United States EPA Science Advisory EPA-SAB-04-007
Environmental Board Staff Office (1400F) July 2004
Protection Agency Washington DC www.epa.gov/sab
Review of the Environmental
Economics Research Strategy
of the U.S. Environmental
Protection Agency
A Report by the
EPA Science Advisory Board
Environmental Economics Advisory
Committee
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
OFFICE OF THE ADMINISTRATOR
SCIENCE ADVISORY BOARD
July 9, 2004
EPA-SAB-04-007
The Honorable Michael O. Leavitt
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Subj ect: Review of the Environmental Economics Research Strategy of
the U.S. Environmental Protection Agency; A Report by the
EPA Science Advisory Board
Dear Administrator Leavitt:
This letter transmits the advice of the U.S. EPA Science Advisory Board (SAB)
Environmental Economics Advisory Committee (Committee) on the U.S. EPA's
Environmental Economics Research Strategy. The Agency asked the SAB to consider a
number of issues, including whether the Research Strategy adequately characterized the major
research gaps in key areas and addressed the issues of greatest scientific uncertainty; whether
the research was feasible and likely to generate high quality results in a timely manner; what
valuation methodology research should be investigated, whether the agency had missed any
issues of overriding importance, and how best to communicate the research needs to the wider
research community.
The Committee focused on five key areas of research; valuation of human health and
ecological benefits of environmental improvement, environmental behavior/decision-making,
market methods/incentives, and benefits of environmental information disclosure.
In general, the Committee concluded that the Research Strategy adequately
characterizes the major research gaps in the literature for the benefits of human health and
ecological risk reduction and that the research could generate high quality, useful information
in a reasonable time frame. The Committee noted that valuation of human health risk
reduction benefits should consider the reliability of existing estimates of the value of
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statistical life and that research should also be conducted on the issue of marginal versus non-
marginal risk valuation. In addition, the Committee emphasized that to be most valuable,
there must be a high level of interaction between economists and ecologists in the area of
ecological benefits research.
The Committee noted that in spite of the focus of the academic literature on
nonmarket valuation methodologies, some areas of valuation still would not receive
appropriate funding without EPA attention and interest. The Committee listed a number of
examples of methods research that would be of importance for the agency.
The Committee provided information on several environmental compliance and
decision making issues and noted that this is one of the most important research topics for the
agency. They strongly urged that research should focus on overall environmental behavior,
not just compliance. The Committee stated that the ultimate goal in this area is to understand
why firms differ in the amount of pollution they create (or "in pollution intensity.") A
number of additional research topics were identified by the Committee.
In the area of market mechanisms and incentives, the Committee believed that the
Agency has identified some extremely important areas for future research and that the
research could lead to high quality results. However, the Committee judged the proposed
research to be too limited in its focus and they identified some additional areas for Agency
consideration.
The Committee agreed with the Agency on the importance of environmental
information disclosure and agreed that there is no generally accepted method for estimating
the benefits of these programs. A first step in estimating the benefits of such programs is to
accurately estimate their impacts on emissions and ambient pollution. Additional research in
this area is certainly required. The Committee also suggested that the agency contrast the
cost-effectiveness of environmental information disclosure with the cost-effectiveness of
traditional approaches to pollution regulation. The Committee noted that studies of the
effectiveness of information disclosure under the Emergency Preparedness and Community
Right-to-Know Act of 1986 could provide valuable information regarding the viability of
such policies to reduce the environmental component of terrorism risk.
Finally, the Committee recommended that EPA could achieve wider distribution of the
results of the research strategy and receive useful feedback from members of the research
community by holding workshops in conjunction with the annual meetings of the American
Economics Association and the American Agricultural Economics Association.
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We appreciate the opportunity to review, and to provide you with advice on, the
EPA's draft Environmental Economics Research Strategy. We look forward to your response
to this report.
Sincerely,
/Signed/ /Signed/
Dr. William H. Glaze, Chair Dr. Maureen Cropper, Chair
EPA Science Advisory Board Environmental Economics Advisory Committee
EPA Science Advisory Board
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NOTICE
This report has been written as part of the activities of the EPA Science Advisory
Board, a public advisory committee providing extramural scientific information and advice to
the Administrator and other officials of the Environmental Protection Agency. The Board is
structured to provide balanced, expert assessment of scientific matters related to problems
facing the Agency. This report has not been reviewed for approval by the Agency and, hence,
the contents of this report do not necessarily represent the views and policies of the
Environmental Protection Agency, nor of other agencies in the Executive Branch of the
Federal government, nor does mention of trade names or commercial products constitute a
recommendation for use. Reports of the EPA Science Advisory Board are posted on the EPA
website at: http://www.epa.gov/sab.
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U.S. Environmental Protection Agency
Science Advisory Board
Environmental Economics Advisory Committee
Advisory Panel on the Environmental Economics Research Strategy
CHAIR
Dr. Maureen L. Cropper, University of Maryland, College Park, MD and The World Bank,
Washington, DC
MEMBERS
Dr. Dallas Burtraw, Resources for the Future, Washington, DC
Dr. Lawrence Goulder, Stanford University, Stanford, CA
Dr. James Hammitt, Harvard University, Boston, MA
Dr. Gloria Helfand, University of Michigan, Ann Arbor, MI
Dr. Catherine Kling, Iowa State University, Ames, IA
Dr. Arik Levinson, Georgetown University, Washington, DC
Dr. Richard Norgaard, University of California, Berkeley, CA
Dr. Kathleen Segerson, University of Connecticut, Storrs, CT
Dr. Hilary Sigman, Rutgers University, New Brunswick, NJ
Dr. Robert Stavins, Harvard University, Cambridge, MA
Dr. Gary Yohe, Wesleyan University, Middletown, CT
SCIENCE ADVISORY BOARD STAFF
Mr. Thomas Miller, U.S. EPA Science Advisory Board Staff Office, Washington, DC
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TABLE OF CONTENTS
1. INTRODUCTION 1
1.1 Background 1
1.2 Charge to the Science Advisory Board 1
1.3 Format of this Report 2
2. ANSWERS TO CHARGE QUESTIONS 1 AND 2 3
2.1 Valuation of Human Health Benefits of Environmental Improvements 3
2.1.1 Characterization of Research Gaps and Priorities 3
2.1.2 Research Feasibility 4
2.1.3 Usefulness of the Research 6
2.2 Valuation of Ecological Benefits of Environmental Improvements 6
2.2.1 Characterization of Research Gaps and Priorities 6
2.2.2 Research Feasibility 8
2.2.3 Usefulness of the Research 9
2.3 Valuation Methodologies 9
2.4 Environmental Compliance Behavior and Decision-Making 10
2.4.1 Characterization of Research Gaps and Priorities and Usefulness of Research 10
2.4.2 Research Feasibility 12
2.5 Market Methods andlncentives 14
2.5.1 Characterization of Research Gaps and Priorities and Usefulness of the Research 14
2.5.2 Research Feasibility 18
2.6 Benefits of Environmental Information Disclosure 18
2.6.1 Characterization of Research Gaps and Priorities and Research Feasibility 18
2.6.2 Usefulness of the Research 20
3. ANSWER TO CHARGE QUESTION 3 21
3.1 Missing Issues 21
4. ANSWER TO CHARGE QUESTION 4 22
4.1 Communication of the Research Strategy 22
References 23
in
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Review ofthe Environmental Economics Research Strategy of the U.S.
