United States Office of
Environmental Protection Policy Analysis
Agency Washington, DC 20460 EPA-230/ 1-84-003 C0 1
Guidelines for Performing
Regulatory Impact Analysis
Do not remove. This document
should be retained in the EPA
Region 5 Library Collection.
U.S. Environmental Protection Agency
Region 5 Library (PL-12J)
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Chicago, IL 60604-3590
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December 1983
GUIDELINES FOR PERFORMING REGULATORY IMPACT ANALYSES
Page
INTRODUCTION 1
I. Schedules for OMB Review 3
II. Stating the Need for and Consequences 3
of the Proposal
III. Considering Alternative Approaches 4
IV. Assessing Benefits 6
V. Analyzing Costs 12
VI. Evaluating Benefits and Costs 15
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INTRODUCTION
On February 17, 1981, the President issued Executive Order
12291. According to this order, regulatory agencies must prepare
regulatory impact analyses (RIAs) on all major regulations. In
addition, before taking action, they must send all RIAs and pro-
posed regulations to the Office of Management and Budget (OMB) for
review.
An RIA assesses the analytical results of studies conducted
during a regulation's development.* Each RIA should calculate the
benefits and costs of a proposed regulation's full range of effects
and should compare them with those of other regulatory and nonregu-
latory approaches. For environmental regulations, this range
extends from the release of pollutants to their ultimate harmful
effects on humans and the environment.
Benefits and costs should be quantified and monetized'in the
RIA to the extent possible. The RIA should discuss fully benefits
and costs that cannot be quantified and should assess their impor-
tance relative to those that are quantified or monetized. When
many benefits cannot easily be monetized, or when law requires a
specific regulatory objective, cost-effectiveness analysis may be
used to evaluate regulatory alternatives.
These guidelines are designed to help analysts at the U.S.
Environmental Protection Agency (EPA) prepare RIAs that satisfy
OMB's requirements. They generally follow the outline of OMB's
guidance document, Interim Regulatory Impact Analysis Guidance,
and provide information on the types of analytical procedures that
can be used to satisfy the Executive Order's requirements. Spe-
cifically, they discuss the analytical techniques that may be used
and the information to be developed when (1) stating the need for
the proposed regulatory action; (2) examining alternative
approaches to the problem; (3) quantifying benefits and costs and
valuing them in dollar terms (where feasible); and (4) evaluating
the findings on benefits, costs, and distributional effects.
More detailed information on benefit analysis, cost analysis,
choice of discount rate, and analysis of distributional effects is
provided in appendices. The appendices elaborate on many of the
* It should incorporate all analyses required by the Regulatory
Flexibility Act and the Paperwork Reduction Act (the requirements
under the Paperwork Reduction Act replace EPA's requirement for a
"reports impact analysis"). However, OMB no longer requires an
"urban impact analysis."
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conceptual issues raised in the Guidelines and suggest how to pro-
ceed with the analysis.
The goal of regulatory impact analysis is to develop and
organize information on benefits, costs, and economic impacts so as
to clarify trade-offs among alternative regulatory options.* RIAs
may vary in terms of level of detail; quantification of benefits,
costs, and economic impacts; and precision of information. These
differences may result because of variations in the nature and
quantity of underlying data or in the adequacy of the available
analytical techniques, because of resource or time constraints, or
because some environmental problems or regulatory approaches are
less amenable to formal analysis. However, by developing and
organizing information, quantifying and monetizing benefits and
costs to the extent possible, and determining distributional
effects and economic impacts, the RIA should provide decision
makers with a comprehensive assessment of the implications of
alternative regulatory actions.
These Guidelines have been designed for evaluating specific
regulations controlling individual pollutants or particular waste
streams. They are not readily applicable to regulations for
generic information gathering, testing, and procedural rules. In
these situations, program offices should contact EPA's Office of
Policy, Planning and Evaluation and OMB in the early stages about
the procedures, extent of detail, and degree of quantification
appropriate for the RIA.
* When the Agency is legally precluded from using the information
provided in the RIA for regulatory decision making, the RIA
should set forth the legal basis for that determination.
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I. SCHEDULES FOR OMB REVIEW
The Executive Order specifies when RIAs are required and
establishes a schedule for rule making.*
0 For every major rule** with a notice of proposed rule
making, the Agency must submit:
- a preliminary RIA to OMB at least sixty days before
publishing the notice of proposed rule making and
- a final RIA and a final rule to OMB at least thirty
days before publishing the rule as final.
0 For every major nonemergency rule with no notice of pro-
posed rule making, the Agency must submit a final RIA to
OMB at least sixty days before publishing the rule as
final.
