United States Science Advisory EPA-SAB-ACCACA-96-003
Environmental Board (1400) June 1996
Protection Agency
&EPA AN SAB REPORT: REVIEW
OF CLEAN AIR ACT
SECTION 812
RETROSPECTIVE STUDY OF
COSTS AND BENEFITS
ADVISORY COUNCIL ON CLEAN
AIR COMPLIANCE ANALYSIS
(ACCACA) REVIEW OF THE
AGENCY'S PROGRESS ON THE
RETROSPECTIVE STUDY OF
SECTION 812 CLEAN AIR ACT
BENEFITS AND COSTS FROM
1970 THROUGH 1990
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF THE ADMINISTRATOR
June 3,1996 SCIENCE ADVISORY BOARD
EPA-SAB-ACCACA-96-003
Honorable Carol M. Browner
Administrator
U.S. Environmental Protection Agency
401M Street, S.W.
Washington, DC 20460
Re: ACCACA Review of Progress on the Retrospective Study of Clean Air Act (CAA) Benefits
and Costs from 1970 through 1990
Dear Ms. Browner:
The Advisory Council on Clean Air Compliance Analysis (ACCACA, or the Council; formerly
known as the Clean Air Act Compliance Analysis Council, CAACAC) met on June 12 and 13, 1995.
This meeting, our first in two years, was devoted to a review of progress on the Congressionally
mandated retrospective study of the Clean Air Act (CAA) benefits and costs from 1970 through 1990
(CAA, 1970; 1990). In addition, we reviewed and accepted the June 6, 1995 draft report of the ACCACA
Physical Effects Review Subcommittee (PERS), which we transmitted to you as a final report on
September 29, 1995 (EPA-SAB-CAACAC-95-022), as well as an advisory dated September 28, 1995
(EPA-SAB-CAACAC-ADV-95-001). The above-cited'report and advisory summarizes and highlights
our deliberations of the PERS. This report conveys the Council's deliberations and advice on the
Agency's progress as of the June 12 and 13, 1995 review. We begin with some general remarks about the
study as a whole, address some important issues of style and presentation, present observations about
what appeared to be the main quantitatively most important issues, and conclude with discussions of a
range of specific issues that came before us.
The Council has reviewed the Agency's draft documents that are being prepared for the
Congressionally mandated retrospective study of benefits and costs from 1970 through 1990 under
Section 812 of the Clean Air Act (CAA). The Council stressed the importance of providing a sound
quantitative picture of total costs and benefits attributable to the CAA. Doing so requires distinguishing
clearly between central-case assumptions, which are appropriate for an unbiased analysis of this sort, and
worst-case assumptions appropriate for analysis of protective regulation. The Council stressed that the
report should also give a sound picture of the qualitative state of knowledge about all readily identifiable
effects of the CAA, whether or not they can be valued or even quantified.
With regard to risk and uncertainty, the Council believes that presentation of a single point
estimate is at best incomplete as a description of the state of knowledge, and at worst seriously
misleading. The Council stressed that the Agency should, where possible, compute and present
quantitative measures of uncertainty and that major sources of uncertainty should be described
qualitatively as a general matter. Because of controversies within the economics profession regarding
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Contingent Valuation (CV) methods, the Council believes that the methods used to derive valuation
estimates should be presented clearly and visibly.
On other issues of presentation, the Council advised that apparent anomalies in the draft chapters
should be corrected. We also advised that predicted employment changes should be deemphasized
because their significance is commonly misunderstood, and that predicted changes in Gross National
Product (GNP) be deemphasized because GNP also is inferior as a measure of economic welfare to Net
National Product (NNP) and Equivalent Variation (EV). The importance of disaggregating costs and
benefits where possible was stressed.
It appears that three quantities will be the most important determinants of total estimated
benefits: reductions in mortality due to reduced exposure to lead, reductions in mortality due to reduced
exposure to paniculate matter (PM), and the dollar value attached to lives saved. The Council devoted
considerable attention to the last two of these; available information did not permit extensive discussion
of lead-related mortality. As regards particulate matter, the Council discussion in June 1995 was clearly
not informed by the subsequent CAS AC review of Agency documents related to PM (see for instance,
U.S. EPA, 1996a, 1996b, and 1996c). We believe that the final treatment of PM-related mortality effects
in the retrospective study should be consistent with CASAC's final conclusions.
The Council stressed that the value of a statistical life is not uniform throughout the entire
population; it reflects the particular mortality risk-money tradeoff of the population being examined. We
argued that the Agency should make an effort to consider the ages at which death is being prevented by
the CAA and the expected health status of those who would have died because of air pollution but for the
C AA. The Agency must also resolve questions about how it is going to adjust the statistical value of life
to reflect issues pertaining to both quality and quantity of life. Four different approaches are offered, and
we urge the Agency to explore and compare them.
The Council identified and considered other significant issues, including the treatment of post-
1990 benefits, choice of discount rate(s), use of cost-of-illness estimates, valuing reductions in chronic
bronchitis, inputs to benefit analysis, relations between peak and average emissions, spatial extrapolation
of ozone concentrations, CAA effects on asset replacement decisions, and estimated impacts of lead
reduction on wages.
We appreciate the opportunity to review the progress to date on the CAA impact analysis and
look forward to receiving your responses to the major points raised in this report. We also look forward
to continued productive interaction with the Agency staff in this process on an important topic of interest
to many Americans.
Sincerely,
r. Richard Schmalensee, Chair
Advisory Council on Clean Air Compliance Analysis
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NOTICE
This report has been written as a part of the activities of the Science Advisory Board, a
public advisory group providing extramural scientific information and advice to the
Administrator and other officials of the Environmental Protection Agency. The Board is
structured to provide a balanced, expert assessment of scientific matters related to problems
facing the Agency. This report has not been reviewed for approval by the Agency; hence, the
comments of this report do not necessarily represent the views and policies of the Environmental
Protection Agency or of other Federal agencies. Any mention of trade names or commercial
products does not constitute endorsement or recommendation for use.