Environmental Protection Agency: A Report by the
EPA Science Advisory Board
1. INTRODUCTION
1.1 Background
This report transmits the advice of the U.S. EPA Science Advisory Board (SAB) on the
EPA's Environmental Economics Research Strategy. This report was prepared by the
Environmental Economics Advisory Committee subsequent to its review which began during
November, 2003. The review was announced in the Federal Register (see 68FR61206).
1.2 Charge to the Science Advisory Board
The Environmental Economics Advisory Committee (EEAC) was requested to review
EPA's Environmental Economics Research Strategy. Specifically, the EEAC was asked to
address the following charge questions:
1. For each of the major subject areas described in the EERS, EPA has attempted to articulate
the research questions most relevant to EPA that can be effectively addressed given the
available tools and resources. In this context, please address the following for the key
research questions identified in the EERS in each of the subject areas.
a) Is the characterization of each of the major research gaps in the literature for the key
subject areas of relevance to EPA's economic sciences, as identified in the EERS,
adequate? Will these priorities and implementation approaches effectively address the
areas of greatest scientific uncertainty?
b) Given the implementation strategy laid out in the EERS;
-To what extent is this research scientifically feasible at a high level of quality?
—How successful is this research likely to be in answering policy-relevant questions
for EPA within the next 8-10 years?
c) What improvements in the design and implementation of the EERS would make
each research project more useful to EPA and other environmental management
agencies?
2. What methodological research needs in valuation should EPA investigate as a complement
to the needs derived from the strategy interviews? In the valuation areas, EPA's expressed
needs are primarily practical: better values for ecological and human health impacts of
environmental policies. However, most grant proposals (and most journal articles)
investigate practical questions as well as methodological or other questions (e.g. incentive
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compatibility or elicitation methods in stated preference or more refined models of
behavior in revealed preference). EPA does not expect that researchers will propose to
estimate only the practical values that EPA needs, but will also propose to investigate
methodological issues. Since the research strategy interviews did not elicit methodological
needs, and EPA believes that improving methodology while generating practical values
provides useful synergy, further input on prioritizing methodological issues from the
EEAC would be useful.
3. Can the SAB identify by consensus any environmental economics issues of overriding
importance to EPA that the EERS has missed, and that EPA should address provided that
more resources would be available for Environmental Economics Research? Could the
SAB explain why this (these) issue(s) should be of high concern to EPA's research
programs.
4. What is the best way for EPA to communicate the results of the research strategy and plans
for achieving its long-term research goals to the wider research community, and other
potential users?
In addressing these questions the committee focused on the five key areas in which EPA
identified additional research needs:
a) Valuation of the human health benefits of environmental improvements
b) Valuation of the ecological benefits of environmental improvements
c) Environmental behavior and decisionmaking
d) Market methods and incentives
e) Benefits of environmental information disclosure
1.3 Format of this Report
The Science Advisory Board's answers to Charge Questions 1 and 2 are presented by
research area. The discussion begins by summarizing EPA's research priorities in each area,
and then answers Charge Questions 1 and 2. Charge questions 3 and 4 are answered at the
end of document.
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2. ANSWERS TO CHARGE QUESTIONS 1 AND 2
2.1 Valuation of Human Health Benefits of Environmental Improvements
2.1.1 Characterization of Research Gaps and Priorities
Is the characterization of each of the major research gaps in the literature adequate? Will
these priorities and implementation approaches effectively address the areas of greatest
scientific uncertainty?
Most of the literature on human health valuation has focused on mortality valuation—
measuring what individuals will pay for small reductions in their risk of dying in a specified
time period. As the EERS notes, much less effort has been invested in measuring what people
will pay to avoid episodes of acute illness or to reduce their risk of contracting a chronic
illness (morbidity valuation).1 As a result, many health endpoints are not monetized in
Regulatory Impact Analyses; or their value is measured by productivity gains and avoided
medical costs, which are a lower bound to the appropriate measure of value. In the area of
morbidity valuation, the EERS (p. 10) calls for valuation of non-cancer endpoints; earaches,
headaches, colds, gastrointestinal upsets, reproductive and developmental effects (e.g.,
Attention-Deficit Disorder, autism), and cancer-related morbidity effects. On p. 15 of the
research strategy, more emphasis is put on chronic health effects. The EERS notes that it is
important to allow valuation to depend on severity, duration and frequency of symptoms.
Emphasis is also put on valuing children's health.
According to the EERS, the main needs in mortality valuation (p. 16) focus on the
impact of age on the Value of a Statistical Life (VSL) and on the impact of the health status of
the individual and co-morbidity (illness preceding death) on the VSL.
The committee agrees with the Agency's assessment on the lack of estimates of the
value of morbidity risk reduction benefits. Willingness to pay (WTP) estimates are indeed
unavailable for many cancers, as well as for risks of heart attacks and strokes. WTP estimates
for the other health endpoints noted in the first paragraph are also lacking. In many cases, the
productivity losses and medical costs associated with illness are not born by the individual. If
this is the case, estimates of productivity losses (the so-called indirect costs of illness) and
medical costs (the direct costs of illness) must be added to WTP estimates. Estimating these
illness costs is itself a research task whose importance should not be underestimated.
Regarding the Agency's priorities in the area of mortality valuation, the impact of age
on the VSL is an important, policy-relevant topic. Any environmental regulation that saves
lives in proportion to the age distribution of deaths in the U.S. will primarily extend the lives
of older people. (Fifty percent of the deaths in the U.S. occur after age 75.) Regarding the
impact of health status and co-morbidity on the VSL, the important issue here is whether
environmental pollution causes chronic illness or simply increases mortality risk for people
1 WTP estimates exist for reduced risk of chronic bronchitis and for some cancers, as well as for asthma attacks,
restricted activity days and symptom days.
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who have pre-existing chronic conditions. When environmental contaminants cause a
disease, it is theoretically desirable to value the risk of contracting the illness (such as cancer)
which will entail both morbidity and a reduction in life expectancy. If pollutants differentially
affect mortality risk for those with a pre-existing condition (e.g., cardiovascular disease), then
efforts should be put on measuring the impacts of the health state on the value of increasing
life expectancy.
There are three topics in the area of mortality risk valuation that the committee
believes deserve attention even though they are not mentioned in the EERS. The first
concerns the reliability of existing estimates of the VSL, which rely on labor market and on
stated preference studies. The Agency has recently commissioned re-analyses of data from
compensating wage studies (Black, Galdo and Liu 2003) and of data from contingent
valuation studies of mortality risks. Examination of these results may suggest that emphasis
should be placed on developing newer, more reliable estimates of the VSL.