0 For all rules other than major rules, the Agency must sub-
mit every notice of proposed rule making and every final
rule to OMB at least ten days before publication. Although
a full-scale RIA will not be required, sufficient analysis
must be performed to demonstrate that the rule meets the
objectives of the Executive Order. At a minimum, this
should include cost and economic impact (distributional
effects) analyses.
II. STATING THE NEED FOR AND CONSEQUENCES OF THE PROPOSAL
An RIA should describe concisely the nature of the environ-
mental problem as perceived by the Agency, industry, labor, and
* OMB has no firm guidelines on deregulatory proposals. It exam-
ines each proposal separately to decide whether to waive the RIA
requirement.
** "'Major rule' means any regulation that is likely to result in:
(1) An annual effect on the economy of $100 million or more;
(2) A major increase in costs or prices for consumers, indi-
vidual industries, Federal, State, or local government
agencies, or geographic regions; or
(3) Significant adverse effects on competition, employment,
investment, productivity, innovation, or on the ability
of the United States-based enterprises to compete with
foreign-based enterprises in domestic or export markets.1
[Executive. Order 12291]
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public interest groups.* It should explain that the proposed
regulatory action is within the Agency's statutory authority and
should indicate whether specific action by the Agency is required by
statute. The RIA also should provide information on the follow-
ing points:**
o the market imperfections that necessitate regulatory
action;
o the pollutant creating the problem, its annual discharge
mass, and its principal sources, both now and, where
feasible, over the time horizon of the analysis;
o the degree of the pollutant's current or projected impact
on the environment, health and safety, and the economy;
i
o current control techniques and their effectiveness; and
o the amount or proportion (or both) of the pollutant that
the proposed regulatory action would control and the
resulting beneficial effects.
In stating the consequences of the proposed regulation, an RIA
should discuss how, if promulgated, the regulatory proposal would:
o improve the way the market functions (primarily through
internalizing the damages from pollution) or otherwise meet
the regulatory objectives, and
o produce better results than no regulatory change, taking
into account the possibility that regulation fails to
achieve its stated goals (this may result from poorly
designed rules, as well as from weakness in enforcement
and lack of compliance).
III. CONSIDERING ALTERNATIVE APPROACHES
The Executive Order requires that RIAs thoroughly examine the
most important regulatory alternatives. It also requires RIAs to
explain why the proposed approach has been selected.
In developing this part of the RIA, the analyst should first
define the baseline, which will be the standard against which the
* The Agency's public participation policy for the regulatory
process also applies to RIAs.
** Consult the Guidelines for Evaluation Planning, developed by
EPA's Office of Standards and Regulations.
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incremental benefits and costs of all alternative actions will be
compared. The baseline is what is likely to occur in the absence
of regulation. Certain analyses, such as those dealing with new
sources of pollution, way require more than one baseline because
of uncertainties about what might happen without the proposed
regulation.
The next step is to develop an initial set of regulatory
alternatives that would mitigate or eliminate the environmental
problem.* An RIA should consider four major types of alternatives.
o Alternatives to federal regulation. These include nego-
tiated voluntary actions and market, judicial, or state or
local regulatory mechanisms that could address the environ-
mental problem.
o Alternatives within the legislative provision's scope.
These include three broad categories of alternatives: the
degree of control, effective compliance dates, and methods
of ensuring compliance. The second category, for instance,
could involve issuing related regulations jointly to allow
the affected industries to modify their products or operat-
ions to comply simultaneously with all the regulations.
Alternative methods of ensuring compliance could involve
employing various enforcement options (e.g., on-site
inspections versus periodic reporting and sharing implemen-
tation responsibilities among the different levels of
government); using various compliance methods for different
segments of industry or types of economic activity where
costs of compliance vary sharply (e.g., different treatment
for small and large firms); or allowing variances under
certain conditions.
o Market-oriented regulatory alternatives (whether or not
they are explicitly authorized in the Agency's legisla-
tive mandate) . These methods include using information or
labeling to enable consumers or workers to evaluate hazards
themselves and using economic incentives, such as fees or
charges, marketable permits or offsets, changes in insur-
ance provisions, or changes in property rights.
o Major alternatives beyond the scope of the legislative
provision under which the proposed regulation is being
promulgated. These would include regulatory alternatives
that controlled other routes of exposure and that possibly
would be authorized under other legislation.
* Consult the Checklist of Regulatory Alternatives developed by
EPA's Office of Standards and Regulations.