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ABSTRACT
The Advisory Council on Clean Air Compliance Analysis (ACCACA or the Council;
formerly known as the Clean Air Act Compliance Analysis Council, CAACAC) of the Science
Advisory Board (SAB) has reviewed Agency draft documents prepared for the retrospective
study of benefits and costs from 1970 through 1990 mandated under Section 812 of the Clean
Air Act (CAA). The Council stressed the importance of providing both a sound quantitative
picture of total costs and benefits attributable to the CAA and a sound qualitative picture of the
state of knowledge regarding all the CAA's readily identifiable effects, whether or not they can
be quantified. The Council stressed that quantitative measures of uncertainty should be
presented whenever possible, and major sources of uncertainty should always be described
qualitatively.
The Council advised that, because of ongoing controversies, the methods used to estimate
valuations should be clearly indicated. Several other issues of presentation were considered, and
the Council advised that predicted employment changes should be deemphasized, and costs and
benefits should be disaggregated where possible.
The Council devoted considerable attention to estimation of particulate-related mortality
changes and to valuation of mortality changes (including variations in the value of a statistical
life), as these are likely to be among the most important determinants of estimated total benefits.
The Council provided detailed technical advice on both topics, and stressed that the final
treatment of particulate-based mortality in the retrospective analysis should be consistent with
and should cite the Clean Air Scientific Advisory Committee's (CASAC) ultimate conclusions,
taking into account that key issues in this area are studies in which mortality should be based and
that the purposes of the retrospective cost-benefit study and the CASAC analysis are different.
Other significant issues were identified and advice was offered on a number of topics,
including the treatment of post-1990 benefits, choice of discount rate(s), use of cost of illness
estimates, valuing reductions in chronic bronchitis, inputs to benefit analysis (including dollar
value attached to lives saved), relations between peak and average emissions, spatial
extrapolation of ozone concentrations, CAA effects on asset replacement decisions, and
estimated impacts of lead reduction on wages.
Key Words: Air Pollutants, Clean Air Act, Contingent Valuation Methodology, Cost-Benefit
Analysis, Economic Valuation, Valuation Methodologies
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U.S. ENVIRONMENTAL PROTECTION AGENCY
SCIENCE ADVISORY BOARD
ADVISORY COUNCIL ON CLEAN AIR COMPLIANCE ANALYSIS
(ACCACA)
Chair;
Dr. Richard Schmalensee, Sloan School of Management, Massachusetts Institute of Technology,
Cambridge, MA
Members:
Dr. Maureen Cropper, The World Bank, Washington, DC
Dr. Ronald G. Cummings, Policy Research Center, Georgia State University, Atlanta, GA
Dr. Daniel Dudek1, Environmental Defense Fund, New York City, NY
Dr. A. Myrick Freeman, Department of Economics, Bowdoin College, Brunswick, ME
Dr. Robert Mendelsohn, Yale University, School of Forestry, New Haven, CT
Dr. William Nordhaus, Department of Economics, Yale University, New Haven, CT
Dr. Wallace E. Oates, Department of Economics, University of Maryland, College Park, MD
Dr. Paul R. Portney, Resources for the Future, Washington, DC
Dr. Thomas H. Tietenberg, Department of Economics, Colby College, Waterville, ME
Dr. W. Kip Viscusi, Department of Economics, Duke University, Durham, NC
SAB Committee Liaisons:
Dr. William Copper, Environmental Processes and Effects Committee (EPEC), Institute for
Environmental Toxicity, Michigan State University, East Lansing, MI
Dr. Paul Lioy, Integrated Human Exposure Committee (THEC), Department of Environmental
and Community Medicine, Robert Wood Johnson School of Medicine, Piscataway, NJ
Dr. Wayne M. Kachel, Environmental Engineering Committee (EEC); Mele Associates, Brooks
Air Force Base, TX
Although a member of the Council, Dr. Dudek was unavailable to participate in this specific review.
111
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Dr. George T. Wolff, Clean Air Scientific Advisory Committee (CASAC), General Motors
Environmental and Energy Staff, Detroit, MI
SAB Staff;
Dr. K. Jack Kooyoomjian, Designated Federal Official, ACCACA, U. S. Science Advisory
Board (SAB) (HOOF), 401 M Street, S.W., Washington, DC 20460
Mrs. Diana L. Pozun, Staff Secretary, ACCACA, U. S. Science Advisory Board (SAB) (1400F),
401 M Street, S.W., Washington, DC 20460
IV
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TABLE OF CONTENTS
1. GENERAL REMARKS 1
2. STYLE AND PRESENTATION 3
2.1 Risk and Uncertainty 3
2.2 Contingent Valuation 3
2.3 Ambiguities and Anomalies 3
2.4 Costs and Employment 4
2.5 Macroeconomic Modeling 4
2.6 Disaggregation of Costs and Benefits 5
3. MAIN QUANTITATIVE ISSUES 6
3.1 Particulate-Related Mortality 6
3.2 Valuing Reductions in Mortality 6
4. OTHER SIGNIFICANT ISSUES 9
4.1 Post-1990 Benefits 9
4.2 Discount Rate 9
4.3 Cost-of-Illness (COI) Estimates 9
4.4 Morbidity/Chronic Bronchitis 10
4.5 Benefit Analysis Inputs 10
4.6 Peak v. Average Emissions 11
. 4.7 Extrapolation of Ozone Concentrations 11
4.8 Asset Replacement Decisions 11
4.9 Effects of the Lead Documents 12
REFERENCES R-l
APPENDIX A - GLOSSARY OF TERMS AND ACRONYMS A-l
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1. GENERAL REMARKS
The Council [also known as the Advisory Council on Clean Air Compliance Analysis
(ACCACA), and formerly referred to as the Clean Air Act Compliance Analysis Council
(CAACAC)] is encouraged that the Agency has made significant progress on this important and
complex study in the two years since our previous meeting. We are encouraged that the Agency
is undertaking serious and credible analysis (in the face of tight budget constraints) and is
attempting to present that analysis in a clear and balanced fashion. We are also pleased that the
Agency is apparently eager to finish this study and to move on to the more important prospective
study of the benefits and costs of the 1990 Clean Air Act Amendments (CAAA) (CAA, 1990).