The second research topic concerns the issue of marginal versus non-marginal risk
valuation. Emphasis in the literature is on valuing small changes in risk of death, on the order
of 1 in 10,000 per year or smaller. The agency, however, uses these estimates to value
regulations that, together, account for much larger risk reductions. To illustrate, The Benefits
and Costs of the Clean Air Act 1970-1990 (USEPA 1997) predicted that air quality
regulations issued between 1970 and 1990 reduced mortality by 200,000 lives in 1990.
When a VSL of $4.8 million (1990 USD) was applied to these statistical lives, the WTP in
1990 for mortality risk reductions occurring in that year was estimated to be approximately
$16,000 (1990 USD) for a family of four.2 This was because the VSL was applied to a non-
marginal reduction in risk of death (on average, a 1/1,000 reduction). Similarly large benefit
estimates may arise when one adds together WTP for the risk reductions associated with the
1990 Clean Air Act Amendments, the Tier II Emissions standards, the Heavy Duty Engine
Diesel Rule, the Off-Road Diesel Rule and Clear Skies. In short, while a single regulation
may confer marginal risk reduction benefits, the set of environmental regulations evaluated
over a 10-year period may confer non-marginal benefits, and should be evaluated accordingly.
The third research topic concerns the impact of income on the VSL. Historically EPA
has adjusted future values of the VSL to allow for income growth. Such adjustments require
estimates of the income elasticity of WTP for mortality risk reductions. We believe that this
is a topic that requires additional research.
2.1.2 Research Feasibility
Given the implementation strategy laid out in the EERS; —To what extent is this
research scientifically feasible at a high level of quality? —How successful is this
research likely to be in answering policy-relevant questions for EPA within the next 8-
10 years?
2 The total value of the statistical lives saved, $1 trillion, when divided by the population of the U.S. in 1990,
implies a WTP of approximately $4,000 per person.
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There are several criteria to consider in formulating a research strategy for morbidity
valuation:
a) The approach taken should be able to evaluate a large number of health endpoints.
b) It should, ideally, value the risk of avoiding chronic illness rather than avoiding the
illness with certainty.
c) The definition of health endpoints should take into account the severity, duration and
frequency of symptoms.
d) The health endpoints valued should correspond to those linked to environmental
pollutants in the epidemiological literature.
An important question, related to mortality valuation, is whether chronic morbidity
and mortality should be valued as part of the same package. For example, should people
value the risk of developing congestive heart failure as the risk of experiencing a series of
hospital episodes, recurring discomfort and shortened life span? Or, should the impact of air
pollution on the morbidity associated with congestive heart failure be valued separately from
the impact of air pollution on the mortality associated with congestive heart failure? The
answer to this question depends crucially on the point articulated in item 'd' above. If the
epidemiological literature suggests that air pollution increases risk of death due to congestive
heart failure (and other forms of heart disease), but does not link air pollution to increased
incidence of the disease, then valuation should mirror this approach. For diseases where
environmental contaminants may actually increase the risk of contracting the disease (e.g., for
some cancers) then, assuming that people can comprehend both the risk of the disease and its
sequelae, the goal should be to value the morbidity and mortality risks as a single package.
Regarding the number of health diseases to be valued, a possible approach to dealing
with the point articulated in item 'a' above is to have people value functional limitations
(characterized by severity, duration and frequency) which, in turn, are related to illnesses.
This is likely to work best for chronic illnesses and less well for acute illnesses. Obtaining
reliable values for the risk of an illness will remain a challenge. One potential area of
research is to examine whether it is possible to use information contained in measures of
health preference, such as quality adjusted life years (QALYs), that are used in other public-
health domains to provide a method for transferring benefit estimates from one health
endpoint to another.
Regarding estimates of the value of mortality risk reductions, it would seem that stated
preference methods are the main candidates for studying the impact of age and health status
on WTP, although it may be possible to use revealed preference methods for the impacts of
age in the context of auto safety. (Labor market data probably cannot be used to estimate
WTP for ages greater than about 65 because of the relatively small fraction of the elderly who
are employed (Viscusi and Aldy 2003)). The use of both stated and revealed preference
methods to value reductions in risk of death is advisable. Regarding the issue of valuing non-
marginal risk changes, this is certainly feasible using stated preference approaches. Recent
advances in dealing with the identification problem in hedonic markets suggests that this
should also be feasible in a revealed preference context (Heckman, Matzkin and Nesheim
2003).
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The committee believes that progress in the area of health valuation can be made, with
appropriate funding, within the next 8-10 years. We believe that for these efforts to be
successful, and to yield high-quality research, it is essential that the economists conducting
the research work together with epidemiologists to ensure the that health effects valued match
up with those examined in the epidemiological literature, and with physicians to ensure that
any health status indices that are used to facilitate evaluating a large range of health endpoints
are appropriate to the task
2.1.3 Usefulness of the Research
What improvements in the design and implementation of the EERS would make each research
project more useful to EPA and other environmental management agencies?
The committee believes that it is important to measure the impact of household
characteristics on WTP for both morbidity and mortality benefits. This is important if the
Agency is to examine the distributional impacts of environmental policies. It is also the case
that certain air pollution epidemiology studies distinguish health effects by socioeconomic
status (e.g., Pope et al. 2002). Making these distinctions in terms of valuation would make it
possible to further refine the distributional impacts of air pollution control strategies.
2.2 Valuation of Ecological Benefits of Environmental Improvements
2.2.1 Characterization of Research Gaps and Priorities
Is the characterization of each of the major research gaps in the literature adequate?
Will these priorities and implementation approaches effectively address the areas of
greatest scientific uncertainty?
The EERS identifies a number of endpoints for which valuation of ecological services will
be useful. These endpoints include water quality changes, ecological impacts of air pollution,
introduced versus native species, avian species, etc. While this way of thinking about the
benefits of ecosystem improvement is consistent with how economists view the valuation of
many goods, this single endpoint focus is not generally consistent with how ecologists view
ecosystem functioning. For research in ecological benefits to be most valuable, there must be
a high level of interaction between economists and ecologists. To begin, there must be a
broad understanding of the way in which ecologists view ecosystem functioning. For
example:
a) The research plan refers to "outcomes" as if ecosystems are mechanical," i.e.,
when the level of an insult increases the ecosystem has predictable new
equilibrium outcomes. This characterization of ecosystem dynamics may be
appropriate in some cases, but this is not the way ecologists think about
ecosystem responses generally. Rather, they tend to think of ecosystems as
constantly changing, with different levels of insult affecting the course of
change. Even if there is an equilibrium, the equilibrium may not be reached for
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decades or a century, so outcomes have to be thought of in a more dynamic
way. On the other hand, ecologists do think of the services provided by well
functioning ecosystems as something that can be characterized and assessed.
