Economic Analyses at EPA

Assessing Regulatory Impact

Richard D. Morgenstern

• Publisher: Routledge
• Year: 2014
• eBook ISBN: 9781135891176
• Topic: Biological Sciences
• Subtopic: Ecology
• Index: Biological Sciences

For years, the Environmental Protection Agency has been conducting programmatic 'economic analyses,' also known as Regulatory Impact Analyses (RIAs), to assess the economic effects of its regulatory efforts. This important volume explains the purpose of these analyses, along with their design, execution, conclusions, and their ultimate impact on environmental rules. Richard Morgenstern, formerly director of EPA's Office of Policy Analysis, has assembled twelve original case studies of RIAs performed over the past decade on matters such as lead in gasoline, ozone depletion, asbestos, clean drinking water, and sewage management. The contributors, most of whom actually worked on these RIAs, provide detailed examination of why and how they were performed. The case studies critique the nature, amount, and quality of data used by the EPA in their benefit-cost and cost-effectiveness analyses as well as the use (or abuse) of the results in final decisionmaking. The authors illustrate how the analyses take into account difficult issues such as discounting, risk, nonmonetized benefits and costs, and equity. Morgenstern provides the necessary historical context and the legal framework for requiring and conducting EAs. He describes new procedures outlined by the Clinton administration and synthesizes the case studies into thoughtful cross-cutting conclusions, drawing important lessons that will improve future analyses.

1

Introduction to Economic Analyses at EPA

Richard D. Morgenstern

Throughout history, the messenger of bad news is often attacked by those who do not like the message. Recently, economic analysis has come under attack from several quarters as an inherently flawed environmental management tool. On the one hand, environmentalists criticize those economic studies that reveal high costs associated with proposed actions. On the other hand, industry challenges economic assessments that indicate high benefits. Thus, in this conflict-ridden world, economic analysis of environmental policies inevitably comes under attack as the vehicle for conveying information considered bad news by somebody. In point of fact, economic analysis is inherently neither good nor evil. Rather, it can serve as an analytical tool for estimating real world trade-offs and for identifying cost-effective approaches to environmental management.

In order to determine what constitutes well-conducted economic analyses, this book reviews the execution and use of economic analyses in support of twelve major regulations issued over the past decade by the U.S. Environmental Protection Agency (EPA) under six different statutes. They include both highly sophisticated analyses as well as simpler ones. The authors are all economic analysts who were involved in the individual rulemakings, either as EPA employees or as consultants.

The premise of this book is that stigmatizing economic analysis in general for the flaws of specific economic analyses is misguided. Here, economic analysis is viewed as a potentially powerful set of methods that can be systematically applied to the study of environmental issues in order to achieve better policies. Economic analyses are understood as specific applications of economic methodologies that may or may not be done well.

This volume is an attempt to learn as much as possible about the real-world practice of economic analysis as applied to environmental issues.

•  How and to what extent have economic analyses contributed to better environmental rules?

•  Have they helped reduce the costs of environmental regulations? Have they helped develop more stringent rules?

•  Have they delayed regulatory actions?

•  Do economic analyses generally consider a broad array of options?

•  Do barriers to quality analyses exist? If so, what are they and how can they be overcome?

•  Can analytical or institutional procedures be changed to facilitate more informed environmental decisions and, if so, in what ways?

•  All said, what can we learn from our experience with economic analysis to improve environmental decisionmaking in the future?

The estimated benefits of just three of the rules examined in this volume exceed the estimated costs of all twelve rules combined. Yet, unless one simply seeks to praise or damn the regulatory system, the conclusion that the benefits do or do not exceed the costs for any group of rules is not terribly helpful. The real goal of this book is to elucidate the processes that will improve our abililty to develop sound environmental policies. As former EPA administrator William Reilly has noted, “we can probably afford to spend three percent of the nation’s wealth on environmental protection, but we can’t afford to spend it in the wrong places (Stevens 1991).”

Following this introductory chapter, Chapter 2 provides background on the legal, institutional, and cultural context applicable to the conduct and use of economic analysis at EPA. Chapter 3 presents the basic rationale for economic analysis as applied to environmental issues, considers some of the controversies surrounding that rationale, and reviews key elements of the analyses. Here, a theme of this book—that economic analysis can play an important role in environmental decisionmaking—is developed in some detail. Chapters 4 through 15 constitute the core of the volume with cases covering air and water pollution, drinking water, municipal wastes, toxics, and pesticides. Most focus on human health, a few on ecological concerns, and one solely on aesthetic considerations. Finally, Chapter 16 assesses the contribution that economic analysis has made to the environmental rules under study and, within the confines of the existing laws, makes recommendations to improve the process.