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Often there may be a trade-off between considering more alter-
natives and developing more detailed, quantified, and reliable
benefit and cost estimates for fewer alternatives. In each case,
the choice will be subjective, taking into account the nature of
the environmental problem, current government regulations and
status of compliance, the amount of flexibility permitted by the
law governing the regulation under consideration, the schedule of
required action, and resource constraints.
IV. ASSESSING BENEFITS
The benefits of decreased pollution are the resulting improve-
ments in health and aesthetics and reductions in damages to plants,
animals, and materials. To measure benefits, one must ordinarily
follow a chain of events from (1) the release of pollutants by
industry, households, agriculture, and municipal sources to (2) the
impact of these releases on ambient quality to (3) exposures of
people, plants, animals, and materials through various media (air,
water, etc.) to (4) the adverse effects to (5), when feasible, what
people would pay to avoid these effects. Finally, the analysis of
benefits should cover the entire spectrum of benefits, from those
that can be assigned a dollar value to those that can only be des-
cribed qualitatively, and from those that are direct and immediate
to those that are remote in distance or time.
The direct chain of events is, in itself, complex to model.
Beyond that, one should take into account alternative behavior
that could mitigate the effects of pollution, such as using sub-
stitute materials and obtaining medical care. Thus, because of
the complexity of assessing benefits, the analysis should report
not only most likely estimates but also upper- and lower-confidence
limits.
Benefits should be measured relative to an assumed baseline.
All underlying assumptions should be consistent, and all related
information should be documented in detail and a form enabling
reproduction of the analysis.
QUANTIFYING HEALTH EFFECTS
To assess the health risks posed by a pollutant, one must have
information on the nature and extent of human exposure and on the
toxicity of the pollutant.* Such information may be used to esti-
mate the likely number and type of harmful effects, as well as to
characterize the uncertainty underlying the estimates. Often,
however, the information available may be insufficient to quanti-
tatively assess health effects.
* Health effects need not be quantified for some regulatory activ-
ities, such as information gathering, testing, and procedural
rules.
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A comprehensive analysis of health effects would include:
o evaluation of substances on a case-by-case basis;
o a discussion of the likelihood that the substance may be
harmful to humans and a description of the nature and
duration of the harmful effects (this should be based on a
weight-of-evidence evaluation of scientific information,
including the results of both positive and negative
studies);
o estimation of dose-response relationships to extrapolate
risk* at low doses or, if the information available for
noncarcinogens do not permit developing dose-response
relationships, determination of a no-observed-effect-level
or a related parameter (these should include a discussion
of the mechanism of action and the procedures used to
convert evidence from other organisms to predictions of
potential human effects);
o information on the exposure of people to the substance (this
should include the number of people in and the composition
of the exposed populations; the level, frequency, and
duration of their exposures; and the routes of exposure);
o an estimate of the distribution of risk to individuals or,
if information available for noncarcinogens do not permit
risk~s~to be quantrifTecr;a marg±n~of safety or recommended
limit of exposure (the population and age groups with
greater sensitivities should be identified where possible);
o an estimate of the expected number of adverse health
effects; and
o a discussion of the science policy judgements and uncer-
tainties present in all the analyses.
The Agency's ability to provide this information may vary,
depending on the quality and types of data available, the nature
of the harm, and the capability to predict exposures.
To the extent possible, an RIA should include information on
the types of adverse effects the suspect substance causes, whether
or not these effects are reversible, and whether they follow
single or repeated exposures. It should predict the magnitude,
pattern, and length of human exposure, along with the nature and
Risk is defined as the probability of experiencing an adverse
health effect from the pollutant under consideration.
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composition of the exposed groups (including sensitive subgroups).
Finally, it should combine the information on the substance's
toxicity with exposure estimates to predict the effect each regula-
tory alternative has on improving human health.
More specific guidance on evaluating the health effects of
carcinogens and noncarcinogens is provided below. It should be
recognized that risk assessment policies are updated from time
to time, and as changes are made these Guidelines will be modi-
fied appropriately.
Carcinogens
o Carcinogenic risk assessment should be on a case-by-case
basis.
o A determination of the likelihood that a substance is a
human carcinogen should be based on a weight-of-evidence
judgment. All available information from human epidemic-
logical studies and from animal studies should be evalu-
ated, along with evidence from short-term tests, studies
of comparative metabolism, structure-activity analysis and
other relevant toxicological and biological analysis. The
evaluation should consider the number and kind of tum-
origenic responses and their statistical significance, as
well as the quality of the available studies. Properly
evaluated animal data may be used to predict human
responses.
o A variety of models may be used to estimate the risk of
cancer at low doses, based on what is known about possible
mechanisms of action and the quality of data available.