This may be the point at which ecologists and economists can best find
common ground.
b) Ecologists are more concerned with thresholds and irreversibilities in
ecosystems than in the pros and cons of changing from one equilibrium to
another. One of the effects of a change may be that the ecosystem is less
resilient to the next insult, so alternative scenarios of future insults need to be
explored, not one-time changes.
c) This brings us back to earlier efforts to tackle cumulative effects. Ecologists do
not think of stresses as being separable. Hence they are more "conservative"
than economists who are comfortable with the assumption that stresses are
separable and hence can be considered "on the margin." For ecologists, the
order of stresses also can be important. The earlier efforts of economists to
understand cumulative impacts should probably be reviewed as a starting point
for moving forward in this respect.
While it would be nice if ecologists could simply provide predictions of ecosystem
behavior to meet economists' specifications of what they need, the fact of the matter is that
ecologists are the experts on ecosystems. Implying that the economists need something that is
contrary to the expertise of ecologists may not be a good starting point for what has to be a
joint project. The research strategy should address how economists and ecologists in the
Agency can learn more about what each other knows and how they can develop shared
understandings, language, and models. Rather than valuing changes in a single service from
an ecosystem, e.g., increased avian species or increased fish catch, it may be appropriate to
work with ecologists to value the entire bundle of service changes associated with a change in
an ecosystem from one state (perhaps one with a low level of function generally) to another
(one that supports on average more species diversity, more resilience to external shocks, etc.).
Research on the benefits of ecological systems and services will necessarily need to be
ecosystem specific. While "outcomes" for human health effects are many and are probably
sensitive to the age at which the problem occurs, they are going to be pretty much true
whether a person lives in Phoenix or Philadelphia. For ecosystems, while there are
classifications of ecosystem types that will prove helpful, there are going to be a considerable
number of types. The condition of the ecosystem for which an additional stress is being
considered also will be important. Of course, the conditions of people experiencing an
environmental stress are also important, but the stress is generally experienced by a large
population of people whose conditions can be understood in statistical terms. Decisions on
ecosystems will much more likely be taken one system at a time.
The EERS recognizes the large reliance the agency places on benefits transfer and the
likely need to continue this reliance. They suggest that a "cost-effective strategy may be to
investigate methods that generate theoretically sound values for multiple endpoints." The
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committee generally agrees with the logic of this idea, but the Agency should consider that
the highly contextual nature of ecosystem services may make transfers even more challenging
than when single endpoints can be focused upon. Benefits transfer in the case of ecosystems is
exceptionally challenging.
One important issue noted in the document is the fact that ecosystem services and
functioning are not well understood by the general public, thus complicating the process of
valuation. In addition to eliciting the value of ecosystem changes, the valuation process
usually requires some education of the public. This has important implications for the
resulting values and for the resulting use of benefits transfer.
The relationship between physical measures of ecosystem functioning (pollution
concentrations in water or air, number of species present in a land area, etc), features of an
ecosystem that people perceive and the perception of the ecosystem by people is poorly
understood. Since this linkage is critical for valuation, this is an area of research that might
yield high returns to EPA and other agencies.
The inherent uncertainties in ecosystem functioning make the need to characterize
uncertainty in the valuation process particularly important when ecosystem values are sought.
This is an area where additional work could be focused. Likewise, additional work on the
implications of the "precautionary principle" and cost-benefit analysis when irreversibility
and uncertainty is present may prove beneficial. Another feature that merits focus is the
implication of threshold effects and valuation of large rather than marginal changes.
Valuation for dynamic systems and the consequences of valuing changes in ecosystem
services under very long time scales are also issues that EPA may wish to consider. Again,
these features may be unique to ecosystem valuation as distinct from health endpoints or other
nonmarket goods.
Among nonmarket values for ecosystem services, nonuse values are the poorest
understood, yet they have the potential to be very large in magnitude. This implies that
research that focuses on nonuse values may have the highest returns.
Some committee members felt that materials damage and losses of visibility from
pollution should also be included among environmental benefits to be studied.
2.2.2 Research Feasibility
Given the implementation strategy laid out in the EERS; —To what extent is this
research scientifically feasible at a high level of quality? —How successful is this
research likely to be in answering policy-relevant questions for EPA within the next 8-
10 years?
The committee sees considerable return on research in the area of ecosystem
valuation. With adequate funding, the Agency is likely to see information that is very
relevant for policy questions being produced.
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2.2.3 Usefulness of the Research
What improvements in the design and implementation of the EERS would make each
research project more useful to EPA and other environmental management agencies?
Many of the ecological benefits measures needed by EPA would also be of value to
other government and public agencies. Specifically, the U.S. Army Corps of Engineers,
USD A, Forest Service, and many Nongovernmental Organizations and state agencies would
find ecological benefits work to be highly valuable. EPA should find ways to share research
results as well as consider jointly funding and identifying needed research on ecological
benefits.
One of the needs identified in the report is for valuation of reductions in pesticides in
water, but in many parts of the country, nutrients are as much or significantly more of an
issue. Nitrogen is a clear problem for hypoxia, while phosphorous and other nutrients are
important for local water quality problems in much of the Midwest.
A centralized team of economists in Washington D.C. may not be the ideal
configuration of economists for undertaking research that is going to be inherently more
contextual than other types of environmental economic research. More economists are
probably going to be needed in the regional offices to carry out ecosystem valuation
effectively. This activity could also be enhanced by the use of non-EPA economists (outside
of Washington) with expertise in ecosystems analysis.
2.3 Valuation Methodologies
What methodological research needs in valuation should EPA investigate as a
complement to the needs derived from the strategy interviews?
As noted in the Research Strategy much of the academic literature in nonmarket
valuation focuses on methodological development. While this implies that a substantial
amount of methodological work may be produced without impetus from EPA or other
agencies, there are some areas of valuation where the needed methodological refinements may
not be as forthcoming as others. In particular, some areas may not be viewed to be as
methodologically interesting as others, but may still be critical to improving the accuracy of
nonmarket valuation in the context of ecosystem services. The committee identified the
following topics as being of particular value to EPA programs:
a) Improved methodologies and tools for benefits transfer as well as increased
understanding of the range of uncertainty associated with the transfer of values from
one study site to another. Given the enormous reliance that EPA and other agencies
make on the transfer of benefits to perform benefit-cost analysis, considerable gains
from additional understanding of this process may be possible.
b) Increased understanding of the appropriate extent of the market when taking welfare
estimates from individual values and aggregating them to the full population (this is
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particularly important for nonuse values). There is both the issue of having the
appropriate sampling frame from which to compute per household benefits (e.g., a
random population survey versus a sample of people visiting a shopping mall) and the
issue of how much of the general population to apply these values to (e.g., households
in close proximity to the impacted resource, all households in a certain political
jurisdiction, all households in the world?).
c) Further study of the WTP-WTA divergence literature. In many cases a strong
argument may exist for the use of a WTA valuation rather than WTP based on explicit
or implicit property rights.
d) Increased understanding of the appropriate valuation of the opportunity cost of time in
revealed preference studies. This concern relates primarily to recreation demand
studies, where different assumptions about the value of time can yield differences in
the estimates of welfare changes by a factor of two or more.
e) Improved bid design methods for stated preference surveys. Discrete choice stated
preference surveys require the researcher to define the bid distribution for respondents.
