David Kreutzer, Ph.D.
September 5, 2012
The Environmental Protection Agency’s world is chock full of external costs and external benefits that it must rectify with taxes, subsidies, and regulations. For instance, to cure this world of CO2-itis, the EPA, along with the National Highway Transportation and Safety Administration (NHTSA), recently released the latest version of the corporate average fuel economy (CAFE) standards. Unwittingly, perhaps, they also argue for subsidizing domestic oil production.
In making its case for forcing consumers to buy lighter (yet more expensive) cars, the EPA argues that with each barrel of imported oil we forgo, the economy avoids $13.42 in external costs from the overall economic disruption of oil price spikes. (See Table 4-14 of an earlier joint technical support document, or JTSD.)
While the EPA does not explicitly say we should subsidize domestic petroleum production, the benefit of cutting imports—which are separate from whatever benefit there may be from cutting consumption altogether—can come from either cutting consumption or increasing domestic production.
Is this external benefit weighty enough to spur the nanny state into action? (Note: This external benefit is about 10 times the often-asserted-but-grossly-exaggerated subsidies to oil and gas companies. For a clear explanation oil and gas subsidies, click here.) Let’s compare it to one that did.
The whole purpose of (and legal underpinning for) these most recent CAFE standards is to cut CO2 emissions and the external costs they supposedly impose. Though far from a universally accepted number, according to the EPA, the external cost of CO2 is $22 per metric ton. So how much would this be per barrel of petroleum?
On page 4-45 of the JTSD, the EPA lists its estimate of CO2 released per gallon of gasoline (19.6 pounds) and diesel fuel (22.5 pounds). After adjusting for the greater use of gasoline, we get an average of about 20.4 pounds of CO2 per gallon, or 858 pounds (0.39 metric tons) per barrel.
Therefore, the perceived externality that so motivated the EPA, NHTSA, untold environmental activists, lobbyists, and legislators—and led to the 1,230-page regulation (not counting supporting documents)—works out to $8.58 per barrel (0.39 metric tons of CO2 per barrel times $22 worth of damage per metric ton of CO2).
Let’s recap. According to the greens, the damage from CO2 is so severe it can justify a public service announcement with a sickeningly graphic vision of blowing up children who don’t comply with the greens’ rules. It is so severe that there are constant protests against oil companies. It is so severe that those who disagree are listed as climate criminals. It is so severe that it has occupied the EPA for years.
Yet, according to the EPA’s own numbers, the magnitude of the CO2 external cost is less than two-thirds the magnitude of the external benefit of producing domestic petroleum. That is, even according to the EPA, the energy security benefits of domestic oil production exceed the cost of CO2 emissions.
We await the EPA’s 1,230-page rule to promote domestic petroleum production.