Where possible, most likely estimates, as well as upper-
and lower-confidence limits, should be provided. When
lack of data or of scientific understanding prevent the
Agency from providing a "most likely" estimate, it may
use plausible upper-limit estimates of risk, so long as
they are identified as such.
o Where epidemiological data permit, the expected types of
cancer should be described in terms of the disabilities
they produce and their duration.
Some risk assessments will be more consistent with this guid-
ance than others due to differences in the amount and quality of
information available for specific substances, as well as uncer-
tainties in understanding of the disease.
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Noncarcinogens
o Noncarcinogenic health effects, which include target
organ toxicity, neurotoxicity, adverse reproductive
effects, and other health effects, should be evaluated
on a case-by-case basis. (These effects traditionally
have been evaluated similarly to each other, but as a
group in a different way from carcinogenicity.)
o An assessment of the likelihood that the substance causes
noncarcinogenic health effects should be based on a thor-
ough evaluation of human epidemiological studies and animal
studies. It should discuss the type of health effects,
their severity and potential reversibility, and whether
they may occur from single, repeated, or continuous
exposure.
o A judgment of the extent of potential health hazards
posed by a substance (at ambient concentrations or at
estimated dosages) should be based on an evaluation of
human or, more commonly, experimental animal studies in
which preselected uncertainty factors are applied to no
observed effect levels (NOEL) or other parameters to
determine the level below which human exposure should
fall. Alternatively, margins of safety can be computed
that express the ratio between the NOEL (or other para-
meters) and estimated human exposure. Judgments about
the adequacy of protection of public health can be based
on such ratios. Occasionally, more complete data may be
available and it may be possible to construct dose-response
functions for predicting health effects at alternative
exposure levels.
QUANTIFYING ENVIRONMENTAL EFFECTS
Pollution may also result in a number of environmental effects.
They include adverse effects on plants and animals, including
ecological disruptions and effects on endangered species; increased
soiling and materials damage; and adverse effects on recreational
activities and aesthetics. The objective of a benefits assessment
is to quantify these impacts in physical terms, provide measures
of the uncertainty inherent in the estimates, and trace the links
to human activities and values.
Where data permit, the analysis should consider the likely
actions individuals may take to mitigate the effects of pollution.
For instance, ozone may adversely affect agricultural productivity,
but farmers may lessen the impacts by planting different crops.
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Th e Agency's ability to provide this information will depend
on the quality and types of data available, the nature of the
environmental effects, and the ability to estimate the fate and
transport of substances in the environment.
VALUING HEALTH AND ENVIRONMENTAL EFFECTS
The major objective of economic valuation is to transform
estimates of changes in physical or biological effects into mone-
tary estimates of benefits. This is done by using the amount
individuals would pay for such changes as a measure of their
value, i.e., benefits should be measured in terms of willingness
to pay.
When markets exist, such as for consumer goods and services,
estimating benefits in terms of willingness to pay is essentially
a problem of estimating a demand curve from observed prices and
quantities. But organized markets for environmental quality
typically do not exist, even though people are willing to pay for
environmental improvements. Thus, other techniques for valuing
the health and environmental effects associated with regulatory
programs must be used.
Health Effects
Morbidity (illness) should be valued by estimating its direct
cost, unless it is feasible to use willingness to pay measures.
This estimate provides a lower bound on the value of morbidity.
It includes medical costs, loss of work and earnings, and impacts
on future productivity. Since this procedure does not consider
pain and suffering, as well as the value of time for sick people
who are not in the labor force, it is likely to underestimate the
benefits of reduced morbidity. It is also likely to ignore the
value of reducing the incidence of very subtle health effects
attributable to pollution, e.g. discomfort and impairments in
cognitive development.
Mortality may be valued either directly or indirectly through
the implicit valuation technique. In either approach, however, a
value is not placed on saving a particular individual's life.
Environmental regulations generally provide health benefits by
reducing the risk that people experience adverse health effects,
e.g., a regulation may reduce the probability that individuals
contract cancer over their lifetimes from 1 in 1,000 to 1 in 10,000,
The extent of likely improvements in health to the total population
may be estimated by aggregating the expected reductions in health
risks to individuals. When assessing potential life-threatening
illnesses, such as cancer, the resulting measure is termed "statis-
tical lives saved." Thus, "statistical lives saved" refers not to
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particular lives, but to the sum of small reductions in risk to
large numbers of people. This measure is useful for comparing
the aggregate health effects likely to result from regulatory
alternatives and for determining the relative cost of attaining
health benefits.
