ECONOMICS IN. EPA
A Report
The Subcommittee on Economic Analysis
Science Advisory Board
U.S. Environmental Protection Agency
July 22, 1980
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EPA NOTICE
This report has been written as a part of the activities of
the Agency's Science Advisory Board, a public advisory group
providing extramural scientific information to the Administrator
and other officials of the U.S. 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, and hence
its contents do not represent the views and policies of the
Environmental Protection Agency, nor does mention of trade names or
commercial products constitute endorsement or recommendation for
use.
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ROSTER
Subcommittee on Economic Analysis
Science Advisory Board
Dr. J. Clarence Davies, Co-Chairman
Conservation Foundation
Washington, DC
Dr. Wassily Leontief, Co-Chairman*
Department of Economics
New York University
New York, NY
Dr. John L. Buckley
Whitney Point, NY
Dr. Morton Corn
School of Hygiene and Public Health
Johns Hopkins University
Baltimore, MD
Dr. Robert Dorfman
Department of Economics
Harvard University
Cambridge, MA
Dr. A. M. Freeman
Department of Economics
Bowdoin College
Brunswick, ME
Dr. Robert Haveman
Department of Economics
University of Wisconsin
Madison, WI
Dr. Henry M. Peskin
Resources for the Future
Washington, DC
Dr. Douglas Seba
Executive Secretary
Science Advisory Board
Mr. Barry Gold
Staff Assistant
Science Advisory Board
* Dr. Leontief has abstained from accepting the conclusions and
recommendations of this report. His reasons are detailed in
Appendix A.
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TABLE OF CONTENTS
Page
I. The Roles of Economics in Environmental
Policy 1
A. Introduction 1
B. Costs and Benefits of Regulations 2
C. Costs and Benefits of Programs 3
D. Economic Impacts 4
E. . Alternative Regulatory Strategies 4
F. Organizing Information 5
II. Economic Analysis Done by EPA 6
A. Statutory Authority 6
B. Economic Focus 6
C. Review of Economic Analysis to Date 11
Table 1 - Types of U.S. EPA Economic Studies from
January 1970 through June 1979 13
Table 2 - Economic Studies by Program Office in
the EPA from January 1970 through
June 1979 14
Table 3 - Review of Industry Specific Economic
Studies of U.S. EPA from January 1970
through June 1978 Compared with New
Plant and Equipment Expenditures for
Pollution Abatement from 1973 to
1977 15
Table 4 - Media Matrix of Economic Benefit
Studies by the U.S. EPA from January
1970 through June 1979 16
III. Improving the Analysis of Benefits and Costs 17
A. Analysis of Benefits 17
B. Analysis of Costs 19
IV. Recommendations 23
Appendix A - Views of Dr. Leontief 31
Appendix B - Charge to the Economic Analysis
Subcommittee 37
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ECONOMICS IN EPA
I. THE ROLES OF ECONOMICS IN ENVIRONMENTAL POLICY
A. Introduction
Economics has a vital role to play in the formulation and
implementation of environmental policy. It can greatly assist EPA
in making the numerous choices it faces. Economics can also make
important contributions to the Agency's relations with outside
political forces such as Congress, the courts, and the public.
One of EPA's essential continuing tasks is planning its
program so that the most urgent environmental problems receive
prompt attention. Economics has an important role to play in
program planning and in assigning priorities. These decisions
require preliminary assessments of the social costs of a wide
variety of environmental threats and impairments. For example, it
may be necessary to compare the social costs inflicted by a number
of industrial effluents, some of which endanger health, some of
which defile recreational areas, and some of which interfere with
neighboring economic activities. The physical and physiological
effects of the effluents can be assessed by natural scientists and
engineers; comparing the values society places on such effects is
essentially an economic task.
What actions should be taken in specific cases should be
based, in part, on economic analysis. The evaluation and
comparison of the costs and benefits of any contemplated action not
only provide essential information for making the decision but also
provide an overall framework for structuring information so that it
can be useful to the decisionmaker. (Unless otherwise noted, this
report uses the term "benefits" to refer to all of the gains from
an action and "costs" to refer to all of the losses. The terms are
not confined to financial or monetary gains or losses.) Because
economics seeks to explain the behavior of firms and other
organizations, it can help to predict the responses of firms to
alternative forms of regulation. The implementation and structure
of regulatory decisions can be improved by economic approaches
which may suggest more effective and efficient methods for
accomplishing environmental goals.