Potential bias and inefficiency from suboptimal bid design are not well understood.
f) While a growing literature in the valuation field combines stated and revealed
preference information to jointly estimate the parameters of welfare measures, there
may be substantial gains to EPA and other agencies from furthering work in this area.
The combination of stated and revealed preference data enjoys the prospect of
grounding welfare estimates in observable behavior while allowing for a much broader
category of benefits to be studied with the inclusion of stated preference information.
2.4 Environmental Compliance Behavior and Decision-Making
2.4.1 Characterization of Research Gaps and Priorities and Usefulness of
Research
Is the characterization of each of the major research gaps in the literature adequate?
Will these priorities and implementation approaches effectively address the areas of
greatest scientific uncertainty?
What improvements in the design and implementation of the EERS would make each
research project more useful to EPA and other environmental management agencies?
This topic is one of the most important research priorities faced by the EPA. Judging
from the survey of EPA program offices, this topic is tied with "Valuation of Reduced
Morbidity Benefits" for the highest priority. Several research questions are highlighted,
including: a) Why and how do facilities comply; b) What policies or approaches increase
compliance; and c) How successful have voluntary programs been? The Committee offers the
following comments on the research goals:
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a) Previous EPA funded results. It would be helpful to assess how successful the
previous Science To Achieve Results (STAR) competitions on Corporate
Environmentalism have been.
b) Breadth of research area. This research priority area is termed Environmental
(Compliance) Behavior and Decision-making. It is unclear whether the focus is
limited to compliance-related behavior or whether this priority area is intended to
include broader issues relating to environmental behavior. Some of the specific
questions raised in this context (e.g., location, technology adoption, and pesticide use)
do not involve compliance directly. They are questions about how firms make
decisions that have environmental implications. The Committee believes that this is
the correct perspective on this issue. Ultimately, EPA's goal should be to understand
why some firms pollute more (per unit of input or output) than others. This may
depend on the nature or environmental regulations and their enforcement, but will also
depend on the costs of reducing emissions.
If the focus is on compliance alone, then it is not clear why the questions relating to
voluntary programs are included, since by definition voluntary programs do not entail
"compliance" with existing rules or regulations. The study of voluntary programs
would fit more closely with the research about information disclosure. Alternatively,
if this priority area is intended to be broader, then the research on information
disclosure could be folded into this priority area.
c) Feedback from regulated industries. Traditionally, research on compliance and
enforcement has treated the policy process as linear. The regulator first designs and
imposes a policy, then an enforcement strategy (e.g., an audit frequency and penalties
for non-compliance), and then the polluting firm decides whether or not to comply.
Some research on enforcement and compliance might benefit from considering a more
interactive model, under which regulators and regulated parties work together to
identify pollution sources and means to address them. Monitoring and information
generation are key parts of such a strategy. One example is EPA's Clean Charles
2005 Initiative. (Again, this suggests that the research priority area on information
disclosure is closely linked to this priority area.)
d) Public sector compliance. Most of the compliance and enforcement literature
studies private-sector polluters. Other sources, such as municipalities, have received
relatively little attention. Yet in some contexts these constitute the primary pollution
sources (e.g., water pollution). Thus, the scope of the research priority should be
sufficiently broad to include not only decisions by private polluters but also by public
sources.
e) Unobserved determinants of behavior. The existing literature has understandably
focused on easily observable determinants of environmental decisions: firm size,
industry group, etc. However, less easily observable motivational factors may be
more important in explaining the environmental behavior of a particular firm.
Information about these factors comes primarily from case studies, which are often
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viewed as anecdotal. Therefore, it seems appropriate for EPA to fund research that
seeks to provide statistical evidence regarding firm decision-making, as well as more
in-depth case studies of the behavior of individual firms.
f) Market incentives. A key question that needs to be addressed (statistically and
through case studies) is whether market incentives for environmental protection (e.g.,
from consumers, communities, suppliers, or investors) are sufficiently strong. Again
this relates closely to the effect of information disclosure, since information disclosure
is likely to increase these pressures. Instead of thinking about voluntary approaches
and information provision as substitutes for more traditional regulations, they may be
thought of as complements.
g) Cost-effectiveness. Most studies focus on accounting costs of compliance, and
ignore things like the transactions costs of dealing with regulators, liability costs, and
adverse publicity. It would be worth considering these broader definitions of costs.
h) Market structure. Regulations may have different effects on industries with
different market structures.
i) Appropriate fines. The EPA's current practice requires firms caught violating
environmental regulations to pay fines equal to the profits they earned as a
consequence of their violations. It is an open research question whether this is in any
way optimal. Research could also be conducted on the use of resource-based
compensation in lieu of fines. Sometimes violators can avoid fines by undertaking
restoration or enhancement activities of great value than the fine. The desirability and
effectiveness of non-monetary penalties need to be better understood.
j) Ex-ante versus ex-post estimates of compliance costs. Ex-ante estimates are
typically higher. This may be due to strategic industry overstatement of costs, or
because technological improvements are not foreseen. Research on the difference
between ex-post and ex-ante estimates would be useful to researchers assessing future
proposed regulations.
k) Data. Several researchers noted that state variation in approaches, fines,
monitoring, etc., can be used to study these issues, but that state data are difficult for
individual researchers to collect. A useful role for EPA may be to encourage states to
collect data in a standardized way and to assist in compiling the data.
2.4.2 Research Feasibility
Given the implementation strategy laid out in the EERS; —To what extent is this
research scientifically feasible at a high level of quality? —How successful is this
research likely to be in answering policy-relevant questions for EPA within the next 8-
10 years?
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In general, Committee members felt that EPA researchers have identified an important
area for research, and one that could lead directly to improvements in EPA efficacy,
reductions in regulatory costs, and improvements in environmental quality. Key tasks for the
EPA include: defining the scope of the research objective, assessing prior EPA funded
research, and assisting with the unification and publication of monitoring and enforcement
data.
