PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

SBE Council Comments at EPA’s Public Hearing on Proposed Ozone Regulations

By at 29 January, 2015, 8:57 pm

by Raymond J. Keating

Chief Economist

Small Business & Entrepreneurship Council

and the

Center for Regulatory Solutions

 

Public Hearing

Environmental Protection Agency

William Jefferson Clinton East Building

1201 Constitution Avenue, NW, Room 1153

Washington, DC 20460

 

January 29, 2015

 

My name is Raymond J. Keating, and I serve as chief economist for the Small Business & Entrepreneurship Council, which is a nonpartisan, nonprofit advocacy, research and education organization that works to protect small business and promote entrepreneurship. In addition, the Center for Regulatory Solutions (CRS) is a project of SBE Council. CRS educates the public about reforms that will improve the regulatory system, as well as the consequences of over-regulation on the economy and small businesses.

On November 25, 2014, the EPA proposed to tighten the National Ambient Air Quality Standards (NAAQS) pertaining to ozone. The new regulation would reduce the standard from the 75 parts per billion (ppb) – which was set in 2008, down from 84 ppb – to a range of 65 to 70 ppb, with the agency seeking comments on a regulation as low as 60 ppb.

SBE Council is very concerned about the considerable costs involved with these new regulations, including the resulting ills for entrepreneurship, small business and the economy.

Changing the NAAQS starts a process. As explained by the EPA, “EPA must designate areas as meeting (attainment) or not meeting (nonattainment) the standard. The Clean Air Act (CAA) requires states to develop a general plan to attain and maintain the NAAQS in all areas of the country and a specific plan to attain the standards for each area designated nonattainment for a NAAQS. These plans, known as State Implementation Plans or SIPs, are developed by state and local air quality management agencies and submitted to EPA for approval.” If the EPA fails to approve a state plan, then it would impose a federal plan. In effect, this means that the EPA has complete control over the process, from establishing the standards to imposing the regulations it wants in each state to meet its standard.

Unfortunately, as noted in an analysis from the SBE Council’s Center for Regulatory Solutions, the process is wrought with uncertainties at the very start: “Not only are big costs and long delays involved, but when the Environmental Protection Agency (EPA) issues tightened National Ambient Air Quality Standards (NAAQS) without rules and guidance for state permitting agencies and manufacturing facilities, the confusion adds even more delays and more costs.  This uncertainty derails projects, and means lost opportunity for job growth and economic opportunity for the many communities and states that desperately need these investments.”

When it comes to clarifying what “nonattainment” means in the real economic and policy worlds, the Center for Regulatory Solutions also highlighted key points from a July 2014 study by NERA Economic Consulting for the National Association of Manufacturers. It was pointed out in the NERA study: “Unlike regulations that target specific sectors, an ozone standard would directly affect virtually every sector of the economy, because ozone precursors (oxides of nitrogen, or NOX, and many types of volatile organic compounds, or VOCs) are emitted by a wide range of stationary, mobile, and area sources.”

The center’s analysis adds: “NERA also explains what ‘non-attainment’ means in practical terms.  New businesses must obtain air permits to operate.  In order to do so, state officials must find ‘offsets’ for those emissions from other sources, which is extremely difficult, especially as new air quality standards become more stringent. As NERA stated: ‘[B]eing in nonattainment of a NAAQS triggers more regulatory burdens than just reducing emissions to achieve attainment. A number of regulatory programs are also imposed on nonattainment areas. Significant among these is a requirement that any economic entity that wishes to obtain a permit to establish a new facility that will emit the pollutant(s) of concern in a nonattainment area must first find an offsetting reduction of those same emissions from another facility that is exiting the area, or has voluntarily reduced its own emissions below its permitted level. Markets for these “offsets” often develop, but offsets can be exceedingly costly or difficult to find if there are few existing emitting facilities in the area to create a supply’”

However, the NERA study also noted the uncertainties: “To date, the EPA has only identified one-third of the controls needed to meet the possible new standard; the other two-thirds must come from controls the EPA has not identified.”

Much of the nation would be in nonattainment areas under the EPA’s new regulatory standards. For example, the Business Roundtable reported: “155 U.S. counties violate the current ground-level ozone standard of 75 parts per billion (PPB). EPA is considering a new standard in the range of 70 ppb to 60 ppb… Approximately one-third of the U.S. population currently lives in areas that violate the current standard of 75 ppb. Lowering the standard to 60 ppb will mean that two-thirds of the U.S. population would live in areas at risk of violating the standard.”