We were disappointed, however, to learn that the Agency's internal scientific resources,
particularly those in the Office of Research and Development (ORD), were still not significantly
engaged in the Section 812 study. Given the nature of many of the problems with which this
study is concerned, the in-house ORD scientists would bring an essential perspective and could
make vital contributions. To this end, we strongly recommend their participation in this
exercise.
It is important to note, however, that while speed may now be desirable, haste is not. The
retrospective study will almost certainly have a significant impact on environmental policy
debates. In order for that impact to be constructive, the study must be honest and credible and
able to withstand serious technical criticism. Its results must be presented clearly and in ways
that meet the needs of both specialist and non-specialist audiences. To this end, a report
structure with short summary chapters backed by detailed technical appendices seems like a
sound approach. It is also important to accomplish three distinct but interrelated substantive
objectives.
First, the report should present a sound quantitative picture of total costs and benefits
attributable to the CAA. In order to avoid unnecessary tension between this study and other
EPA publications, it is important to distinguish clearly between central-case assumptions,
appropriate for an unbiased analysis of this sort, and worst-case assumptions appropriate for
protective regulation. (This may be particularly important in the case of air toxics.)
Second, the report should present a sound qualitative picture of the state of knowledge
regarding all readily identifiable effects of the CAA, whether or not they can be valued or even
quantified. Completeness is important here, particularly as regards ecological impacts, which
some have argued may have social and political significance disproportionate to dollar amounts
that can be justifiably assigned to them. Similarly, due attention can be paid to environmental
problems that persisted during the 1970-90 period but were addressed in a sounder fashion in the
1990 CAAA. Distinctions should also be clearly made between effects that are well understood
physically but cannot be valued, effects that are, not well understood but for which rough
magnitudes are known, and effects that are simply uncertain. For credibility, worst case
language (e.g., "could be as much as X") should be used sparingly in cases of the latter sort.
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Third, if the first two objectives are met, the study will have significant implications for
the nation's environmental research agenda and for the desirability of alternative monitoring
strategies. A third objective is to present and defend those implications clearly.
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2. STYLE AND PRESENTATION
2.1 Risk and Uncertainty
Perhaps the most significant shortcoming of the draft report material we were asked to
review was its treatment of uncertainty. In areas where there is significant uncertainty, and this
is essentially all the areas addressed by the report, presentation of a single point estimate is at
best incomplete as a description of the state of knowledge and at worst seriously misleading.
Where possible, standard errors or related measures of uncertainty should be computed and
presented, with major sources of uncertainty described qualitatively. We recognize that in some
phases of the analysis, time and budget constraints effectively rule out any quantitative treatment
of uncertainty. It is then even more important to provide a complete qualitative treatment of
sources of uncertainty and their rough importance. We note, in addition, the direct logical
correspondence between important sources of uncertainty regarding costs and benefits, on the
one hand, and desirable research priorities, on the other.
2.2 Contingent Valuation
Members of the Council hold a wide range of opinions on the proper scope for the use of
Contingent Valuation (CV) methods and the appropriate criteria to be used in assessing
individual CV studies. CV methods are controversial within the economics profession. We do
not believe that this Council should attempt to resolve this controversy, but neither do we believe
that this study should ignore it. In discussions of valuation, the text should indicate the methods
primarily relied upon in each case, and citations should be given to debates regarding the validity
of CV and, as necessary, other methods. Serious consideration should be given to visually
indicating the methods used to derive estimated values, perhaps by using asterisks and similar
characters, in some or all tables. (To put this in perspective, some Council members would
strongly prefer that CV not be used at all in this study, while others would object to any
suggestion that CV methods are more suspect a priori than others, particularly in the context of
valuing health benefits.)
2.3 Ambiguities and Anomalies
The Council review of the draft chapters revealed a number of presentation problems that
could cause problems for the study's readers in Congress and elsewhere. The roles of model
outputs as against actual data in the control case need to be clarified in the text, and it would be
desirable to provide some indications in appendixes of the fit between model outputs and data
for this case. In addition, it is important to be clear, probably in an appendix, about the exact
role of the Jorgenson-Wilcoxen (J/W) model as an integrating device, especially as regards
consistency between aggregate and sectoral predictions from the J/W model and assumptions
made elsewhere in the analysis.
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The materials we reviewed contained a number of apparent anomalies, such as increases
in emissions apparently caused by the CAA and an odd spatial pattern of changes in acid
deposition. These sorts of things catch readers' attention and can be used to attack the whole
study. They should at least be dealt with in footnotes when they appear. In addition, the choice
of units in which results are presented can cause sound results to appear anomalous. As a
general rule, results should be presented in units that readers can readily understand or, if it is
unclear how to do this, they should be presented in units that relate directly to benefits.
2.4 Costs and Employment
We feel strongly that predicted employment changes from the J/W model should be
deemphasized in their presentation. This is not because we necessarily believe that these
predictions are flawed. The main problem is that presenting employment changes is likely to
encourage readers in the persistent error of trying to think of the costs - and sometimes even the
benefits - of environmental programs in terms of job changes. In fact, the Agency would serve at
least the cause of clear thinking about its programs if this study contained a paragraph or two
noting that the cost of environmental protection is best measured by reductions in national
productivity; that environmental programs are unlikely to affect aggregate employment; and that,
as a consequence, jobs in "the environmental protection sector" are a cost, not a benefit, because
they represent the use of valuable labor worker hours that could be used to produce other goods
and services. (The benefits of allocating labor and other resources to environmental protection
may, of course, outweigh these costs.)