If mortality is to be valued directly, a range of values can
be used to determine the sensitivity of the results to alternative
values. Recent studies that measure how much people need to be
compensated to incur small risks provide a means for selecting
such values. For example, many of these studies examine the rela-
tionship between risks in the workplace, which typically range
between 1 in 100,000 and 1 in 1,000 on an annual basis, and wages.
They have found that annual wages are between about $4 and $70
higher for jobs with 1 in 100,000 greater risk. This translates
into a value for a statistical life of roughly $400,000 to $7,000,000
(in 1982 dollars).
Alternatively, mortality may be valued indirectly by calcu-
lating the implicit cost per statistical life saved. This is done
by subtracting the monetized benefits of- a regulatory alternative
from its costs and dividing the result by the estimated number
of statistical lives saved. When possible, the implicit cost per
statistical life saved should be calculated on an incremental basis,
i.e., dividing the change in costs (less benefits) between regu-
latory alernatives by the change in statistical lives saved. the
resulting implicit value may be evaluated in light of the compensa-
tion people have been observed to require to incur small risks or
the costs of other government regulations. However, when there
are other important nonmonetized benefits, the implicit valuation
technique will overestimate a regulation's cost per statistical
life saved.
Environmental Effects
There are four basic methods for valuing environmental
effects: direct cost, travel cost, property value, and contingent
valuation. All lead to estimates of what groups are willing to
pay to avoid the damages of the pollutant(s) to be regulated.
(These techniques sometimes may measure both nonhealth and health
effects.) However, each technique is best suited for estimating
only certain types of environmental benefits.
o The direct cost method is best suited for estimating the
the value of the commercial effects of reduced pollution,
such as reduced damage to fisheries, forests, and agricul-
ture and increased lifetimes of building or machinery. The
monetary value of these effects is estimated as the savings
in costs to industry and to consumers.
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o The travel cost method may be used to estimate the value
of the recreational effects of reduced pollution. Mone-
tary values are estimated by developing a demand curve
for recreational activities and determining how it would
change because of improvements to the environment.
o The property value method may be used to estimate the value
of the health, aesthetic, and recreational effects of
reduced pollution. This method relates differences in
property values to housing characteristics, location, and
environmental characteristics to infer the values placed on
environmental improvements.
o The contingent valuation method primarily has been used to
estimate the value of nonmarket goods and services, such as
improvements in aesthetics (gains in visibility or water
clarity and reductions in odor) and the preservation of
wildlife and wilderness areas. In this method people are
asked what they would be willing to pay to enjoy alterna-
tive levels of environmental quality.
A more detailed discussion of techniques for valuing envir-
onmental effects is provided in the appendix on benefits analysis.
V. ANALYZING COSTS
EPA generates cost estimates for a number of purposes during
the rule-making process. These estimates typically have been used
to help determine the economic effects of regulations on the regu-
lated community.
Performing cost analysis appropriate to the benefit-cost
assessment required in PIAs should involve more than predicting the
compliance costs of parties directly affected by regulation. It
requires estimating total costs to society, defined as the value
of goods and services lost by society resulting from the use of
resources to comply with and implement a regulation, and from
reductions in output. Thus, a comprehensive analysis adds up all
costs society incurs. These fall into four general categories:
private-sector real-resource costs, government regulatory costs,
dead-weight welfare losses, and adjustment costs (these costs are
described below). For most regulations, firms' real-resource costs
will account for nearly all the costs to society. Thus, adapting
Agency cost analyses to incorporate the total social cost concept
needed for RIAs usually will require only minor adjustments.
As in benefit analyses all assumptions underlying cost anal-
yses must be consistent and all related information should be docu-
mented in a form enabling reproduction of the analysis. To account
for uncertainty, most-likely estimates of costs should be presented,
along with cost ranges and statements about their likelihood.
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SELECTING A COST FRAMEWORK
The use of a static, partial-equilibrium analytical framework
is the most practical means for estimating total social costs.
This framework, in its most sophisticated form, is based on an
analysis of supply-and-demand relationships in the directly
affected markets.
When an industry is regulated, compliance requirements gener-
ally result in increased unit costs of production. This, in turn,
leads to an upward shift in the industry's supply curve, which
normally results in higher prices and a lower production level.
Compliance costs, and net welfare losses incurred by producers and
consumers because of decreased output, are measurable within this
framework; other costs, described below, are not.