At 70 ppb, based on the Business Roundtable’s analysis, 48 percent of the population would live in counties at risk of violating the ozone standard, and at 65 ppb, it would be 59 percent of the population living in counties risking violation.

As summed up in the NERA study, “if a 60 ppb ozone standard were in place today, the vast majority of the country would likely be in nonattainment.”

Indeed, it’s not just urban areas at risk of nonattainment. As noted in the NERA study, when looking at oil and natural gas development and processing in particular, “Obtaining offsets may be difficult and/or costly, particularly in relatively rural areas that are likely to face nonattainment issues that, until now, have mainly been an issue exclusive to urban areas. Such rural areas will have few industrial emissions sources to create offset supply, so that a potential requirement of new sources in nonattainment areas to purchase offsets may become a substantial hindrance to growth.”

In September 2014, SBE Council’s Center for Regulatory Solutions Senior Fellow Kevin Nyland (former Deputy Administrator of OIRA) was first to identify the ozone rule as possibly “the most expensive in U.S. history.” Obviously, the EPA should focus “on getting the science right,” added Nyland. Nyland’s assessment is backed up by a variety of analyses. The NERA study, for example, found:

“Employing our integrated energy-economic model (NewERA), we estimate that the potential emissions control costs would reduce U.S. Gross Domestic Product (GDP) by $270 billion per year on average over the period from 2017 through 2040 and by more than $3 trillion over that period in present value terms. The potential labor market impacts represent an average annual loss of 2.9 million job-equivalents.

A tighter ozone standard may also result in barriers to new energy production activity in areas that become in nonattainment. We therefore also consider a sensitivity case that includes constraints on new natural gas production in the U.S., leading to even greater estimated impacts in terms of energy costs for consumers and losses in economic output. In this sensitivity case, we estimate a GDP reduction of $360 billion on average and more than $4 trillion over the period from 2017 through 2040 in present value terms, and a projected average annual loss of 4.3 million job-equivalents.

In the end, all sectors of the economy would be negatively affected by the EPA’s new, stringent NAAQS ozone regulations. That means, of course, that small businesses will be hit hardest, as is the case with nearly all regulations and given that small businesses account for the overwhelmingly majority of firms across sectors of our economy.

The NERA study highlighted potential lost output in non-energy and energy sectors. Consider the major role of small business plays in the overall economy and in some of these key sectors affected by these new regulations (latest Census Bureau employers data from 2012):

  • Among all industries, 89.6% of employer firms have less than 20 workers, and 99.7% less than 500 employees.
  • Among agriculture, forestry, fishing and hunting businesses, 93.5% of employer firms have less than 20 workers, and 99.6% less than 500 workers.
  • Among all manufacturing firms, 75.3% have less than 20 workers, and 98.6% less than 500 employees.
  • Among key energy industries:
  • 90.7% of employer firms among oil and gas extraction businesses have less than 20 workers, and 98.5% less than 500 workers;
  • 78.1% of firms among drilling oil and gas wells businesses have less than 20 workers, and 97.2% less than 500 workers;
  • 81.5% of firms among support activities for oil and gas operations businesses have less than 20 workers, and 98.6% less than 500 workers;
  • 60.5% of firms among oil and gas pipeline and related structures construction businesses have fewer than 20 workers, and 95.5% less than 500 workers;
  • 54.7% of firms among oil and gas field machinery and equipment manufacturing businesses have less than 20 workers, and 91.4% less than 500 workers;
  • 68.5% of firms among coal mining firms have less than 20 workers, and 93.7% less than 500 workers;
  • and 64.6% among support activities for coal mining businesses have fewer than 20 employees, and 96.4% less than 500 workers.

 

The costs of the proposed EPA ozone regulations promise to be enormous for small businesses, and for the overall economy. It’s also worth highlighting that energy – which has been a rare bright spot in an otherwise dismal economy over the past eight years – and manufacturing – which is in the midst of a revitalization – would both suffer significantly under the new EPA regulations. Again, those sectors are very much about small business.

Small businesses in non-attainment areas will have a difficult time expanding and competing for “offsets”  — they will be expensive, or perhaps not exist when they need them. Compliance will be complex and costly. Economic opportunity and job creation will suffer. The expense and red tape will be a massive barrier to new startups and business formation. These regulations would hamper local efforts to spur new business creation, and could, in effect, serve as a cap on entrepreneurship and small business growth.

Indeed, the proposed ozone rule not only has the potential to be the “most expensive regulation” ever enacted by the federal government in U.S. history, it will be one that severely impinges on entrepreneurship and economic freedom.

Thank you for your time and attention.

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