2.5 Macroeconomic Modeling
In earlier comment, the Council suggested that better measures of economic costs on
impacts should be employed. In the latest draft from the Agency, the main measure of economic
welfare is Gross National Product (GNP). The Council views this as an unsatisfactory measure
for a number of reasons, the chief of which is that any change relative to a baseline includes
capital depreciation.
The Council would propose using three alternative measures when the Report to
Congress presents a summary of the results on the economic costs, namely: (a) the direct cost of
compliance — a first-order estimate without any feedback; (b) Net National Product (NNP),
which is total consumption plus net capital formation — widely understood by most non-
economist readers and quite close to the appropriate measure; and (c) Equivalent Variation (EV),
such as was used by Jorgenson, Slesnick and Wilcoxen (1992), employing an intertemporal
utility function for infinitely lived "dynasties" with different demographic characteristics - a
slightly better measure than NNP in principle because it includes (estimated) non-market output.
The study is useful in allowing a decomposition of Endogenous Technological Change
(ETC) from Factor Substitution (FS). The current baseline simulation includes ETC as the
standard scenario. (For clarity, "endogenous technological change" means that the evolution of
production functions are affected by factor prices or policy variables.) The Council was
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concerned that ETC is an unusual specification in the economic growth literature and suggests
that EPA present the case with no ETC as a highlighted alternative1.
The Council's understanding was that the costs without ETC were approximately one-
half of the costs with ETC, and this non-standard model could therefore exaggerate the costs. In
addition, some CAACAC members were concerned that other technological or productivity
effects, such as the impact of the health effects of pollution on productivity, were omitted from
the macroeconomic modeling, so the technological benefits of removing the CAA might well be
overstated.
Finally, the Council notes that there is some inconsistency in the use of the J/W model in
the detailed sectoral analysis. The original philosophy had been to use the J/W sectoral outputs
as the drivers of the individual pollution models. EPA should clarify whether this was done and,
if not, what inconsistencies arise between the sectoral assumptions and the J/W model.
2.6 Disaggregation of Costs and Benefits
While there is undoubtedly interest in the aggregate benefits and aggregate costs of all
CAA programs combined, many readers will want to know about the costs and benefits of
specific provisions of the Act, such as those dealing with mobile sources. If only because others
will surely attempt to compute such quantities using information from the final report, the final
report must itself address disaggregation of this sort - both to show what can be done and to lay
out what can't be done. It is clear, for instance, that it is difficult to express even the direct costs
of pollution control on a pollutant-by-pollutant basis, for at least two reasons. First, certain
controls (e.g., those on mobile sources) reduce several pollutants simultaneously. This raises the
difficult problem of apportioning cost among joint products. Second, some pollutants (including
sulfur dioxide, nitrogen dioxide, and volatile organic chemicals) are transformed in the
atmosphere in part into paniculate matter and/or ozone. For example, while it may be possible
to determine the fraction of paniculate matter that comes from, e.g., sulfur dioxide, this does not
help in determining the fraction of the cost of controlling sulfur dioxide that should be ascribed
to particulates.
It may be better to work with broad programs (e.g., mobile sources) to which costs can be
more easily assigned. This raises the problem of apportioning emissions/exposure reductions
across programs. This may be difficult to do even roughly for ozone and perhaps also for
particulates. Still, here as elsewhere, rough approximations may be a good deal more useful to
all concerned than blank pages.
2 Dr. Nordhaus notes that the Council had an earlier comment along these lines, and strongly recommends
that both versions be calculated and presented for each of the major experiments.
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3. MAIN QUANTITATIVE ISSUES
It appears that three quantities will be the most important determinants of total benefits:
reductions in mortality due to reduced exposure to lead, reductions in mortality due to reduced
exposure to particulate matter (PM) and possibly ozone, and the dollar value attached to lives
saved. While sensitivity analysis is generally desirable, it is particularly desirable that the study
contain careful examinations of the consequences of alternative assumptions and methods
relating to these three quantities. We were given only a few pages on lead-related mortality and
hence cannot deal with related issues in this report. Our views on issues related to the other two
quantities follow.
3.1 Particulate-Related Mortality
Since the Council meeting in June 1995, the Clean Air Scientific Advisory Committee
(CAS AC) has conducted thorough reviews of EPA documents (U.S. EPA,1996a, 1996b and
1996c). We believe that the final treatment of particulate-related mortality in the retrospective
analysis should be consistent with (and should cite) CASAC's ultimate conclusions, taking into
account that key issues in this area are studies in which mortality should be based and that the
purposes of the retrospective cost-benefit study and the CAS AC analysis are different.
A minor issue is the approach to be taken to estimating ambient PM concentrations in
counties without PM monitors. The Council believes that the importance of PM-related benefits
justifies devoting resources to developing extrapolation methods that sensibly use relevant
information - and to presenting clearly the residual uncertainty in exposure levels. We note, for
instance, that visibility may serve as a good marker for concentrations of fine particulates, that
rural and urban counties can be expected to differ systematically, and that information is
available regarding the rules for deciding where monitors are placed and on the distribution of
concentration across existing monitors.
3.2 Valuing Reductions in Mortality
The value of the mortality benefits of reducing air pollution is clearly central to the EPA
analysis. In the draft report, estimates derived from wage-risk tradeoffs are used to derive
implicit values of a statistical life. This approach yields a value of life of around $5 million,
consistent with the wage/risk evidence.
It should be emphasized, however, that the value of a statistical life is not uniform
throughout the entire population. Rather, it reflects the particular mortality risk-money tradeoff
of the population being examined. In the case of wage-risk studies, the population group under
scrutiny consists primarily of white male blue-collar workers. These individuals may have quite
different attitudes toward mortality risk than, for example, people with many more years of life
at risk (such as college students) or people whose life expectancy is much lower (such as those
with terminal diseases). It should also be noted that the workers in these wage-risk studies self-
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selected themselves into risky jobs. Individuals exposed to risk involuntarily through the effects
of air pollution may be more reluctant to bear mortality risk than workers who have been
compensated for the risks they face.