Each of the unconventional regulatory alternatives (such as
user charges, offsets/bubbles, pollution indemnity) involves its
own particular set of cost considerations. These are discussed
in the appendix on cost analysis.
DEFINING THE COMPONENTS OF COST ANALYSIS
Baseline
The first step in estimating the costs of a regulation is to
determine the baseline what is likely to happen in the absence
of the regulation. The population of the regulated community must
be estimated, as well as the degree of pollution control that may
occur without the regulation.
Principal Cost
An estimate of the total costs that regulations impose on
society should begin with private real-resource costs. These are
pretax compliance costs, net of any transfer payments (e.g., emis-
sion fees, licensing fees, or subsidies). Compliance costs should
include costs imposed on both existing and new sources.
Calculating the net present value of compliance costs requires
adding the discounted stream of operating and maintenance costs to
the initial investment costs. In many cases compliance is not
required immediately, and the initial investment must be dis-
counted .
Estimates of private real-resource costs usually rely on
engineering cost estimates. They should be based on a realistic
appraisal of the equipment or process changes needed to meet the
requirements of each regulatory alternative. A most likely, as
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well as an upper- and lower-bound estimate of cost should be pro-
vided. For alternatives that do not involve engineering controls,
the cost analysis components will have to be modified accordingly.
For most regulations requiring the use of pollution control
technology, private real-resource costs will account for nearly
all of the total cost to society, and little further effort to
estimate costs is necessary. In some cases, however, other costs
to society may be significant.
Other Costs
Although some of the following costs are difficult to predict
and quantify, they should be considered when estimating total costs
to society. The amount of resources devoted to such analyses
should depend on the expected contribution of these costs to total
costs. If certain components are likely to be small, less analy-
tical effort should be used to measure them than when they are
likely to substantially change estimated total cost.
o Government Regulatory Costs Federal, state, and local
governments may incur costs to issue permits for affected
plants, to monitor performance, and to enforce compliance.
o Dead-Weight Welfare Loss Net losses in consumers' and
producers' surplus may occur from the decrease in output
of goods and services resulting from a regulatory action.
Generally these losses are a relatively small part of the
total costs to society, except when there are no readily
available substitutes for a product that is banned or that
has its use severely restricted. Dead-weight welfare loss
should be estimated within the conceptual framework dis-
cussed in the appendix on cost analysis.
o Adjustment Costs for Displaced Resources Regulatory
action often results in dislocation of labor and other pro-
ductive resources. Three types of costs may occur. First,
if an industry's production decreases, some of the
resources that had been required to produce the lost output
fail to be used elsewhere in the economy. The value of
resources that are reallocated to other markets is netted
out. Second, there is a resource reallocation cost, typi-
fied by a person's spending time and money looking for a
job and moving to a new location. Finally, society expends
resources to operate programs to help the unemployed (this
does not include transfer payments to individuals).
o Adverse Effects on Product Quality, Productivity, Innova-
tion, and Market Structure These effects should be
quantified to the extent possible or, at a minimum, dis-
cussed qualitatively.
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Th e analysis conducted to conform with the requirements of the
Paperwork Reduction Act should be incorporated into this section of
the RIA. The reporting requirements imposed on industry are a part
of principal costs, while those incurred by the Agency will be in the
"other costs" category.
VI. EVALUATING BENEFITS AND COSTS
The final section of an RIA should be a comprehensive evalua-
tion having the following elements:
o estimates of the net benefits of each major alternative,
based on the benefits and costs for which a dollar value
can be assigned, and a discussion of nonmonetizable or
unquantifiable benefits and costs;
o a schedule of all benefits and costs for each major alter-
native, including economic impacts and intergenerational
effects; and
o the results of cost-effectiveness analysis of major alter-
natives, when many benefits are not easily monetized or
when the law sets forth specific regulatory objectives.
ESTIMATING NET BENEFITS
The net benefits of each major alternative may be estimated by
subtracting the present value of monetary social costs (as defined
in section V) from the present value of monetary social benefits
(as defined in section IV). For this calculation the same baseline
must be used in both the benefit and cost analyses. Plausible
upper- and lower-bound estimates of net benefits should be pro-
vided, and the sensitivity of the net benefits estimate to varia-
tions in uncertain parameters (including the rate of compliance)
should be examined.
The choice of discount rate is critical in calculating the
present value of estimates of net benefits. OMB's Guidance
requires using an annual real discount rate of 10 percent. It
also states that "where it appears desirable, other discount rates
also may be used to test the sensitivity of the results."