In the past, when the economic impacts of environmental
programs were smaller and the competing pressures created by the
energy problem and inflation were less pressing, there was less
demand for EPA to consider economic factors. In the present
context, however, economic considerations are an inescapable
element of every important decision made by the Agency. EPA must
justify the costs it imposes on the public; it must economize on
those costs; and it must avoid actions whose costs it cannot
justify in the eyes of the public. For all of those ends, economic
analysis is essential.
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Actions taken by EPA are subject to many constraints imposed
by forces outside the Agency. For example, the courts require EPA
to show that its regulations are reasonable. Under some statutory
provisions EPA has to demonstrate that, before issuing a
regulation, it has made a well-informed and competent evaluation of
both the costs and the benefits of the regulation and that a
reasonable man could conclude that., the benefits are commensurate
with the costs. Thus, economic analysis is necessary to sustain
the legality of EPA decisions.
EPA's effectiveness, like that of any other agency, depends
upon a constituency which believes that EPA's program is worthwhile
and depends upon willingness to comply with the Agency's
regulations. Without such support, the Agency's enforcement
problems will become intractable, and the entire program will be
subjected to erosion as a result of the pressures of special
interest groups and the demands of competing social objectives.
Maintenance of such support, especially among business groups and
the general public, requires careful consideration of the costs and
benefits of Agency actions and programs, including how such costs
and benefits are distributed among segments of the population and
how EPA's activities impact other social goals. In short, careful
and sophisticated economic analysis is required.
As will be discussed later in this report, there are major
limitations on the ability of economics to provide the kinds of
analyses needed for EPA programs. Some of these limitations are
due to the current state-of-the-art of economics; others are due to
the inadequacy of the data available or the incompleteness of
scientific knowledge. The major initial step needed to overcome
these limitations is a recognition within the Agency of the role
that economics should play. If the need for economic analysis is
recognized, then the steps to fulfill the need are more likely to
follow.
The role of economic analysis can be seen in more detail by
examining it in the context of types of EPA decisions. Later in
this report we will examine separately the analysis of costs and
the analysis of benefits.
B. Costs and Benefits of Regulations
EPA perceives that its central function is to issue
regulations. The Agency collects a lot of information and does
extensive research, but these functions are aimed at supporting the
regulatory process.
Intelligent decisons about regulations require economic
analysis of the costs that the regulations will impose on society.
Without such analysis, the decisionmaker will not know whether the
costs of a specific regulation will outweigh its benefits or
whether some alternative regulation might accomplish the same
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purpose at a lower total cost. With such analysis he or she will
be in a better position to predict the political reaction to the
regulation; then it is likely that the regulation will be
successfully implemented.
A few statutory mandates administered by EPA ostensibly
require the Agency to look at only the health benefits when
considering regulations. But, in almost every case, such a
requirement is unrealistic. For example, in setting primary air
quality standards, it has become increasingly clear that to protect
the more sensitive members of the population EPA would have to set
the standards at zero, i.e., prohibit any pollution whatsoever.
EPA has not done so, and Congress has acquiesced in the Agency's
failure to do so because the costs of standards set at zero would
be unacceptably high.
Economics can also contribute to evaluation of the benefits
of a proposed regulation. Many kinds of benefits, such as savings
in hospital costs, reduced damage to crops, and incresed property
values, deal with things that are traded in the marketplace, can be
readily analyzed using economic methods, and can be meaningfully
expressed in dollar terms. The values of goods that are not traded
in markets can sometimes also be expressed in dollars using a
variety of methods. The advantage of expressing the benefits as
well as the costs in dollars is that it allows a direct comparison
between the costs and the benefits. This is important because the
relationship between the costs and benefits is at least as
important as the absolute value of either one. Furthermore, direct
comparisons of costs and benefits promote consistency among
regulations and also may indicate more efficient ways of achieving
a regulatory goal.
It is not suggested here that health and safety regulatory
decisions should be made on the basis of a formal cost-benefit
analysis. There are too many uncertainties and too many
limitations on cost-benefit analysis for EPA to rely on it as the
sole basis for making decisions. But a thorough accounting and
analysis of all available information on both costs and benefits is
necessary to ensure that regulatory decisions contribute to the
national welfare.