In addition, the Committee noted that any research in this area will have to deal with
the following problems:
a) Enforcement actions are widely understood to be targeted at likely violators, and
hence endogenous. Researchers cannot estimate the effect of inspections and
enforcement on the probability of violating environmental laws without
simultaneously estimating the effect of violations on enforcement. This task is
difficult without knowing the procedures EPA or the states use to decide which
facilities to inspect. For a seminal paper on this topic, see Magat and Viscusi
(1990).
b) A second empirical problem, noted by Harrington (1988), is that given the low
probability of any particular firm being inspected, or punished given an observed
violation, the overall level of compliance is surprisingly high. Some other
phenomenon aside from regulatory enforcement must explain compliance: public
relations, citizen suits, NGO actions, etc.
c) A third empirical problem involves the availability of data. Much of the empirical
literature focuses on the pulp and paper industries, due to the availability of water
pollution enforcement data via the Permit Compliance System (PCS).
d) Finally, this section of the research strategy asks to what extent voluntary pollution
reduction programs such as the "33-50" program have succeeded. Answering this
question requires facing another simultaneity problem: firms that have unobserved
tendencies to reduce pollution are more likely to volunteer to do so. To accurately
assess the efficacy of these voluntary programs, a researcher will need some
exogenous variation in the programs, or some instrument for program
participation. The Agency needs to be particularly attentive to opportunities to
exploit exogenous variation in eligibility for particular programs so that valuable
chances to assess the consequences of "natural experiments" are not missed.
Labor economists have sensitized the discipline to the desirability of natural
experiments for program evaluation. In particular, the Agency needs to be
watchful whenever there are boundaries in some dimension (time, firm size, space)
across which the assignment of firms to regulatory regimes is randomized by
arguably external factors.
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2.5 Market Methods and Incentives
2.5.1 Characterization of Research Gaps and Priorities and Usefulness of the
Research
Is the characterization of each of the major research gaps in the literature adequate?
Will these priorities and implementation approaches effectively address the areas of
greatest scientific uncertainty?
What improvements in the design and implementation of the EERS would make each
research project more useful to EPA and other environmental management agencies?
The Research Strategy combines the research priority "Market Mechanisms and
Incentives [MMI], Trading" with the priority "Market Mechanisms and Incentives, Other than
Trading" in its final list of research gaps (p. 19). The proposed research emphasis from the
Office of Research and Development will be on "trading in practice and trading in new
markets" (p. 29). These specific areas are mirrored in the identified research gaps on p. 19.
Especially regarding "trading in practice," the key questions that are identified are the
environmental effects of trading and estimating the resulting cost savings. For new
applications, the key questions are predicting the success of new markets and designing the
markets to achieve both environmental and cost-reduction goals.
Some specific possible research areas that are mentioned include using market
approaches for urban storm water management; programs for new pollutants and media; the
complexities of tradable water quality permits in a world of multiple market distortions, lack
of monitoring, and "cultural resistance to enforcement" (p. 20); the interactions of marketable
permits with existing taxes; and market design questions.
The Committee believes the Research Strategy identifies some extremely important
areas for future research but is too limited in its focus. The following are also areas worthy of
inclusion in the MMI research program.
a) Market mechanisms other than trading are notably absent from the discussion of
research gaps. Exceptions include the brief mention of "environmental information
programs" (p. 12) and "Methodology for evaluation of effectiveness of voluntary
programs" (p. 26), which are already the subject of research priorities identified
elsewhere in the EERS. The exclusion of other MMI instruments, or more
generally incentive-based instruments, such as pollution taxes, abatement
subsidies, scrappage schemes for old cars, and deposit-refund systems, unduly
limits the policy approaches that merit study. For example, current environmental
policy relies heavily on legal liability for environmental contamination, which is
an incentive-based policy. The empirical effects of these policies are not well
understood but are a promising area for future research because data exist from
recent experience.
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Although the language in the Strategy does not rule out study of mechanisms other
than permits, the absence of their mention does not encourage it either. Research
has shown that different market-based instruments vary in, for instance, their
effects on technological change, their total costs to pollution sources, their effects
on entry and exit in an industry, the potential for "double dividend" effects, and
the political or social acceptability of the instruments. Exploration of the relative
merits of other instruments would be a valuable area of study.
b) The spatial and temporal effects of MMI also need further attention. For many, if
not most, pollutants, the kind of cap-and-trade program exemplified by the acid
rain program differs from the design of a trading program identified in economic
theory because the spatial and temporal distribution of pollution determines
pollution damages. For efficiency, the marginal damages at any given locale or
time need to be considered. Even in the absence of information on marginal
damages, a cost-effectiveness measure should take spatial and temporal effects
into account, due to requirements in environmental laws to achieve site-based
environmental targets (such as the National Ambient Air Quality Standards under
the Clean Air Act). There has been little ex post assessment of the spatial effects
of uniform trading ratios in cap and trade systems such as the 1990 Clean Air Act
Amendments, the Ozone Transport Region's NOX budget program, and the NOX
SIP call trading program.
The spatial and temporal effects of MMI are important components for design of
future programs as the nation addresses mercury and ozone as atmospheric
problems and the use of TMDLs in water quality. Simple trading designs, such as
a cap-and-trade system for marketable effluent permits, may not achieve
environmental targets in all places. On the other hand, incorporating transfer
coefficients, limiting trading regions, or otherwise accounting for spatial and
temporal effects limits trading opportunities and thus reduces potential cost
savings. Research should evaluate the tradeoff between achieving environmental
goals and achieving cost reductions, and the administrative and scientific
difficulties involved in more theoretically correct trading systems.
c) The implications of monitoring and enforcement for the design of MMI policies
should be an important part of the MMI priority. Monitoring can take at least two
forms: one form measures actual environmental outcomes (e.g., ambient air or
water quality), and another form ensures that the emissions or other factors for
which a market is developed are measured at the source. Adequate monitoring of
ambient measures can help tremendously in ensuring the success of MMI
programs in achieving environmental goals in all locales. Research into ambient
monitoring and the interaction with MMI requires involvement of environmental
scientists, for example, to help identify the efficient placement and number of
monitoring sites for achieving ambient goals. Monitoring of source behavior is
necessary for the success of the markets: for example, if it is easy for sources to
emit more than the number of permits they own, then the permit market as well as
environmental quality will suffer.
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d) An important and controversial aspect of MMI programs has been the emergence
of trading without a cap on aggregate emissions. Such programs have been labeled
"open market trading programs" because they allow for new participants who may
identify low-cost opportunities for emission reductions to enter the program. These
programs have been widely criticized because of the absence of a strict emission
cap, and the difficulty in observing and monitoring emission reductions. However,
this generic approach has a broad application in the Clean Development
Mechanism and Joint Implementation aspects of international efforts to reduce
greenhouse gases, and it continues to be suggested at the state level in the US for
control of conventional pollutants. Open market trading should be studied to
identify its weaknesses (so that programs can be designed to avoid them), its track
record, and its role as a transition to cap-and-trade programs.
e) Another important area of study is the use of market approaches on indirect
measures of the environment. For instance, it is typically almost impossible to
measure nonpoint source pollution from a source, because the runoff cannot be
observed. Instead, pollution policies are sometimes proposed for related goods,
such as fertilizer use or Best Management Practices. Other examples include
taxing gasoline instead of auto emissions and pay-at-the-pump auto insurance.
