The Wall Street Journal (WSJ) reports that the Environmental Protection Agency (EPA) has recently issued rules to cut the sulfur content of gasoline by 67% and to significantly reduce tailpipe emissions in cars and pickups, starting with the 2017 models. These new rules are known as “Tier 3 standards.” They are designed to reduce the smog created from tailpipe emissions and the subsequent incidence of various lung diseases.
Not surprisingly, both the WSJ and the New York Times (NYT) reports that federal adoption of these stricter Tier 3 standards found broad based support among many environmental and health groups. The Natural Resources Defense Council said the Tier 3 standards could save America $19 billion a year in health-related costs by 2030. The American Lung Association said that Tier 3 standards will reduce pollution equivalent to taking 33 million cars off the road.
Further, the WSJ article also reported that the Alliance of Automobile Manufacturers, which includes 12 of the largest makers, supported these new rules. Apparently, automobile manufacturers prefer the certainty of knowing a short time table for making a one-time change in vehicle design and production efforts to meet a single stricter standard, rather than satisfying numerous varying emissions standards over multiple changes and across the many states.
However, there seems to be a lack of economic perspective guiding the EPA in designing this new sulfur extraction requirement. For example, while health and environmental benefits arising from further sulfur reduction are desirable, the incremental increase in benefits get smaller and smaller as more and more sulfur is extracted from gasoline. Meanwhile, the incremental increase in the costs of extracting more and more sulfur is rising. Does the new standard hit the right balance? Furthermore, as Henry Hazlitt is famous for pointing out, one cannot predict the many unforeseen consequences of manipulating the market. How might this reality pan out when the federal government enforces the Tier 3 standards?
First, consider the cost of Tier 3 compliance. EPA Administrator Gina McCarthy estimates that the expected cost of compliance will be less than a penny per gallon of gasoline. The oil producers of American Petroleum Institute and the refineries owners of the American Fuel & Petrochemical Manufacturers beg to differ. They both say the rules would raise gas prices by about 10 cents a gallon. Also, Tier 3 would require the industry to bear billions of dollars in capital restructuring costs.
Yet, the NYT article cites how the American Fuel and Petrochemical Manufacturers (AFPM) claim that the earlier required reductions in sulfur content in gasoline from 300 parts per million to the current requirement of 30 parts per million was a relatively inexpensive goal to achieve. Meeting the new Tier 3 levels of 10 parts per million of sulfur content in 2017 will be much more expensive. Mr. Drevna, President of AFPM, said, “Wringing the last 10 percent of those molecules is like getting the last little bit of red wine stain out of a white blouse.”
Second, another big cost to society seems to be completely ignored by the EPA — the unintended consequences of manipulating the market process. The WSJ article further reports that oil companies and oil refinery owners all agree that energy-intensive hydro-treating equipment used for removing the sulfur from gasoline to the lower levels required by Tier 3 standards would emit far more carbon dioxide than the existing processes used to achieve the current level of sulfur extraction. Yet there is no indication that such secondary impacts on greenhouse gases were even considered.
Perhaps the EPA is so narrowly focused on achieving the incremental benefits of the new Tier 3 standards that it forgot its self-declared mission to combat global warming.