C. Costs and Benefits of Programs
Economics can also provide the methods for analyzing the
costs and benefits of entire programs, such as the solid waste
program; the municipal waste treatment grant program; the
automobile emissions control program; and, indeed, EPA's entire
effort to protect the environment.
Program analyses serve two functions. The first is political
or informational. People other than economists ask questions such
as "Is the program worthwhile?" or "Are the benefits of the program
really worthwhile?" In fact, an increasing number of Congressmen,
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businessmen, and citizens are asking just such questions about
environmental programs. They are entitled to answers, and the EPA
programs will be gravely jeopardized if those answers are not
forthcoming.
The second function of program analyses is to identify
programs that are high-priority candidates for improved regulatory
approaches or, in the extreme case, those that should be
eliminated. For example, a number of analyses of the automobile
air pollution control program indicate that alternative approaches,
such as requiring emission control devices on cars registered in
urban areas different from those for cars in rural areas, are
seriously worth considering.
D. Economic Impacts
An examination of the overall economic impact of EPA's
programs is necessary to anticipate obstacles to compliance with
the programs, to identify and examine conflicts between
environmental policies and other national goals, and to evaluate
the full costs and benefits of Agency programs.
Economic impacts can be examined at both the micro- and
macroeconomic levels. At the microeconomic level EPA has begun to
examine the impact of all Agency programs combined on particular
,industries. By using such studies, the Agency can determine how
much of a strain environmental requirements impose on an industry,
locality, or segment of the population and can thus detect
situations in which its regulations are causing hardship. In this
spirit, for a number of years EPA has kept track of plant closings
attributable to environmental regulations, so that remedial
measures can be taken for unemployed workers. Data on plant
closings also serve as a politically relevant indicator of the
economic impact of Agency programs.
On the macroeconomic level, studies have been conducted on
the impact of EPA programs on inflation-, employment, economic
growth, productivity, income distribution, and technological
innovation. Such studies are needed to show the present and future
effects of environmental programs on the national economy and to
show areas where environmental and economic goals may be in
conflict. If accomplishing environmental goals diverges too
greatly from the accomplishment of economic goals, the
environmental programs are likely to be curbed or altered.
E. Alternative Regulatory Strategies
Large portions of our lives are controlled by market
mechanisms, and it is one of the functions of economics to
understand these mechanisms and explore their applications. Many
environmental regulatory programs could potentially employ market
mechanisms to supplement or replace the more traditional
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"command-and-control" approach. There is good reason to believe
that in some cases market incentives might be both less costly and
more effective than the regulatory approach.
Economics can also be used to decide among alternative
regulatory strategies through the use of cost-effectiveness
analysis. Given a goal to be attained (such as a specific
environmental standard), such analysis can examine the best method
of achieving that goal. Economic analysis can help Agency
officials choose among different control mechanisms or different
regulations.
Stragegic choices about program priorities can also be made
using economic analysis. One way of looking at priorities is that
those decisions that will produce the most benefits for any given
cost should have the highest priority. Using this benefit-cost
framework obviously involves economics.
F. Organizing Information
One of the valuable roles that economists can perform is to
provide a framework for integrating different research efforts and
linking these efforts with decisionmaking. An integrated system of
models and data bases that promotes the assemblage and analysis of
data in a systematic manner could provide EPA with a badly needed
capability to assess the environmental situation and to anticipate
changes to be brought about by future economic growth and new
technology. Economic modeling approaches—for example input-output
analysis, regional models, microdata simulation, and general
equilibrium models—can provide the framework for such a
capability.
Some of the important advantages of integrating models are
that they 1) provide a data depository designed to be used and
not just to provide dead storage; 2) automatically provide a way to
link the various data sets; 3) force a measure of quality control
and consistency on the data collection effort; 4) enable the
economic impacts of a decision to be traced through the economy to
reach a more comprehensive evaluation of its impacts; and 5) allow
the data to be analyzed from many different perspectives. For an
agency such as EPA, which deals with huge amounts of data and
complex interrelationships among natural, technological, and
economic factors, these functions are of great importance.
We shall next turn to an examination of the economic analyses
which EPA has actually conducted.
