studies was authored by colleagues at Resources For the Future. It was a study by Curtis Carlson, Dallas Burtraw, Karen Palmer, and myself, which we published in the Journal of Political Economy back in 2000, long time ago. So we estimated marginal abatement cost curves for all electricity generating units. We estimated what it would cost to meet the cap if everybody had to obey a uniform standard, and what we would save by trading, assuming that trading was perfect, assuming that each utility is a cost minimizer and in the end we're equalizing marginal abatement costs. And so, we came up with an estimate of something like $780 billion per year cost savings. Those are 1995 dollars so that's not chump change. But when you ask the question, how many dollars were saved in reality? That's a really tricky question to answer.
First of all, there is really no control group for the electric utilities here under the Acid Rain Program like there was for the NOx Budget Program. It really would apply to all utilities throughout the country. So what we did in the paper you were referring to, which was written with Ron Chan, Andrew Chupp, and Nick Muller. What we did was to estimate using data on actual compliance behavior of the utilities. We estimated a model to explain where utilities purchased coal from, having observed their purchases and also whether they installed a scrubber—a flue-gas desulfurization unit—to reduce SO₂ emissions. In the case of these ex ante studies in particular, the one I mentioned by Curtis Carlson and colleagues, the assumption was that there would be no more scrubbing because it was much cheaper to fuel switch and buy coal from the Powder River Basin. But in fact many utilities scrubbed, and we were trying to understand when they scrubbed, when they didn't, and where they got their coal from.
So we estimated this model and then we used it to simulate behavior under trading, under the Acid Rain Program, and also under a uniform performance standard. And we calculated the cost savings that way. Okay. So first of all, we did this just for the year 2002. As many listeners I'm sure will know, the Acid Rain Program was effectively ended by the Clean Air Interstate Rule and by rumors that that was going to replace the Acid Rain Program. So by 2003 and certainly by 2004, the Acid Rain Program is not functioning the way everybody thought it would function. People realized what huge health benefits there were from reducing sulfur dioxide emissions, and they wanted to make standards more stringent. So we had to look at the program just before it effectively was superseded by something else.
So when we looked at the gains from trade, we found them to be about $200 million, 1995 dollars, so only about a quarter of what the previous study had found. And they're really two reasons for that. So, first of all, we looked at the cap that was actually achieved in 2002, which was a little over 10 million tons of SO₂. It was actually a looser cap than the ultimate nine million ton cap that would have been achieved under the program had it continued and was of course eventually achieved by utilities, but it was a looser cap. So you don't expect the gains from trade to be so big if the cap is looser, right?
Daniel Raimi: Right.
Maureen Cropper: But then also, as I said, the increase in scrubbers was about a 50 percent increase compared to the beginning of the Acid Rain Program. So some utilities installed scrubbers when according to our calculations, it would have been cheaper for them to actually purchase permits. So you know, not everybody's a cost minimizer, but we do find cost savings. I mean that's the important thing. The gains from trade here are about $200 million for the year 2002 and that's about 20 percent of what I would call the total costs of complying with the Acid Rain Program that year. So there still were savings, significant savings generated by the Acid Rain Program.
Daniel Raimi: Got it. That's so interesting. And there's all sorts of like really fascinating questions we could dig in on to sort of probe these findings more. There are two that sort of stood out to me when I was reading the paper in preparation for our conversation. One of them is about how the program sort of changed the distribution of emissions across the United States. So the program had an effect on where the most emissions occurred, and therefore the location on the number of the people that were affected by those emissions changed because of the program. Can you talk a little bit about why this geographic shift occurred, and what its impacts were in terms of public health?
Maureen Cropper: Sure. Thanks Daniel. Well, you know, a question that always arises when you look at cap-and-trade programs is whether they create hotspots. So if the marginal damages from emissions are higher for the people who are buying permits—let's say they're located in more densely populated areas—than for the utilities that are selling permits—let's say those are located in less densely populated areas—then there's going to be a net increase in damages as a result of trade, and this is what people were concerned about with the Acid Rain Program. Because as I said a little while ago, the idea was that you would have utilities closer to the Powder River Basin being the sellers. They're in less densely populated areas than utilities in the Northeast and along the Eastern seaboard who were largely the buyers of permits.
So here's what we did to try to estimate that effect. We looked at actual damages under the Acid Rain Program in 2002 based on EPA's monitoring data, and we calculated the health impacts of those observed emissions. Then we calculated the health impacts of what would have happened if each utility had to emit the allocation of permits that it was given by the government in 2002 plus some banked permits. If it actually did emit essentially what it had without trading, what would the health impacts have been. And so what we see is that under trading, the health damages associated with sulfur dioxide emissions increased by a little over $2 billion. Again, this is all in 1995 dollars, and this does in fact reflect the move of emissions from areas west of the Mississippi to densely populated areas along the East Coast.
