The Impact of Waiving Environmental Regulations

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Recent PPR seminar examines effects on air quality and fuel prices from waiving environmental regulations.

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Hurricanes have ravaged the nation’s coasts over the past eleven years, making Katrina, Sandy, and Ike household names as the three costliest hurricanes in United States history. Although analyses of the federal government’s response to these crises often focus on emergency relief, one researcher is examining the impact that temporarily waiving environmental regulations after disasters can have on air quality.

At a recent seminar sponsored by the Penn Program on Regulation (PPR), Joseph Aldy, a professor at Harvard University’s John F. Kennedy School of Government, examined government waivers of fuel content regulations and their impact on local air quality and fuel prices. Reflecting on his experience working with fuel regulations in the public and nonprofit sectors, Aldy noted that waivers present an opportunity to assess the social benefits of state and regional fuel regulations.

Natural disasters and other catastrophic events can restrict fuel supply by restraining oil refinery operations or impeding the transport of fuel through pipelines and ships. More specifically, these calamities may severely disrupt so-called “boutique” fuel markets, where regulations mandate specialized fuel content unique to a particular state or region. Such disruptions usually necessitate a response from the regulator—often the U.S. Environmental Protection Agency (EPA)—to avoid spikes in fuel costs for both the industry and consumers.

Aldy focused on boutique fuel regulations under the Clean Air Act. Boutique fuel regulations typically affect specific urban regions with poor air quality that require special treatment of gasoline to reduce emissions of ozone precursors. Aldy noted that although the impact of these regulations on air quality is unclear, they may affect both the costs of fuel refining and the consolidation of market power in the industry. In addition, such standards could well increase fuel markets’ vulnerability to supply shocks resulting from destabilizing events, such as pipeline disruptions or natural disasters.

To address supply shocks, the EPA administrator has the authority to waive boutique fuel regulations. The 2005 Energy Policy Act permits the administrator to waive these regulations under “extreme and unusual” circumstances that could not have reasonably been foreseen or prevented. Waivers must serve the public interest and are granted only after consultation with the U.S. Department of Energy.

EPA decisions to waive fuel content regulations are usually made within a week or two after an event occurs which results in a supply shock, according to Aldy. The waiver process begins when a governor petitions EPA to waive boutique fuel content regulations. Next, EPA consults with the Energy Department, industry leaders, and state officials, and then acquires information about the inventory of local fuel stocks and the breadth of the supply shock. At this point, EPA either approves the waiver for a period of up to twenty days or declines to issue a decision.

joealdy_050Since EPA first began issuing waivers in 2005, there have been sixty waivers of boutique fuel regulations, with 85 percent of them granted in the wake of hurricanes, according to Aldy.

In an initial analysis, Aldy found a statistically significant increase in ozone concentrations when regulations were waived in areas operating under a boutique standard set by the California Air Resource Board (CARB). However, he did not find any statistically significant impact from waivers on ozone concentration in communities adhering to other, non-CARB standards, known as Reid vapor pressure and reformulated gasoline standards. According to Aldy, weather explains much of the variation in the data, but waiving CARB fuel content regulations correlates with an increase of about 6 percent in hourly average ozone concentrations and an increase of about 9 percent in eight-hour average ozone concentrations.

Aldy emphasized that his research is still preliminary and that he plans to measure the effect of waivers on social welfare. To determine the social benefit of these waivers, Aldy plans to compare air quality, fuel prices, and human health outcomes in the aftermath of natural disasters when EPA has waived boutique fuel regulations to those values corresponding with pre-2005 natural disasters that occurred before EPA had waiver authority.

Aldy hopes his research will illuminate the impact of government regulations, not only when they are enforced, but also when they are relaxed in the aftermath of natural disasters.

Aldy’s seminar was organized by the Penn Program on Regulation as part of its Risk Regulation Seminar Series, and it was jointly sponsored by the Wharton Risk Management and Decision Processes Center and the Kleinman Center for Energy Policy.