State of the Planet

News from the Columbia Climate School

The Financial Reality of Regulating Lead and Methane

Environmental regulations provide a legal foundation for the goal of a cleaner environment. Last week, the U.S. EPA announced new and ambitious regulations to reduce lead in drinking water and to reduce methane pollution from fossil fuel drilling, storage, and transmission. In the case of lead, the regulation requires that all lead pipes carrying drinking water be replaced within ten years. According to the EPA, the methane rule:

“… includes a comprehensive suite of pollution reduction standards that address the largest sources of methane and other harmful pollutants at oil and gas facilities, including methane that leaks or is vented from equipment and processes. Among other things, the final rule will phase in a requirement to eliminate routine flaring of natural gas that is produced by new oil wells; require comprehensive monitoring for leaks of methane from well sites and compressor stations, while giving oil and gas companies flexibility to use low-cost and innovative methane monitoring technologies; and establish standards that require reductions in emissions from high-emitting equipment like controllers, pumps, and storage tanks. In addition, the final rule includes a Super Emitter Program that will utilize third-party expertise in remote sensing to detect large methane releases or leaks known as “super emitters,” which recent studies have indicated account for almost half of methane emissions from the oil and gas sector.”

The methane rule is justified in part by a revised estimate of the social or full cost of methane emissions, which calculates the cost of pollution reduction to be far lower than the benefits. These costs include health impacts, damage from extreme weather, lost productivity, and the other indirect impacts of climate change. The social cost of pollution has been a political football over the past three presidencies—set at $42 a ton under President Obama, lowered to $5 under President Trump, raised back to $51 under President Biden, and now, due to the growing financial cost of climate change, it has been raised to $190 a ton by EPA. Interestingly, large fossil fuel producers tend to favor the methane rule, while small ones tend to oppose it. For large producers, the costs are a small portion of their capital budgets, while for small producers, it could be the difference between staying in business or going out of business. Large fossil fuel producers don’t mind eliminating competition through regulation. The EPA will need to navigate some delicate politics as it seeks to enforce this rule.

In my view, this rule is simply an effort to change the management practices of fossil fuel producers to eliminate pollution that is not central to their business. It eliminates sloppy practices and replaces them with more careful production processes. Nevertheless, there is a phase-in period to enable fossil fuel producers to have the time to adjust their operations to the new rules. As in all other environmental rules, we can expect that the one or two years mentioned in the regulation fact sheet could easily be extended to five to ten years if the company demonstrates a genuine interest in “good faith compliance.” While this rule will increase costs borne by consumers, the volatility of fossil fuel prices is so great that it is unlikely that these costs will be visible to consumers. They can also be avoided by using renewable energy instead of fossil fuels.

The lead pipe issue is a different type of rule, with different financial impacts. Since water supply is either delivered by a public agency or a regulated private utility company, the local costs of compliance are directly borne by the public through larger water bills or whatever taxes support the local water system. According to Coral Davenport of the New York Times:

“The proposal on Thursday from the Environmental Protection Agency would impose the strictest limits on lead in drinking water since federal standards were first set 30 years ago. It would affect about nine million pipes that snake throughout communities across the country…Digging up and replacing lead pipes from coast to coast is no small undertaking. The E.P.A. estimates the price at $20 billion to $30 billion over the course of a decade. The rule would require the nation’s utilities — and most likely their ratepayers — to absorb most of that cost, but $15 billion is available from the 2021 infrastructure law to help them pay for it.”

The rule does not eliminate lead in drinking water since it only requires the replacement of pipes on public property and does not apply to the pipes on private property bringing water into a building. The EPA’s expectation is that state and local governments will impose pipe replacement rules on private property since it makes little sense to fix public infrastructure only to allow that investment to be negated by private negligence.

The problem, of course, is that the resources needed to replace these pipes must come from somewhere. The $15 billion in federal funds provides an incentive, but the other half of the capital need must come from local and state capital budgets. Pipe replacement must compete with schools, libraries, and roads for scarce capital budgets. The cost of getting the lead out of private water pipes will also cause negative indirect impacts. A landlord faced with a major new expenditure for new water pipes may need to raise the rent, and homeowners might be forced to sell their homes to avoid the cost of compliance. This raises the cost of housing amid a housing crisis and a growing homeless population.

Some elements of the transition to a renewable resource-based economy will be facilitated by new technologies that lower rather than raise the costs of consumption. But some elements require resource investments that may not be feasible or may require unacceptable trade-offs. Advocates tend to ignore these costs as they focus narrowly on their issues of concern. Public health advocates correctly argue that any lead in drinking water can harm children and impact their cognitive development. But raising the costs of housing increases homelessness, which is also known to be very harmful to children. Arguing that this should not be a trade-off doesn’t negate the fact that financial reality makes it one.

Fortunately, as noted above, the enforcement of environmental rules tends to be gradual and has long factored in hardship cases in setting compliance schedules. The myth of draconian environmental enforcement is based on a small number of examples out of many enforcement actions. It is easy to identify the marginal businesses driven to ruin by an environmental rule. Less well-known are the many cases of environmental enforcement that provide ample time for regulated parties to adjust their operations to come into compliance with the law.

The “social cost” of pollution is a valid concept but one that will be the focus of partisan conflict and likely action by the courts. It is a shame that this concept has been politicized since it makes it less useful as a vehicle for consensus-driven action. Academics and advocates keep looking for the magic bullet, the carbon tax, or the cost-benefit factor that correctly measures the externalities of economic production. To these folks, once these are somehow factored into prices, consumer and corporate behavior will automatically change. Unfortunately, some consumer actions must take place regardless of price: people need to get to work and heat their homes. If the cheapest and most convenient way to do that requires fossil fuels, that’s what they’ll use. In a world without a political process, economic theories like internalizing social costs and assessing a carbon tax might work. But political forces are real, and people vote as much with their hearts as with their minds. Voters who cannot afford their cars or homes will tend to vote into office people who promise lower energy and housing costs. You can be sure that Republicans will be running in 2024 on what they call the anti-economic growth and pro-environmental protection policies of Joe Biden’s EPA. The fact that economic growth requires a clean environment—and that the trade-off is therefore false—is drowned out by the volume of anti-environment rhetoric.

The process of making America’s environment cleaner has been going on for about half a century. We are making progress, but it is often a matter of two steps forward and one step back. No one wants children to be poisoned by polluted drinking water. Most people now understand that climate change is real, and we need to reduce and eventually eliminate greenhouse gas pollution. But the pace of cleanup always reflects financial reality. The climate meetings in Dubai this week focus increased attention on the issue of climate change and certainly resulted in the timing of EPA’s new methane rule. But it is a long way from policy pronouncements to environmental reality. The path to environmental protection runs through the reality of financial feasibility.

Views and opinions expressed here are those of the authors, and do not necessarily reflect the official position of the Columbia Climate School, Earth Institute or Columbia University.

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