You know, we're not the first person to point out that there would actually be benefits in a cap-and-trade program if you took damages into account when you actually constructed the program. So if instead of having a one-for-one permit trade, you actually said, “look, we're going to make utilities trade at ratios that reflect their marginal damage.” So, if I'm located in the New York metropolitan area, I'm going to have to buy many permits from a utility in Texas in order to offset one ton of my emissions. This would require actually having estimates of the damage per ton of SO₂ for each utility in the country. And everyone would have to agree on those. Right? But if they did, actually Nick Muller and Rob Mendelsohn in a paper in the AER very nicely calculated what the benefits would be of doing that, of taking marginal damages into account when you construct the cap-and-trade system.
Daniel Raimi: That's really interesting. So one more question going back to the SO₂ program that you talk about in the review and again, for people who are interested, the review paper is called “Looking Back at Fifty Years of the Clean Air Act,” when you're talking about the SO₂ program, you point out this really interesting dynamic, that to a person who doesn't know a lot about the energy system, this would be not intuitive at all. But you point out that the SO₂ program led to substantial benefits, what economists would call rents, basically in a sense, windfall profits for railroad operators due to the SO₂ policy. So what is the connection, and again, for people who don't study the world of energy, what is the connection between the SO₂ program and railroad operators? Like why would they benefit from something like that?
Maureen Cropper: Okay. Very good question. So Meghan Busse and Nate Keohane have a great paper that estimates how much of the cost savings from the Acid Rain Program were actually appropriated by the railroads. So as I said before, everyone expected that the big gains from the Acid Rain Program would come from utilities near the Powder River Basin really substantially reducing their SO₂ emissions and then selling permits. So railroad operators realized that Powder River Basin coal was an asset and they were able to price discriminate based on the utility’s location and whether it was subject to the Acid Rain Program. They actually looked at this during phase one of the program when not all of the utilities eventually involved in phase two were participating. So only some of the utilities.
So they do two things. They, first of all, look at the price that is charged to utilities who are part of the phase one of the program that are within 1,000 miles of the Powder River Basin. And they compare the cost that's being charged to utilities also part of phase one who are more than 1,000 miles from the Powder River Basin. And of course they're taking into account the real costs of transporting the coal and so forth. But the point is that these utilities that are closer to the Powder River Basin, other things equal, are being charged higher prices. They also can use the fact that not all utilities are in the program in phase one. So they can do this price comparison for utilities holding distance constant who are in the program and out of the program.
So if you look within the thousand miles at utilities that weren't part of phase one, they're getting charged a lower price than the utilities that are part of phase one. And the railroads know that they can get this money because of the benefits of Powder River Basin coal. And in fact, if you go to the bottom line here, Busse and Keohane’s estimates suggest that the two railroads involved, which were BNSF and Union Pacific, that they gained about $40 million by price discriminating.
Daniel Raimi: And is that because there's very little competition in the railroad sector, like you know, there aren't people that are ready to step in and build another rail line from the Powder River Basin to whatever power plant? Is that kind of a fundamental driver of this?
Maureen Cropper: Yes. So during this period, you know, this is really a duopoly. As we say in economics, it's BNSF and Union Pacific, and they're the only two railroads that are transporting coal from the Powder River Basin. So they're it, and they have, as a result, a monopoly power.
Daniel Raimi: Right. Fascinating. So I want to ask you one more question broadly about your paper on the Clean Air Act and then go to our Top of the Stack question. So to close up, I'd like to step back for a minute and ask you about broadly, when you look at the paper, your review as a whole, you review all sorts of topics ranging from the power sector to manufacturers to mobile sources like cars. And you look at a variety of different pollutants. When you step back and look at the whole picture, what are some of the key policy lessons that emerge from your review of how the Clean Air Act has worked over the last 50 years?
Maureen Cropper: That's a great question, and the way I'm going to answer it is to say that I think that one of the biggest insights from this ex post literature is really looking at the cost and benefits of environmental policies that vary by location. Actually, one of the key questions in environmental economics is whether environmental policies should be geographically uniform, for example, whether you want to have the same gasoline content regulation everywhere in the United States, or whether you want policies that vary by location. So in the gasoline content example, you would have different regulations for different cities and states depending on how dirty the air was in those places.
Okay. So under the Clean Air Act, counties that violated the National Ambient Air Quality Standards were required to implement stricter regulations to reduce ambient particles and particulate matter and ozone and all the other criteria pollutants than counties that were in attainment with the National Ambient Air Quality Standards. And actually, in the 1977 amendments, it was written directly into the amendments that emission standards for new plants who were locating after '77 emission standards will be more stringent in non-attainment than in attainment counties.