The mortality risk effects may be quite different - both in terms of the nature of the death
and the duration of life effects - from those examined in the existing job risk literature. Air
pollution related deaths from, for example, respiratory failure may have a different value to the
victim than being killed through a traumatic on-the-job injury. If a principal effect of air
pollution is to lead to the deaths of those who have terminal cases of lung cancer, for example,
then the amount of life expectancy that is added through pollution reduction will be small, and
the quality of life that will be affected will be low as well. Alternatively, if air pollution control
primarily prevents the deaths of infants and young children who are asthmatics, then the per
capita number of years and quality of life at risk would be much larger. Before attempting to
attach dollar values to mortality risk effects, it is essential to obtain a quantitative sense of the
distribution of mortality effects along dimensions such as these.
Although we understand that the present state of epidemiological knowledge is
inadequate to do this in a fully satisfactory manner, the Agency should make an effort to deal
with two issues. First, the character of the mortality effects to be valued should be delineated
much more precisely. In particular, whose lives are being extended? (Statistical life extension
should be the focus of the analysis, since air pollution programs extend lives but do not confer
immortality.) At what ages are deaths being prevented? There is some evidence that would
enable the Agency at least to establish different risk levels for those 65 years and over and those
under 65 years of age. Second, it is desirable to know the expected health status of those who
would have died because of air pollution if it had not been for the Clean Air Act. Thus, the
overall intent is to obtain some assessment of both the quality and quantity of the lives that are
affected.
The Agency must also resolve questions about how it is going to adjust the statistical
value of life to reflect issues pertaining to both quality and quantity of life. We offer below four
different possibilities and urge EPA to explore several of them to provide a sensitivity analysis
with respect to benefit assessment.
First, the Agency could undertake original research to ascertain the benefit values. In
particular, using survey methodologies it is possible to assess risk-money tradeoffs among
respondent groups who are quite different from those involved in job risk studies. Such a survey
may not be feasible for this study, but exploring these issues should be a long-run concern of
EPA, since the Agency regularly confronts the benefit assessment problems we discuss here.
Second, there could be an explicit quantity adjustment to reflect the amount of life lost.
One possible approach here is to make an adjustment using the discounted expected number of
life years for those affected by the air pollution reduction and to scale the mortality risk value by
the ratio of the discounted expected life years saved to the discounted expected life years at risk
for a typical worker in a wage-risk study. Although various estimates of the implicit rate of
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discount among workers exist, use of a riskless (real) rate of return in this calculation seems
appropriate and is not inconsistent with the confidence intervals for the estimated discount rates
in the literature.
A third approach is to value the changes in the value of life based on estimates in the
literature on how this value varies with age. The survey results that appear in Jones-Lee et al.
(1985) and Jones-Lee (1989) for example, explore how the value of life in England for
transportation safety decisions varies with individual age. These relative value figures could be
used to rescale value of life numbers. Similar survey evidence might also exist for the United
States. In addition, the EPA cites estimates in various studies by Moore and Viscusi (1988,
1990a, 1990b) and Viscusi and Moore (1989) of the implicit discount rate of workers. As part of
these studies, the variation in the implicit value of life with age is estimated.
A fourth sensitivity analysis would focus on quality-adjusted life years. Not all the lives
at risk may be those of individuals in good health. For some health outcomes, it is possible to
establish laseline values that enable one to calculate the change in the value that has been lost.
For example, if the initial health status is chronic bronchitis attributable to cigarette smoking,
then the EPA benefit assessment for chronic bronchitis provides an index of the welfare that has
already been lost because of this disease. Thus, the health value loss associated with deaths of
people with chronic bronchitis not due to chronic air pollution exposure could be calculated, at
least for illustrative purposes, using both the chronic bronchitis and the mortality estimates in
conjunction with one another.
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4. OTHER SIGNIFICANT ISSUES
4.1 Post-1990 Benefits
The benefit series in principle includes only gains associated with pre-1990 emissions
reductions, although, because of latency periods, those gains include post-1990 deaths averted.
The cost series, in contrast, include pre-1990 outlays for capital goods that reduced emissions
after 1990 as well as before. The easiest way to avoid this mis-match is to replace the
acquisition costs of capital goods with their annual user costs (or rental costs), using judgmental
estimates (informed by the Bureau of Economic Analysis (BE A)) of sector-specific average
lifetimes and depreciation schedules. We recommend that a day or two be devoted to a back-of-
the-envelope exercise here to see if it has a substantial impact on the study's conclusions.
4.2 Discount Rate
Like most groups of economists, the Council members hold a range of opinions regarding
the best discount rate to employ in this study. It is important (and easy) to test the sensitivity of
the study's conclusions to the use of alternative plausible discount rates. It is also important to
be internally consistent in the use of discounting: if the rate used to compute annual user costs of
capital goods does not equal the rate used to discount benefits, there should be a sound economic
reason for the difference. (It should go without saying that real and nominal magnitudes and real
and nominal discount rates should be employed in a consistent fashion. Nominal discount rates
should not be used to value real streams, for instance.)
4.3 Cost-of-niness (COI) Estimates
Although the study attempts to value reductions in morbidity primarily by what
individuals would be willing to pay for such reductions, the cost of medical treatment and
foregone earnings (the so-called cost-of-illness, COI, approach) is sometimes used for this
purpose. Cost-of-illness estimates, when based on reliable data can be a useful adjunct to
willingness to pay. (See the discussion of contingent valuation above, however.) In some cases
(see Harrington and Portney (1987)), they can be used as a lower bound on willingness to pay.
Care should be taken in presenting COI estimates, however. In particular, a distinction
should be made between COI estimates based on large national surveys (such as the National
Medical Care Expenditure Survey, see for instance, U.S. NCHSR/NMCES (1981)) and those
based on small samples (such as Berger et al. (1987)). In fact, the latter numbers should not be
reported. When COI estimates are reported, it should be made clear whether they include
foregone earnings as well as medical costs (as would be preferable) or only medical costs.