In many instances, the present value of net benefits should be
calculated using an additional discount rate because a 10 percent
rate may not reflect the opportunity costs associated with (1) each
of the many ways of financing public investments, (2) differences
in their riskiness, (3) differences in the form of the benefits and
costs, and (4) differences in their distribution. Four alternative
approaches are available for selecting discount rates for benefit-
cost analyses of government programs and projects: shadow price of
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capital, opportunity cost, weighted average, and social rate of
time preference. One or more of these approaches may best fit the
particular economic circumstances of the regulation being con-
sidered. The appendix on discount rates provides more detail on
these approaches.
The net benefit estimate should be carefully evaluated in
light of all the effects that have been excluded because they could
not be assigned a dollar value. Thus, immediately following a net
benefit calculation, all benefits and costs that can only be quan-
tified, as well as all benefits and costs that can only be qualita-
tively described, should be presented and evaluated.
The incremental benefits, costs, and net benefits of moving
from one regulatory alternative to the next also should be pre-
sented. This should include a discussion of incremental changes
in quantified and qualitatively described benefits and costs.
Finally, this section should discuss other potential costs and
benefits that may be by-products of the proposed action. These
include transfers of the pollutant problem from one exposure medium
or program office jurisdiction to another, or possible exacerbation
of exposures for specific groups (e.g., very sensitive populations,
maximum exposure groups, or specific types of workers).
DEVELOPING SCHEDULES OF ALL BENEFITS AND COSTS
The criterion of economic efficiency used in benefit-cost
analysis is not designed to assess whether the distribution of the
benefits and costs of a particular regulatory action is equitable,
either among different groups at a point in time or among different
generations. Both E.O. 12291 and the Agency recognize that regula-
tory decisions should address distributional issues.
Thus, OMB's Guidance calls for schedules showing the distribu-
tion of benefits and costs. The benefit schedule should show the
type of benefit, to whom it will accrue, and when it will accrue.
The cost schedule should identify the type of cost (e.g., capital,
recurring), who will bear it, and when and where it will be
incurred. Important benefits or costs should be highlighted and
their relative importance to the dollar estimate of net benefits
should be assessed.
The part of the schedule showing the distribution of benefits
should be based on an analysis of the distribution of health risks
to the current population (developed in the section of the RIA that
assesses health effects), along with an analysis of intergenera-
tional equity. The part of the schedule showing the incidence of
costs should rely on the type of economic impact analysis the
Agency historically has performed.
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Analysis of Intergenerational Equity
Considering intergenerational equity is particularly important
for EPA because of the uneven distribution over time of the bene-
fits and costs of many environmental regulations. For regulatory
actions with intergenerational impacts time horizons exceeding
the 25- to 30-year range the economic efficiency criterion used
in benefit-cost analysis is less suitable as a guide for decision
making. For example, many people consider the major issue in dis-
posing of long-lived hazardous wastes as how to equitably dis-
tribute benefits and costs across generations.
No entirely satisfactory method exists for evaluating inter-
generational effects. For analytical purposes, several alternative
procedures may be helpful in portraying trade-offs in benefits and
costs between generations. These would include:
o discounting benefits and costs at a lower social rate of dis-
count, rather than at the rate of return on capital;
o indicating the number of years until net undiscounted benefits
become positive and the number of years and amounts by which
they remain positive; and
o directly comparing benefits to future generations with costs
to the current generation.
Economic Impact Analysis
The economic effects to be examined can be divided into two
general categories: (1) primary effects, which should be examined
in every case, and (2) secondary effects, which should be examined
if primary effects appear substantial or if there is reason to
believe that any of the categories of impacts are likely to be
important to the decision process. The primary effects consist of
changes in prices (for both producers and consumers), production,
industry profitability and capital availability (including plant
closures), and employment. The secondary effects are influences
on related markets, secondary employment, the community, the
balance of trade, and energy consumption.
Although many of the secondary effects may be negative, some
may be positive (such as expansions for producers of pollution con-
trol equipment or substitutes for the pollution-related product).
The appendix on economic impact analysis discusses techniques for
analyzing each of these effects.
Quantifiable economic effects can be estimated from a combina-
tion of financial and market analyses. For program offices that do
not have such sophisticated methods as simulation techniques, the
analysis should begin by segmenting the industry into categories of
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plants that will be similarly affected e.g., according to size
distribution, age, and pollution control process. Whenever pos-
sible, industrial analysis should be performed at a plant level of
detail for the affected segments. Long- and short-run effects
should be analyzed. Financial analysis, whether performed on an
actual plant-by-plant basis or for "model plants" that represent
significant industry segments, should normally be employed to
address economic impact issues. Real-resource effects should be
separated from transfers, so that efficiency considerations are
distinct from distributional concerns.
