Truth in Advertising: Will the Trump Administration’s Proposed Methane Rule Deferral Save on Costs?
The Trump administration is touting the cost savings of its proposal and accompanying regulatory impact analysis (RIA) to delay until January 2019 the Bureau of Land Management’s (BLM’s) methane rule, aimed at reducing methane emissions from oil and gas activities on federal lands. These cost savings, however, would result only from deferring, not eliminating, compliance costs. Furthermore, a court decision that was issued just after the publication of the proposed rule would decrease the cost savings of the proposed delay (more on this below).
First, in the proposal to delay the methane rule, BLM asserts that compliance costs would be reduced by $110 million to $114 million in the year 2017. In its RIA, however, BLM shows that these compliance costs simply occur in 2018 instead. BLM also claims in the proposal that the delay will save a total of $19 million to $52 million from 2017 to 2027. In its RIA, the agency states that these positive net benefits result from “the reduction of compliance costs [that] would exceed the reduction in cost savings and the value of the foregone emissions reductions.” This assertion is—at best—misleading. This figure does not reflect a reduction in current-dollar compliance costs but rather is derived solely from discounting: a dollar spent two years from now is worth less today than a dollar spent today.
Of course, discounting is standard practice in developing RIAs. Government agencies are required by the Office of Management and Budget’s Circular A-4 to discount future costs and benefits by 3 percent and 7 percent. In the case of a rule deferral, the same compliance costs are discounted starting from a year or two further in the future; hence the compliance costs are lower in present value terms.
By definition, deferring rules will always result in cost savings because of discounting. The complementary issue with deferral is what happens to the benefits, which should be discounted from the start year further into the future as well. The net benefits of deferral will therefore be lower in proportion to the degree of deferral because both the compliance costs and benefits will be lower by the same discount adjustment.
But, the benefits in the proposal have changed significantly, aside from discounting. In its new RIA, BLM used a domestic rather than a global estimate of the social cost of methane, which amounts to 10 percent of the global estimate. This substitution converts the positive net benefits of the original rule to a net cost, and the deferral makes these net costs smaller. The debate is highly contentious over whether using a domestic or global estimate of the social cost of methane is appropriate. Previously, the Obama administration used the global estimate in its methane rules, under both BLM and the US Environmental Protection Agency.
The second issue we noted up front is that as of October 4, following the publication of the proposed rule, a court struck down BLM’s attempt to freeze provisions of the rule that had not yet gone into effect (a separate action from the proposed rulemaking at issue here). That decision means the rule is indeed in effect and companies will have to comply, at least until the proposed rulemaking is finalized. This means that the baseline against which the Trump administration is comparing its cost savings from deferral has changed because some firms have and will come into compliance before the new deferral rule is finalized. The net cost savings of deferral are therefore lower than what’s outlined in the RIA.
Ultimately, the cost savings hyped by the Trump administration are less compelling than they first appear. Beyond the consideration of cost savings, if the proposal is made final, some climate benefits will be deferred as well.