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II. ECONOMIC ANALYSIS DONE BY EPA
A. Statutory Authority^
A brief glance at the core of the EPA's regulatory authority
to deal with health, safety, and environmental problems reveals
that the following acts, in one or more of their sections,
currently permit or require some form of economic analysis: The
Toxic Substances Control Act, 15 U.S.C., S.S. 2601 et. seq. , The
Clean Air Act, 42 U.S.C., S.S. 1867, et. seq., The Water Pollution
Control Act, 33 U.S.C., S.S. 251 et. seq. , The Safe Drinking Water
Act, 42 U.S.C., S.S. 300f et. seq., and The Federal Insecticide
Fungicide and Rodenticide Act, 7 U.S.C., S.S. 136 et. seq. In
addition to the acts, Executive Order 12044 (March 23, 1978)
requires economic analyses of major decisions.
B. Economic Focus
A review of the Agency's organization chart provides a
perspective on the role of economic analysis within this statutory
framework. The most concentrated economic focus is in the Office
of Planning and Management (0PM), Office of Planning and Evaluation
(OPE), which has an Economic Analysis Division consisting of three
branches: Industrial Analysis; Air Economics and Special Projects;
and Water Economics. The Economic Analysis Division of OPE
provides EPA with a means of monitoring the overall impact of the
Agency's programs on the economy and tries to insure that all
proposed regulations make economic sense.
The Office of Water and Waste Management has a Water
Economics Division under the Office of Analysis and Evaluation to
conduct its economic analyses. The Office of Air, Noise and
Radiation Programs has economic divisions under the Office of
Radiation (Economics & Statistical Evaluation Branch), Air Quality
Planning & Standards (Economic Analysis Office), and Mobile Source
Air Pollution Control (Program Management Office) to conduct its
economic analyses. The Office of Research and Development has
responsibility for methods development and analysis of the benefits
of environmental improvement, except for the benefits of specific
regulations. The Office of Toxic Substancs has economic divisions
under the Office of Chemical Control (Office of Regulatory
Analysis) and the Office of Pesticide Programs (Economic Analysis
Branch) to conduct its economic analyses. Although the Office of
Enforcement lists no specific economics office, the Agency has
produced at least three reports dealing with enforcement economics.
Currently, the activities of the Agency in terms of economic
analysis may be grouped into the following categories: 1)
macro-economic analysis, 2) program specific analysis, 3)
regulation specific analysis, 4) industry analysis, 5) issue
analysis, 6) plant closures, 7) special reports, and 8) methods
development.
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1) Macroeconomic analysis; done for OPE mainly by
outside contractors using econometric models, is
designed to assess the overall impact of pollution
control costs on the U.S. economy.
2) Program specific analysis, done primarily by the
various program offices or their contractors, is an
attempt to assess the impact of a particular pollution
control program (e.g., Water and Hazardous Materials)
on the economy.
3) Regulation specific analysis, done primarily by
the various program offices or their contractors, is
an attempt to assess the economic impacts of specific
regulations. OPE provides direction to the program
offices concerning these studies and a review of their
work. The is currently the bulk of EPA's economic
activities since, for many regulations, a formal
economic impact assessment is required by law, while
for others the analysis is required by Executive Order
12044. And, generally, even when economic impact
analysis is not required, the Agency conducts one to
inform itself of the economic consequences of its
activities.
4) Industry analysis is conducted by OPE since most
industries are affected by more than one set of
environmental regulations. In some cases, the costs of
the combined set of regulations are much greater than
would be included in the economic impact analysis of
the individual regulations. In other cases the
combined impact may be less than the sum of the costs
of individual regulations, for example, if a single
process change can be used to reduce both air and water
emissions. An analysis of overall industry impact has
been completed for the petroleum industry, and one is
currently underway for the chemical industry.
5) Issue-specific analysis is an economic
assessment of special issues which may arise; this is
done primarily by OPE. Examples of issue-specific
analyses are analyses of the impact of EPA's programs
on jobs or the development of a mechanism to assess
fees to remove the economic advantages of noncompliance
with environmental regulations.
6) Plant closures due to the costs of environmental
regulation are a very sensitive issue and have prompted
EPA to develop an early warning system. Every quarter,
based upon a review of the early warning system, OPE
sends a comprehensive information report to the U.S.
Secretary of Labor detailing possible unemployment
problems in affected areas. To date, only twenty
plants, fifteen percent of the total 136 which have
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been reviewed, have actually closed due to
environmental regulations. In many cases, OPE also
investigates whether measures can be taken to allow
plants to stay open.
7) Special reports of a type similar to those
conducted under the heading of issue analysis, i.e.,
"Cost of Clean..." reports, are also done by EPA
through the Office of Planning and Evaluation.