Given the diverse array of issues considered in this volume, it is difficult to draw any general conclusions. Yet, one of the clear findings is that, despite their limitations, the group of economic analyses studied here made significant contributions to the improvement of the agency’s regulations. According to the case study authors, the economic analyses helped reduce the costs of all twelve of the rules studied and, at the same time they helped increase the benefits of five of the rules. The value of these rule improvements likely dwarfs the costs of conducting the economic analyses.

Another finding of this volume is that, even though the economic analyses clearly helped improve the quality of the rules, in many instances the economic analyses played only a minor role in actual decisionmaking. While many factors, including politics, could explain this situation, three possible explanations for the limited role of economic analyses are examined:

•  The underlying scientific and risk information was so uncertain that it provided an insufficient basis on which to conduct an economic analysis.

•  The economic analysis itself was technically flawed in one or more critical ways.

•  The economic analysis was not designed to address a sufficiently rich array of policy options and was thus rendered irrelevant to the actual policy and regulatory decisions.

In fact, all three explanations have currency, although the first and, particularly, the third explanation seem to be the most important. In some instances the economic analysis served little purpose as the underlying risk assessment on which it was based was so weak. In other instances, the policy options explored were so narrow and the range of outcomes so limited that the resulting economic analyses were of limited relevance to the policy process.

Consistent with recent environmental legislation, such as the Safe Drinking Water Act Amendments of 1996, and in an attempt to bring economic analyses into the mainstream of EPA rulemakings, it is proposed that a more open, stakeholder process be developed to conduct economic analyses. Toward that end, economic studies should be begun earlier and, throughout the process, studies should involve public input regarding both their design and conduct. The 1978 revisions to the regulations implementing the National Environmental Policy Act, which created a public process (referred to as a “scoping” process), offers one model for opening economic analyses to greater public involvement.

Fundamentally, there is no escaping economic analysis. If it is not done explicitly, with a careful consideration of alternative options, it will occur implicitly. In that case, decisionmaking will be driven by public fears, special interest lobbying, and bureaucratic preferences. The resulting policies are not likely to reflect the best interests of our citizenry. A key conclusion of this volume is that within the existing legal framework a series of administrative and procedural changes could help move economic analysis of environmental rulemakings more into the bright light of public view and the mainstream of agency decisionmaking.

REFERENCES

Stevens, William K. 1991. What Really Threatens the Environment? New York Times January 29.

2

The Legal and Institutional Setting for Economic Analysis at EPA

Richard D. Morgenstern

Americans have complicated and sometimes paradoxical attitudes toward the environment. More than ninety percent identify themselves as pro-environment and, in response to surveys, routinely express strong support for clean air, clean water, and generally stringent environmental goals. Yet surveys also find that individuals often resist specific policies, particularly when these policies entail direct financial or inconvenience costs. For instance, stringent automobile inspection and maintenance programs are opposed by almost as many people as favor clean air, even though the former help ensure the latter.

Not surprisingly, the laws and institutions that shape environmental policies in the United States—cutting across all branches of government—reflect some of these same paradoxes. Congress enacts the laws and, through the oversight process, influences their implementation. The courts interpret ambiguous legislative language and, sometimes, force agencies to meet specific statutory or court-ordered deadlines. Implementation responsibilities rest exclusively with the executive branch although, increasingly, these responsibilities are being delegated to the states. The U.S. Environmental Protection Agency (EPA) is primarily responsible for administering the major environmental statutes, with some duties also carried out by other departments of government. (Some environmental laws are not implemented by EPA. For instance, the Endangered Species Act is administered by the Fish and Wildlife Service, and various federal wetlands policies are administered by a number of agencies, including the Department of Agriculture and the Army Corps of Engineers).

This chapter focuses on the uneven and sometimes inconsistent manner in which economic considerations enter into environmental decisionmaking. The focus is on the laws, the executive orders issued by Presidents over the past quarter century, and the culture of EPA, the principal implementing institution. A short section of this chapter reviews the recent substantive and procedural provisions enacted in 1995 and 1996.

