Economics and the Environment, 10th Edition

6Measuring the Costs of Environmental Protection

6.1 Introduction

In 2023, the U.S. EPA announced a new regulation requiring oil and gas companies to reduce emissions of methane—a greenhouse gas—at their oil and gas wells and operations. Then official estimate from the EPA was that these measures would cost U.S. oil and gas operators $19 billion dollars over a fourteen‐year period, from 2024 to 2038.¹ Where does a cost number like this come from?

On the face of it, measuring the costs associated with environmental protection appears substantially easier than measuring the benefits. One can simply add up all the expected expenditures by firms on retrofits, technology upgrades, pollution‐control equipment and personnel, plus local, state, and federal government expenditures on regulatory efforts, including the drafting, monitoring, and enforcing of regulations. This direct approach to measuring cost via engineering expenditures is by far the most widespread method in use.

However, because engineering cost estimates are often predicted costs, they require making assumptions about future behavior. For example, cost estimates may assume full compliance with pollution laws or assume that firms will adopt a particular type of pollution‐control technology to meet the standards. To the extent that these assumptions fail to accurately foresee the future, engineering cost estimates may be misleading on their own terms. In a famous case of getting it wrong, the EPA overestimated the ...