A discounted cash flow analysis should be used to determine
whether the value of projected future cash flows minus the costs
of pollution control (as indicated by engineering estimates of
compliance costs) is sufficient to continue operating the plant at
current levels. Where data are unavailable to perform this type
of analysis, a return-on-investment analysis should be performed.
Each of these analyses should assess how much of the cost
increases plants will be able to pass through. They should con-
sider both supply and demand factors. Financial analyses generally
should use both a most-likely estimate of cost pass-throughs for
(model) plants and a worst-case assumption of no cost pass-
throughs. They also should discuss the likelihood of there being
no cost pass-throughs.
ANALYZING COST-EFFECTIVENESS
When many benefits cannot easily be monetized, or when the law
sets forth a specific regulatory objective, the RIA should present
the results of a cost-effectiveness (CE) analysis. This will pro-
vide useful information to decision makers and conforms with the
Executive Order's requirement to minimize the cost of achieving
regulatory goals.
The cost-effectiveness of a regulatory alternative is calcu-
lated by dividing the annualized cost of the regulatory alternative
by a measure of its effectiveness. That measure may range from the
amount of the reduction in pollution to the ultimate improvements
in human health or the environment. Each measure has advantages
and disadvantages: "pounds of pollution removed" is the easiest to
calculate across a broad range of regulations but ignores wide dif-
ferences in pollutant toxicities and dilutions, "units of exposure
avoided" may require sophisticated dispersion models, and "statis-
tical lives saved" requires a detailed understanding of population
exposure and dose-response relationships. In general, the measure
of effectiveness used should be as close as possible to the final
effects thought to result from the regulation.
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CE analysis can be used to identify:
o the most efficient (least-cost) way of achieving a pre-
determined objective, such as avoiding a given level of
pollutant emissions or related health effects;*
o policies that maximize the level of a stated type of bene-
fit (e.g., reductions in exposure to a certain carcinogenic
pollutant) for a given compliance cost; and
o incremental trade-offs between successively more stringent
levels of control when there are no firm benchmarks that
must be attained.
CE analysis does not necessarily reveal what level of control
is reasonable. However, it can indicate which control measures or
policies are inferior options and, thus, usually should be an
integral part of benefit-cost analysis.
CE analysis also can be used to make comparisons across indus-
tries when the effects of emissions or discharges of pollutants
are similar. Regulations for controlling the same pollutant in
other industries can provide a general "range of reasonableness"
against which the cost-effectiveness of a proposed regulation
can be assessed. When properly conducted, comparative CE analysis
can take a stated goal for reductions in aggregate pollution and
determine which distribution of reductions in pollution across
industries is least costly.
Regulations established by different program offices within
the same medium should also be compared if possible. This requires
using comparable measures of effectiveness. Thus, either a pound of
a pollutant removed at one place must be similar to one reduced at
another, or more sophisticated measures of effectiveness must be
used. These would include dollars per exposure avoided or dollars
per health effect prevented. When feasible, this gives a compari-
son of "payoffs" relative to costs across program offices.
USING THE RIA IN DECISION MAKING
One of the purposes of E.O. 12291 is to improve the economic
efficiency of government regulations. In theory, this is achieved
by selecting regulatory options that maximize net social benefits.
Unfortunately, determining which regulatory options are best in
* Other criteria, such as legislative requirements, enforcement
problems, technological feasibility, or quantity and location of
total emissions abated, may preclude selecting the least-cost
solution in a regulatory decision.
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terms of economic efficiency often is made difficult by uncertain-
ties in data, by inadequacies in analytical techniques, and by the
presence of benefits and costs that can be quantified but not mone-
tized or that can only be qualitatively assessed. Thus, even if
the criterion of economic efficiency were the sole guide to policy
decisions, the analytical results of the PIA may not always point
unambiguously to a specific regulatory option as being superior.
Additionally, as recognized by E.G. 12291 and the Agency, reg-
ulatory decisions should address distributional issues. Analysis
can reveal the likely distribution of benefits and costs among
groups or between generations. But it cannot determine whether the
distribution is equitable or how distributional issues are to be
weighted relative to concerns about economic efficiency.
In view of the limitations of current analytical techniques
and the range of factors that may enter into decision making, the
RIA is best viewed as a document that organizes information and
comprehensively assesses the effects of alternative actions and the
trade-offs among them. The results should identify which regula-
tory alternatives are reasonable, while leaving considerable lati-
tude to decision makers in selecting the preferred regulatory
approach.
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