THE LAWS

Unlike most other agencies (such as the National Highway Traffic Safety Administration), EPA does not administer a single, organic statute. Instead, the EPA administrator implements nine major laws and more than a dozen minor statutes. Among the major statutes, six of them form the basis for the rules examined in this volume. Three of the laws—the Clean Air Act (CAA), Clean Water Act (CWA) and Safe Drinking Water Act (SDWA)—are based on the environmental medium in which pollution occurs; the Resource Conservation and Recovery Act (RCRA) focuses primarily on a single medium (land) but deals with other matters as well; the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) deals with a particular set of products; and the Toxic Substances Control Act (TSCA) deals with chemicals in general. While all these laws share a common theme of “protection of human health and the environment,” they differ in many respects, including the way economic considerations enter into the design and implementation of environmental policies.

Many of the environmental statutes set goals that, if interpreted literally, would virtually eliminate pollution or any harms therefrom. The Clean Air Act, for instance, directs the EPA administrator to set primary ambient air quality standards that, “…allowing an adequate margin of safety…protect the public health.” [Clean Air Act, Section 109 (b) (1)]. Economic considerations are not mentioned in the section dealing with setting these standards. The Clean Water Act states that “… it is the national goal that the discharge of pollutants into navigable waters … and … the discharge of toxic pollutants in toxic amounts be eliminated” [Clean Water Act, Section 101 (a)]. Yet, stated so broadly, these goals beg the question: how much protection is required? Since environmental protection almost always requires some effort, how much effort is enough? How much is too much? How much degradation can be allowed until the environment is no longer considered “protected”? Interestingly, it has been argued that this statutory commitment to perfection is an impediment to the functioning of the agency.¹

Most statutes leave it up to EPA to determine what specific requirements or limitations should be placed on the conduct of regulated entities. Typically, statutory language is general in nature, granting broad discretion to agency decisionmakers. These decisionmakers, in turn, are empowered to write rules and standards, to issue permits, and to develop and oversee requirements to help achieve environmental goals. Current methods of addressing environmental problems include:

• Ambient media standards, used as benchmarks for subsequent, more narrowly defined requirements (for instance, ambient air or water quality standards)

• Emission/effluent standards, which focus on pollution at the point of release into the environment and can themselves be defined in a variety of ways including:

• limits on total amounts released

• limits on concentrations discharged to effluent streams

• percentage reduction from uncontrolled levels

• rate of emission per unit of output (such as CWA effluent limits)

• Controls on the sale and use of products that have environmental effects when used or disposed of (for instance, mobile source regulations under Clean Air Act, controls on materials affecting stratospheric ozone, and pesticide regulation under FIFRA)

• Controls on contaminants in products directly consumed (such as the SDWA)

• Controls on operations of activities that manage or use hazardous materials (RCRA requirements for management, disposal, transportation of hazardous waste)

• Targets for remediation of past releases (such as RCRA corrective action)

• Controls to prevent degradation of targeted areas or resources (such as prevention of significant deterioration requirements under the Clean Air Act or nondegradation requirements under the Clean Water Act)

• Requirements for public reporting of information (such as the SWDA and EPCRA)

• Protection of workers from exposure during employment (such as FIFRA worker protection standards)

• Decision processes, procedures and certification training requirements for private abatement of hazards (such as the TSCA lead abatement program)

Much as the implementing mechanisms vary across statutes, so do the requirements for considering costs when a regulation is being developed. Sometimes the agency is granted broad discretionary authority to consider the economic impacts of its decisions. At times it is specifically required to consider economic factors. At other times it is explicitly prohibited from considering costs. Several court decisions have held that benefit-cost studies cannot be considered by agencies unless expressly authorized by statute.

Table 1 reviews the oportunities to use economic analysis under the six major statutes considered in this volume. TSCA and FIFRA contain explicit mandates...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Foreword
• Preface
• 1. Introduction to Economic Analyses at EPA
• 2. The Legal and Institutional Setting for Economic Analysis at EPA
• 3. Conducting an Economic Analysis: Rationale, Issues, and Requirements
• 4. Lead in Gasoline
• 5. Water Pollution and the Organic Chemicals Industry
• 6. Stratospheric-Ozone Depletion
• 7. Asbestos
• 8. Lead in Drinking Water
• 9. Municipal Landfill Management
• 10. Visibility at the Grand Canyon and the Navajo Generating Station
• 11. Agricultural Pesticides and Worker Protection
• 12. Vehicle Inspection/Maintenance
• 13. Municipal Sewage Sludge Management
• 14. Reformulated Gasoline
• 15. Great Lakes Water Quality Guidance
• 16. Economic Analysis: Benefits, Costs, Implications
• Appendix: Peer Reviewers