Daniel Raimi: So like if your air is dirtier, then you have to do more to clean it up essentially.
Maureen Cropper: Exactly. You've got to do more to clean it up. So what the literature though has shown, and there's a big literature on this, is that the more stringent standards in non-attainment counties shifted the location of manufacturing at least in high emitting industries—so industries like iron and steel, plastics, pulp, and paper—from non-attainment counties to attainment counties. It also reduced manufacturing employment in non-attainment counties. In fact, according to Michael Greenstone's estimates, it reduced manufacturing jobs by about 39,000 jobs a year from 1972 to 1989, so about 600,000 jobs were lost in non-attainment counties in manufacturing as a result of these spatially varying standards. We don't know whether some of the jobs went to attainment counties. They could have, but work by Reed Walker suggests that for some workers, especially workers who had to change industries, the earnings losses that they suffered were large and permanent.
So this really raises the question, it's great to have stringent emission standards in non-attainment counties, but why not have the same stringent standards everywhere? So of course the answer to that question—what an economist would tell you—is it all depends on the marginal cost of reducing emissions in different locations and the marginal benefits of these more stringent standards. So there is a literature that looks at how the more stringent standards in non-attainment areas actually affected the rate of decline in ambient air pollution. And there's some evidence at least for some places, in some years, and in some cases for particulates, in some cases for ozone, that these reductions were greater in non-attainment than in attainment counties.
But the problem is we haven't really done a formal benefit-cost test to see whether in fact we are better off or under what circumstances we're better off with uniform standards as opposed to spatially varying standards. And another area where this issue comes up is really in terms of reformulated gasoline standards, which vary significantly across the country and frankly have segmented the gasoline market. And so the question is really the same question there in terms of do you want geographically uniform standards, or do you want to allow them to vary spatially?
Daniel Raimi: Right. That's so interesting. So yeah, I mean definitely while this review does give us a great sense of what we know and what we've learned, it also raises and identifies some key questions that we still need to get to the bottom of. So let's move on now, Maureen, to our last question that we ask all of our guests, which is what you've been reading or watching or listening to that you'd recommend to our listeners. And because we're talking about air quality today, I thought I'd recommend this technology that's called PurpleAir. It's a PM monitor that you can get for your house or your workplace or wherever, that actually works very well. And it's only like $150. We have one at my house because we don't live too far from the highway, and we have a young kid, so I really wanted to know what our air quality was like, at least the PM levels.
So you can install it at your house. And then they have this network, this map that you can look at any time and see real-time air quality data from all around the country at hundreds and thousands of locations. So it's called PurpleAir, and you can find it online if you just search for that and whether or not you're interested in buying the device, you can see the air quality in the place where you are at any given time, which is pretty cool. So I'd recommend people take a look at that.
Maureen Cropper: That sounds great. Absolutely. Yes.
Daniel Raimi: Yeah, yeah. I learned about it over the summer and I learned about it from some friends who were in California and were worried about particulate matter from the fires out there. But how about you, Maureen? What are you listening to or reading and what's at the top of your stack?
Maureen Cropper: Okay, well remember, I am an academic, so I'm not going to be suggesting anything too frivolous. The Fall 2019 issue of the Journal of Economic Perspectives, which people can find online is devoted to the 50th anniversary of the Clean Air Act and the 50th anniversary of the Clean Water Act. So there's a great article by Janet Currie and Reed Walker on the Clean Air Act. You know what have economists said about this over the last 50 years. It's a little different in its approach than what Art, Dick, Max, Joe, and I have done, contrasting the ex ante and ex post literature. But it's a great article.
There's also an article that's looking at the evolution of environmental policy over those 50 years by Dick Schmalensee and Rob Stavins and then last but not least, there's a wonderful article by David Kaiser and Joe Shapiro on the Clean Water Act. As many listeners, I hope know David and Joe have done really pathbreaking work looking at the benefits of the Clean Water Act and this is part of what they are summarizing in their articles. So I would really strongly suggest that people look at the Journal of Economic Perspectives Fall 2019 issue.
Daniel Raimi: Great. It sounds fascinating. So people can continue their deep dive on regulatory analysis and economics. So once again, I want to say thank you, Maureen, for joining us and thank you for sharing your expertise about the Clean Air Act and all the other great things you do around RFF and elsewhere. Thanks so much.
Maureen Cropper: Thank you for inviting me. I've really enjoyed this.
Daniel Raimi: Me too.
You've been listening to Resources Radio. Thanks for tuning in. If you have a minute, we'd really appreciate you leaving us a rating or a comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent, nonprofit research institution in Washington DC. Our mission is to improve environmental energy and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org.
The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Elizabeth Wason with music by me, Daniel Raimi. Join us next week for another episode.