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4.4 Morbidity/Chronic Bronchitis
The dollar values assigned by Industrial Economics, Inc. (See Industrial Economics
Incorporated (1993f)) to avoiding a case of chronic bronchitis seem too high. These estimates
are based on two articles, Viscusi et al. (1991) and Krupnick and Cropper (1992). Each study
values a health outcome — chronic emphysema ~ much more severe and of longer duration than
a typical chronic bronchitis episode, so that these numbers will substantially overstate the
pertinent benefit value for policy analysis. There is a confusion between a "case" of chronic
bronchitis, and an "episode" of chronic bronchitis exacerbation. There is certainly a greater cost
in the creation of a "case," following chronic irritant exposure, than in each of the multiple
exacerbations of their symptoms following a peak level of daily exposure.
Both studies value willingness-to-pay (WTP) to avoid a statistical case of chronic
bronchitis by asking respondents to trade risk of chronic bronchitis for risk of auto death and by
asking respondents to trade risk of chronic bronchitis for changes in the cost of living. The
former approach yields, for each respondent, the number of auto deaths that are equivalent to a
case of chronic bronchitis — call this N. The dollar value of a case of chronic bronchitis is then
obtained by multiplying N by some dollar value of an auto death. The second approach yields a
direct estimate of the value of a statistical case of chronic bronchitis.
All of the Viscusi numbers should be regarded as upper bound or overestimates, since the
health outcome being avoided is more severe. The value recommended by Industrial
Economics( See Industrial Economics Incorporated (1993f)) is based on the first approach, with
the value of a statistical life based on unrelated labor market studies used for valuation. At least
four alternative approaches are superior, (a) Using the second ~ direct — approach would yield a
value of $883,000 based on the mean of the Viscusi et al. (1991) data, (b) Because the
distribution of responses in the Viscusi et al. (1991) study is skewed, it may be more appropriate
to use the median of the distribution, which is $457,000. Values (a) and (b) are the most
defensible estimates, since they are based on the direct preferences expressed within the survey.
(c) The description of the case of chronic bronchitis to be valued in the Viscusi et al. (1991)
study was of a case more severe than is typical. (It was similar to advanced emphysema.) After
adjusting for differences in severity, Rowe et al. (1994) recommended a value per case of
chronic bronchitis avoided of $210,000 in 1992 dollars, (d) If one insists on the first -- two stage
~ approach, the Viscusi et al. (1991) estimate of the value of an auto death should be used along
with the survey's assessment of the auto death equivalent of chronic bronchitis to ensure internal
consistency. High skewness of the reported auto death values argues for using the median value,
which leads to a value of $800,000 for avoiding a case of chronic bronchitis.
4.5 Benefit Analysis Inputs
We naturally urge the Agency to consider all sound, publicly available studies of
pollution effects in its analysis. In particular, the National Acid Precipitation Assessment Project
(NAPAP) work on impacts of acid deposition on forests, aquatic ecosystems, and materials and
the literature on pollution's effects on agriculture should be taken into account. The Agency's
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own work on impacts should also be considered, of course, but with the usual caveat that this
study should employ measures of central tendency (means or medians), not upper bounds.
4.6 Peak v. Average Emissions
Where standards relate to peak emissions, controls can be expected to hit the right tail of
the intertemporal distribution of emissions harder than the mean, thus changing the shape of the
distribution. Since the effect on peak emissions is expected to be much larger, using
proportional rules to scale up the consequences of aggregate emissions reductions is likely to
produce biased estimates. The report should at least note those coefficients that are subject to
this bias.3
4.7 Extrapolation of Ozone Concentrations
We were asked orally about the estimation of ozone concentrations in areas distant from
monitors. (In addition to PM and ozone, similar extrapolation problems apparently arise with
regard to SO2, NOX, and other pollutants, but we were unable to consider those problems in
detail.) We were shown evidence that simple extrapolation procedures based on 20-kilometer
and 50-kilometer circles around existing monitors yielded very similar results. We believe that
this justifies using an average of the results of the two procedures. We also believe, however,
that modest efforts to incorporate information from regional ozone models and data on land use
(particularly on the importance of agriculture and forests) may produce better estimates.
4.8 Asset Replacement Decisions
It is our understanding that the study assumes new automobile sales are the same in the
control and no-control scenarios. In fact, the work of Gruenspect (1982) and others indicates
that pollution control requirements tended to reduce new car sales in the real world as compared
to the no-control case and thus increase fleet age and emissions, at least in the short run. Though
this effect seems likely to be of little quantitative importance, it should be acknowledged.
More important, the study apparently assumes that controls had no effect on electric
utilities' decisions regarding generating unit retirements. It is generally believed, however, that
the new-source bias of environmental regulation has tended to delay generating unit retirements
substantially (see Maloney and Brady (1988) and Nelson et al. (1993)). Thus, in the no-control
scenario, the stock of generating units would tend to be younger than in the control scenario;
and, because of the longevity of the equipment involved, this transitional effect would likely
persist throughout the study period. This difference would tend to reduce emissions in the no-
control case, all else equal, because new units would generally be considerably more thermally
3 The Council also notes that Professor J.V. Henderson of Brown University has completed a good deal
of empirical research for the National Science Foundation on how average and peak emissions have
responded to the CAA. Since we do not believe this work has yet been published, the Agency staff may want
to discuss his findings with him directly.
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efficient than the old units they would replace. In addition, lower emissions and thus lower
damages would generally occur in the no-control case if coal-fired units were replaced by other
technologies. This effect of new-source bias may well be quantitatively important, though we
doubt that on balance emissions would have been lower in the absence of controls, and we urge
the Agency to perform and present a rough assessment of its magnitude.