When market instruments are applied to indirect measures, the environmental
effects are much less understood; indeed, it is possible that adverse environmental
outcomes might arise from unexpected substitutions or other unexpected effects.
f) The interaction of MMI with existing taxes and other policies (such as agricultural
programs) is an important area that deserves study. The General Theory of the
Second Best suggests that improving one market in a world of multiple distortions
may not improve welfare; hence, it is worth understanding whether the use of
MMI might lead to adverse effects in unexpected ways and how the design of
policies can be improved in this light. We would accord priority to three particular
manifestations of the second best and the importance of pre-existing policies that
have been found to be very significant in previous research.
One has to do with policies or subsidies for such areas as agriculture or energy,
outside EPA's jurisdiction, whose potentially significant environmental effects
sometimes conflict with the goals of environmental policy. Other programs may
have beneficial effects, and EPA may be able to learn from experience of
programs in these other areas. For instance, the use of environmental targets in the
USDA's Conservation Reserve Program deserves study as an important
application of subsidies promoting, or consistent with, environmental objectives of
the EPA. This program and its Environmental Benefits Index might be modified
to target water quality and achievement of TMDLs. Generally, there could be
significant environmental and financial gains from greater cooperation and
coordination of research and policy across agencies.
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A second area is pre-existing tax or regulatory policy. EPA has previously funded
work on the "tax interaction effect" and found this to be significant. Significant
opportunity exists to improve this research by making it more accessible for policy
makers and by introducing greater specificity and heterogeneity in the analytical
and simulation models that have been employed to date. In general, further
research that addresses the value (in a public finance context) and potential uses of
revenues from environmental policies would be a very important contribution to
policy design in general. For example, mandatory emission fees in severe
nonattainment areas can be used to generate revenues to subsidize investment in
emission control by firms or in infrastructure improvement that will reduce
emissions.
Finally, state-level policies may interact in unforeseen ways with federal
programs. For instance, states have adopted renewable portfolio standards (RPS)
as a way to influence technology choice and environmental performance in
electricity generation. State-level policies, such as RPS or state emission
restrictions, when implemented under the umbrella of an aggregate emissions cap
at the federal level, could be ineffective for achieving national emission
reductions, as state-mandated gains are traded away.
g) Another important area for future study that is excluded from the EERS is the
implication of MMI designs for the perception of equity or fairness, and ultimately
political feasibility of environmental policies. Economic research is often oriented
toward measures of efficiency, but it also offers the tools to identify the
distributional effects of policy. Of special interest and potential contribution is the
identification of the distributional effects associated with different types of policy
design for a given environmental goal. This research could measure the effects of
policies on market value of firms and the distribution of damage from existing
environmental burdens (and, implicitly, the distribution of benefits from
improvements). Furthermore, ORD should consider an investigation into so-called
"risk-risk" trade-offs affecting the various types of costs and burdens imposed on
households as a result of environmental controls. Potential cost savings of $40
billion from greater use of incentive-based regulation, as has been suggested, may
be one of the most effective programs for improving public health and the
environment, according to the risk literature, and this is a topic that deserves
formal study.
h) The implications of technological innovation in the design of environmental policy
were identified by the Committee as a cross-cutting theme in environmental
economics research. This topic also deserves special attention in the study of
MMI. Important questions remain about the design of MMI policies to promote
efficient innovation and technological diffusion. Although there has been
important recent work in this area, evolving methodologies make this area fruitful
for additional empirical and theoretical study.
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i) Developing methods to estimate the cost savings associated with MMI would be
valuable for evaluating the benefits of these programs. Estimating these savings is
actually very difficult to do. The process requires modeling of costs under both
the market approach and a "traditional" policy with the same environmental goal.
While a number of prospective studies of the benefits of market mechanisms
compared to traditional approaches exist, there have been few retrospective studies
of the benefits of MMI.
2.5.2 Research Feasibility
Given the implementation strategy laid out in the EERS; —To what extent is this
research scientifically feasible at a high level of quality? —How successful is this
research likely to be in answering policy-relevant questions for EPA within the next 8-
10 years?
Environmental economic researchers have examined many of these issues at some
level, although further work needs to be conducted. It is very likely that high quality and
highly policy-relevant work can be conducted in the next 8-10 years.
2.6 Benefits of Environmental Information Disclosure
2.6.1 Characterization of Research Gaps and Priorities and Research Feasibility
Is the characterization of each of the major research gaps in the literature adequate?
Will these priorities and implementation approaches effectively address the areas of
greatest scientific uncertainly?
Given the implementation strategy laid out in the EERS; —To what extent is this
research scientifically feasible at a high level of quality? —How successful is this
research likely to be in answering policy-relevant questions for EPA within the next 8-
10 years?
Several statutes under which EPA operates—including the Emergency Planning and
Community Right-to-Know Act of 1986 and the Safe Drinking Water Act amendments of
1996—require that information about environmental performance be disclosed to affected
communities and/or the general public. EPA states that there is no generally accepted method
to estimate the benefits of such information disclosure, although selected anecdotal evidence
suggests that information disclosure programs may affect the behavior of entities that are
required to provide the information.
EPA is correct that there is no generally accepted method, but it is not clear that one
should search for a "general method." The fact remains, however, that research to date has
not estimated the benefits (or the costs) of environmental information disclosure programs.
For the most part, the major analytical challenge is not associated with monetizing impacts,
but with identifying behavioral responses to information disclosure requirements.
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Clearly, there is increasing interest in the United States (and other countries) in the
potential role that can be played by information disclosure programs, as substitutes or
complements for conventional command-and-control or market-based environmental policy
instruments. Much of this interest can be attributed to the success that has been claimed for
the Toxics Release Inventory (TRI) program, which requires large manufacturing facilities to
report publicly their annual releases of certain chemicals. Since the inception of the TRI
program in 1986, reported releases of over 300 regulated chemicals have fallen by more than
45%.
What is needed is analysis of the efficacy of such information disclosure programs by
examining the ways in which these programs can-in theory-affect environmental quality and
by investigating empirically the ways in which the programs have actually affected pollutant
releases. In terms of theory, there are several pathways through which information disclosure
might lead to pollution reduction, including: green consumerism, green investing, community
pressure, impacts on labor, the threat of future regulation, and organizational limitations of the
firm. Better theoretical modeling of firms' production and pollution decisions would
incorporate these pathways. Such theoretical frameworks could then be used as the bases for
empirical (econometric) analyses of the effects of TRI on facility decision-making. Such
research could produce greater understanding of how facilities respond to information
disclosure programs such as the Toxics Release Inventory. This is a necessary first step to
estimating the benefits of such information disclosure programs.
As EPA notes, there are a variety of other important research questions, including
cost-effectiveness comparisons of information disclosure programs with command-and-
control and/or market-based environmental policy instruments. In general, EPA's Office of
Research and Development has begun funding such research efforts under its category of
"Corporate Environmental Behavior: Examining the Effectiveness of Government
Interventions and Voluntary Initiatives," part of the Science to Achieve Results (STAR)
program.