4.9 Effects of the Lead Documents
It should be noted that the lead documents overstate the impact of lead on wages, because
they omit the costs of education and labor-force participation. The correct treatment is to include
only the direct effect of lead on Intelligence Quotient (IQ); any induced effects (e.g., the impact
on wages from the effect of lead on schooling and the effect of schooling on wages) are to a first
approximation zero by the envelope theorem.
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REFERENCES
Berger, M.C., G.C. Blomquist, D. Kenkel and G.S. Tolley. 1987. "Valuing Changes in Health
Risks: A Comparison of Alternative Measures," Southern Economic Journal, Vol. 53, No. 4, pp.
967-984
CAA. 1970. Clean Air Act. Public Law 91-604. December 31, 1970
CAA. 1990. Clean Air Act. Public Law 101-549, Section 812, 104 STAT 2692, November 15,
1990
Dockery, D.W., Pope, C.A., Xu, X., Spengler, J.D., Ware, J.H., Fay, M.E., Ferris, E.G., and
Frank Speizer. 1993. "An Association Between Air Pollution and Mortality in Six U.S. Cities,"
New England Journal of Medicine, Vol. 329, No. 24, December, 1993, pp. 1753-1759
Gruenspect, H.K. 1982. "Differentiated Regulation: The Case of Auto Emissions Standards,"
American Economic Review, Vol. 72, May 1982, pp. 328-331
Harrington, W. and P.R. Portney. 1987. "Valuing the Benefits of Health and Safety Regulation,"
Journal of Urban Economics, Vol. 22, No. 1, July 1987, pp. 101-112
Industrial Economics Incorporated. 1992. "Review of Existing Value of Life Estimates:
Valuation Document," November 6, 1992
Industrial Economics Incorporated. 1993 a. "Revisions to the Proposed Value of Life
Methodology for Section 812 Retrospective," Draft Memorandum, May 3, 1993
Industrial Economics Incorporated. 1993b. "Addenda to Mortality Valuation Methodology,"
September 28, 1993
Industrial Economics Incorporated. 1993c. "Comparison of Morbidity, Visibility, and Forest
Valuation Studies to Contingent Valuation Guidelines," September 30, 1993
Industrial Economics Incorporated. 1993d. "Review of Additional Studies that Potentially
Provide Estimates of the Value of Carbon Sequestration Services," September 30, 1993
NOTE: This references list includes references cited, as well as references which the Council and its subcommittee
members, consultants, and liaisons believed were relevant to the general topic. They are provided in this
references list for the convenience of the Agency and the reader.
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Industrial Economics Incorporated. 1993e. "Analysis of Visibility Valuation Issues for the
Section 812 Study," September 30, 1993
Industrial Economics Incorporated. 1993f. "Review of Existing Value of Morbidity Avoidance
Estimates: Draft Valuation Document," September 30, 1993
Industrial Economics Incorporated. 1993g. "The Applicability of a Benefits Transfer Approach
to Assess the Economic Benefits of Reduced Air Toxic Emissions Under the Clean Air Act,"
September, 1993
Industrial Economics Incorporated. 1994. "Linkage Between Health Effects Estimation and
Mortality Valuation to the Section 812 Analysis — Draft Valuation Document," March 31, 1994
Jones-Lee, M.W., M. Hammerton, and P.R. Philips. 1985. "The Value of Safety: Results from a
national Sample Survey," Economic Journal, Vol. 95, No. 377, pp. 49-72
Jones-Lee, M.W.. 1989. The Economics of Safety and Physical Risk. Oxford: Basil Blackwell
Jorgensen, D.W., Slesnick, D.T. and P.J. Wilcoxen,. 1992. "Carbon Taxes and Economic
Welfare," Brookings Papers on Economic Activity: Microeconomics, pp. 393-431
Krupnick, A.J., and M.L. Cropper. 1992. "The Effect of Information on Health Risk Valuations."
Journal of Risk and Uncertainty, Vol. 5, No. 2, pp. 29-40
Lave, L.B., and E.P. Seskin. 1970. "Air Pollution and Human Health." Science, Vol. 169, pp.
723-733
Maloney, M. and G.L. Brady. 1988. "Capital Turnover and Marketable Property Rights."
Journal of Law and Economics, Vol. 31, No. 1, April 1988, pp. 203-22
Mendelsohn, R. and G. Orcutt. 1979. "An Empirical Analysis of Air-Pollution Dose-Response
Curves." Journal of Environmental Economics and Management, Vol. 6, No. 2, June 1979, pp.
85-106
Moore, M.J., and W.K. Viscusi. 1988. "The Quality-Adjusted Value of Life." Economic Inquiry,
Vol. 26, No. 3, July 1988, pp. 369-388
Moore, M. J., and W.K. Viscusi. 1990a. "Discounting Environmental Health Risks: New
Evidence and Policy Implications." Journal of Environmental Economics and Management, Vol.
18, No. 2, Part 2, March 1990, pp. S51-62
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Moore, M.J., and W.K. Viscusi. 1990b. "Models for Estimating Discount Rates for Long-Term
Health Risks Using Labor Market Data." Journal of Risk and Uncertainty, Vol. 3, No. 4,
December 1990, pp. 381-401
Nelson, R., T. Tietenberg, and M. Donihue. 1993. "Differential Environmental Regulation:
Effects on Electric Utility Capital Turnover and Emissions." Review of Economics and Statistics,
Vol. 75, No. 2, pp. 368-373
Ozkaynak, H. and G.D. Thurston. 1987. "Associations Between 1980 U.S. Mortality Rates and
Alternative Measures of Airborne Particle Concentration," Risk Analysis, Vol. 7, No. 4, pp. 449-
461
Pope, C.A. Ill, Thun, M.J., Namboodiri, M.M., Dockery, D.W., Evans, J.B., Speizer, F.E., and
C.W. Heath, Jr.. 1995. "Particulate Air Pollution as a Predictor of Mortality in a Prospective
Study of U.S. Adults, "Am. J. Respir. Crit. CareMed., 151, March 1995, pp. 669-674
Rowe, R., C. Lang, L. Bird, M. Callaway, L. Chestnut, M. Eldridge, D. Latimer, J. Murdoch, B.
Ostro, A. Patterson, and D. Rae. 1994. New York State Environmental Externalities Cost Study.
Report 2: Methodology. Prepared by RCG/Hagler Bailly, Boulder, CO, for the Empire State
Energy Research Corporation, Albany, NY. EP91-50
Smith, V. K.. 1986. "To Keep or to Toss the Contingent Valuation Method," in Cummings, R.G.,
D.S. Brookshire, and W.S. Schulze. Valuing Environmental Goods: A State of the Art
Assessment of the Contingent Valuation Method, Rowan and Allenheld (publishers), Totowa, NJ,
1986
U.S. EPA. 1996a. "Clean Air Scientific Advisory Committee (CASAC) Comments on the
November, 1995 Drafts of the Air Quality Criteria for Particulate Matter and the Review of the
National Ambient Air Quality Standards for Particulate Matter: Policy Assessment of Scientific
and Technical Information (OAQPS Staff Paper)," Science Advisory Board, Clean Air Scientific
Advisory Committee, EPA-SAB-CASAC-LTR-96-003, January 5, 1996
U.S. EPA. 1996b. "Air Quality Criteria for Particulate Matter," (OAQPS StaffPaper), U.S. EPA
National Center for Environmental Assessment, Research Triangle Park, N.C., Final Report,
May, 1996
U.S. EPA. 1996c. Review of the National Ambient Air Quality Standards for Particulate Matter:
Policy Assessment of Scientific and Technical Information, (OAQPS StaffPaper)," U.S. EPA
National Center for Environmental Assessment, RTP, N.C., External Review Draft, April, 1996
U.S. EPA. 1995. "Review of the Agency's Methodology and Physical Effects Draft Documents
for Quantifying Health Effects for the Clean Air Act Section 812 Retrospective Benefit-Cost
Analysis," U.S. EPA, Washington, D.C., Draft Report, June 6, 1995
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U.S. NCHSR/NMCES. 1981. National Center for Health Services Research, National Medical
Care Expenditure Survey (NMCES) Household Interview Instruments, Publication No. (PHS)
81-3280, Washington, D.C., U.S. G.P.O., 1981
Viscusi, W.K., W.A. Magat, and J. Huber. 1991. "Pricing Environmental Health Risks: Survey
Assessments of Risk-Risk and Risk-Dollar Trade-Offs for Chronic Bronchitis." Journal of
Environmental Economics and Management, Vol 21, No. 1, July 1991, pp. 32-51
Viscusi, W.K., and M.J. Moore. 1989. "Rates of Time Preference and Valuations of the Duration
of Life." Journal of Public Economics, Vol. 38, No. 3, April 1989, pp. 297-317
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APPENDIX A - GLOSSARY OF TERMS AND ACRONYMS
ACCACA
ADV
BEA
CAA
CAAA
CAACAC
CAACACPERS
CASAC
CD
COI
CV
DOI
EEC
EPEC
ETC
EV
FS
GDP
GNP
GPO
IAQC
IQ
J/W
LTR
NAAQS
NAPAP
NC
NCEA
NCHSR
NMCES
NNP
NOAA
OAQPS
ORD
PERS
PHS
PM
RTP
Advisory Council on Clean Air Compliance Analysis (U.S. EPA/SAB,
also known as the Council, or formally as the CAACAC_C_lean Air Act
Compliance Analysis Council (U.S. EPA/SAB)
Advisory Report
Bureau of Economic Analysis (U.S. Department of Commerce)
Clean Air Act
Clean Air Act Amendments
Clean Air Act Compliance Analysis Council (U.S. EPA/SAB)
Clean Air Act Compliance Analysis Council, Physical Effects Review
Subcommittee (U.S. EPA/SAB)
Clean Air Scientific Advisory Committee (U.S. EPA/SAB)
Criteria Document
Cost of Illness
Contingent Valuation
(U.S.) Department of the Interior
Environmental Engineering Committee (U.S. EPA/SAB)
Environmental Processes and Effects Committee (U.S. EPA/SAB)
Endogenous Technological Change
Equivalent Variation
Factor Substitution
Gross Domestic Product
G/oss National Product
U.S. (government Printing Office
Indoor Air Quality Committee (U.S. EPA/SAB)
Intelligence Quotient
Jorgenson-Wilcoxen Model
Letter Report
National Ambient Air Quality Standard
National Acid Precipitation Assessment Project
North Carolina
U.S. National Center for Environmental Assessment
National Center for Health Services Research
National Medical Care Expenditure Survey
Net National Product
National Qceanic and Atmospheric Administration
Qffice of Air Quality Planning and Standards (U.S. EPA)
Office of Research and Development (U.S. EPA)
Physical Effects Review Subcommittee of the ACCACA, formerly known
as the CAACACPERS
U.S. Public Health Service
Paniculate Matter
Research Triangle Park
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SAB Science Advisory Board (U.S. EPA)
VOCs Volatile Organic Compounds
WTP Willingness-to-Pay
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DISTRIBUTION LIST
Deputy Administrator
Assistant Administrators
EPA Regional Administrators
EPA Laboratory Directors
Office of the Administrator:
Office of Cooperative Environmental Management
Deputy Assistant Administrator for Air and Radiation:
Director, Office of Policy Analysis and Review (OPAR)
Director, Office of Air Quality Planning and Standards (OAQPS)
Deputy Assistant Administrator for Policy, Planning and Evaluation (OPPE)
Director, Office of Policy Analysis (OP A)
Director, Office of Regulatory Management and Evaluation (ORME)
Director, Office of Strategic Planning and Environmental Data (OSPED)
Depul; Assistant Administrator of Research and Development
EPA Headquarters Libraries
EPA Regional Libraries
National Technical Information Service (NTIS)
Library of Congress
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