It is important to distinguish between information disclosure as a complement and as a
substitute for other forms of regulation. EPA suggests in places that information disclosure
might be a substitute for regulation (as in the third bullet point on page 20). While disclosure
requirements might induce pollution reductions, theory suggests that only in a limiting case
would these reductions match those under efficiency-maximizing regulation. In the context of
the TRI, firms would need to assume that, at the margin, the public-relations cost of pollutant
emissions (that is, the negative impact on product demand) were equal to marginal
environmental damages. This would only be the case if customers fully internalized the costs
of pollution in their purchasing decisions. It seems more likely that information-disclosure
requirements will lead only to partial reductions in pollution, relative to the efficient level of
reduction.
This suggests that information-disclosure requirements may indeed be a substitute for
regulation that is less stringent than the efficient amount, but that they are unlikely on their
own to yield large enough reductions to correspond to the efficient level of pollution-
abatement. This also suggests the need for research that examines how information-
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disclosure rules and other regulatory approaches will operate jointly. Even when the two
instruments — information disclosure and other regulation — are used together, there are
potential cost-savings from the information-disclosure component, for example by facilitating
monitoring and enforcement activities.
These considerations imply several additional research questions. First, how large is
the reduction in pollution induced by information-disclosure requirements, relative to the
efficiency-maximizing reduction? Correspondingly, what fraction of the damage from
pollution is internalized in the purchasing decisions of consumers, once they are aware of
respective pollution? What are the cost-savings from combining information-disclosure
requirements with direct regulation, compared with costs under direct regulation alone?
2.6.2 Usefulness of the Research
What improvements in the design and implementation of the EERS would make each
research project more useful to EPA and other environmental management agencies?
The topic of information disclosure relates closely to another potential area of
economic research for EPA that is likely to become more important over time, with increasing
concerns about the effectiveness of terrorism risk policies on plant safety and security. In
particular, EPA might support econometric analysis of the effectiveness of current and
proposed terrorism risk regulations on plant safety and security, drawing upon publicly
available data, as well as the Risk Management Plan database housed at EPA's Chemical
Emergency Preparedness and Prevention Office, and data collected by local emergency
preparedness agencies under the Emergency Planning and Community-Right-to-Know Act.
As noted above, several regulations, beginning in the late 1980s, were designed to
reduce the risk of large-scale chemical accidents. The Emergency Planning and Community -
Right-to-Know Act of 1986 established disclosure requirements for plants using and storing
hazardous chemicals on-site. Section 112(r) of the Clean Air Act Amendments of 1990
requires detailed risk management planning and reporting for all large chemical plants. The
International Standard Organization (ISO) developed a set of management practices designed
to improve environmental performance, but also likely to reduce risk from chemical use. And
in the aftermath of September 11, 2001, the American Chemistry Council, a trade
organization representing the largest chemical manufacturing firms, established management
practices for enhancing the security of chemical plants.
While most of these programs and policies were not specifically designed to reduce
risk from terrorism, studies of the effectiveness of these approaches will provide valuable
information regarding the viability of alternative types of policies to reduce the environmental
component of terrorism risk. Until now, little empirical research has been conducted to
evaluate the relative effectiveness of these regulations on plant and community safety.
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3. ANSWER TO CHARGE QUESTION 3
3.1 Missing Issues
Can the SAB identify by consensus any environmental economics issues of overriding
importance to EPA that the EERS has missed, and that EPA should address provided
that more resources be made available for Environmental Economics Research?
Within each of the five subject areas discussed in section 2. of this report the
Committee has identified topics not originally mentioned in the Research Strategy. For
example, under market methods and incentives we have suggested that the agency broaden its
purview to consider renewable portfolio standards and incentives other than permit trading.
In the case of valuation of environmental benefits we have stressed the importance of valuing
non-marginal as well as marginal changes in risk of death and threats to ecosystems. The
EEAC, however, believes that that the five subject areas on which the Agency has focused in
the EERS are the most important areas of environmental economics research in terms of their
importance to the Agency and in terms of gaps in the literature.
There is, however, an additional area of research, namely, the distributional
consequences of regulation, to which the Agency might give more attention. We know that it
is difficult to attribute the full general equilibrium costs and benefits of any given policy to
specific groups of individuals; however, as long as people have only one vote each, and
cannot exercise a number of votes in proportion to their perceived individual net benefits from
environmental regulations, an awareness of distributional consequences will be important to
the political feasibility of environmental regulations. Even a very attractive potential Pareto
improvement will not fly if the distributional consequences do not meet with society's
approval. The political economy of regulation will be an enduring dimension of successful
environmental management. We urge the agency to give more weight to the distributional
consequences of regulation in its strategy for benefit valuation. And, to the extent possible, in
the measurement of the costs of environmental regulation.
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4. ANSWER TO CHARGE QUESTION 4
4.1 Communication of the Research Strategy
What is the best way for EPA to communicate the results of the research strategy and
plans for achieving its long-term research goals to the wider research community, and
other potential users?
One way in which EPA could foster dialog with members of the research community
is to hold workshops in conjunction with the American Economics Association and American
Agricultural Economics Association annual meetings. These sessions would both give the
Agency an opportunity to communicate its long-range research goals and to hear from
researchers how these goals might best be met. This would inform the Agency's formulation
of Requests for Proposals.
Currently, EPA's requests for proposals are announced 90-120 days in advance, and
may be found on EPA's website under "Funding Opportunities—Environmental Research
Grant Announcements." [http://es.epa.gov/ncer/rfa/] The EEAC suggests that these notices
also be sent to the Chairs of Departments of Economics and Agricultural Economics, and that
announcements be placed in the newsletters of the Association of Environmental and
Resource Economists and American Agricultural Economics Association.
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References
Black, Dan A., Jose Galdo and Liqun Liu (2003). How Robust Are Hedonic Wage Estimates
of the Price of Risk? Final Report to the USEPA [R 82943001].
Harrington, Winston (1988). "Enforcement Leverage When Penalties Are Restricted,"
Journal of Public Economics., 37, 29-53.
Heckman, James, Rosa Matzkin, and Lars Nesheim (2003). Simulation and Estimation of
Hedonic Models. CEPR Discussion Paper.
Magat, Wesley and W. Kip Viscusi (1990). "Effectiveness of the EPA's Regulatory
Enforcement: The Case of Inudstrial Effluent Standards," Journal of Law and Economics
33:2,331-60.
Pope, C. Arden III et al. (2002). "Lung Cancer, Cardiopulmonary Mortality, and Long-Term
Exposure to Fine Parti culate Air Pollution," Journal of the American Medical Association
287:1132-1141.
USEPA (1997). The Benefits and Costs of the Clean Air Act, 1970-1990.
Viscusi, W. Kip and Joseph Aldy (2003). "The Value of a Statistical Life: A Critical Review
of Market Estimates Throughout the World," Journal of Risk and Uncertainty 27:1, 5-76.
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