8) Methods development is the broad area of general
responsibility that belongs to the Office of Research
and Development's (ORD) Economic Analysis Division.
Much of this work is done by contract with some of it
being done at the various laboratories, where the
physical data are gathered and analyzed. Currently,
ORD is involved in a major program to improve the
methodology for determining the benefits of national
and regional pollution programs and to make initial
applications of such methodologies.
Within these eight areas of analytic activity EPA conducts
cost, benefits, cost effectiveness, and benefit-cost analyses
(Table 1). The cost analyses and the benefits analyses form the
foundation of all of these studies.
Cost analysis or cost-impact analysis may be defined as the
estimation of all of the costs—direct, indirect, capital,
maintenance and operating--that result from an actual or a proposed
regulation or program. As Table 1 shows, the largest number of
cost analyses deal with the costs entailed by specific regulations.
These studies typically take the form of engineering cost estimates
of the capital equipment and the cost of operating procedures
required by the regulation. For regulations that affect
agriculture, however, the reduction in the size of the crop likely
to result from the increase in costs of production is often taken
into account. The result of the analysis may be expressed as
either an average annual cost or as the present value of the costs
incurred over some substantial period of years, and as either
aggregate costs imposed on the industry or as costs per unit of
output. In principle, indirect costs and nonmonetary costs are
included in the concept, but they are generally neglected in
practice except in the case of "plant closings," as mentioned
above.
Benefits analysis is the other side of the coin. It consists
of estimating the beneficial effects of a protective program or
measure. A determined effort is made to estimate the beneficial
effects of a program or regulation quantitatively. A bewildering
variety of units results: reductions of discharges- in kilograms
per year or per $1,000 worth of output; reductions in ambient
concentrations in grams per liter; reductions in the incidence of
respiratory infections in cases per 100,000 population; reductions
in medical expenses in dollars per year; etc. Note that as one
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moves from the relatively straightforward reductions in pollution
loads to the monetary values of induced changes, the concepts
become simultaneously more meaningful for administrative
decisionmaking and more complex and difficult to estimate. All
levels of benefits estimation are difficult. For this reason,
largely, the sample reported in Table 1 included far fewer benefits
analyses than it did cost analyses.
Benefits analysis can be divided into four tasks or levels,
not all of which are carried out or even attempted in every study.
The least difficult level or task of benefits analysis is the
estimation of the immediate effects of a protective measure, most
frequently a reduction in the volume of pollutants discharged into
the environment. There are a number of reasons why this task is
not simply a matter of engineering estimation. For example,
pollution abatement equipment rarely operates at one hundred
percent of rated efficiency; municipal waste treatment plants and
automotive emission control devices are well known instances.
Careful analysis of the actual conditions of use and sound
judgment are, therefore, required to make a reasonable estimate of
the reduction of pollution loads that regulations are likely to
cause. The second level or task is to estimate the effect of the
reduction in pollution loads on ambient conditions, usually
pollutant concentrations in environmental media. This is generally
a tricky undertaking because pollutant concentrations are very
sensitive to a number of uncontrollable and very variable
circumstances. Concentrations in water depend upon stream flow,
tidal conditions, wind, and temperature, all of which vary
substantially diurnally and seasonally and are often unpredictable.
The effects of reduced emissions on atmospheric concentrations are
even harder to estimate, because concentrations are sensitive to
wind strength and direction, the peculiarities of the microclimate,
the complexities of atmospheric chemistry, and much more. Often
very crude methods of estimation are used, such as "linear rollback
models," which rest on the assumption that ambient concentrations
are linearly and, indeed, proportionally related to changes in
emissions. The third level or task is still more difficult: it is
the task of translating estimated reductions in ambient
concentrations into socially significant consequences. By far the
most significant of all consequences, in most instances, are
effects on public health. This translation is obstructed by two
major obstacles. First, it requires estimates of human exposure,
and these, in turn, depend upon predictions of human behavior
patterns about which little is known. Second, the effect of
environmental pollutants on health depends upon dose-response
relationships that are poorly understood for most pollutants, in
spite of a great deal of study and research. The fourth level of a
benefits analysis, and the one most frequently omitted, is a
conversion of the physical changes—changes in discharges, ambient
conditions, disease incidence, or whatever--into evaluative units
that express their social importance, almost invariably in monetary
units. A vast amount of theoretical and empirical research has
been devoted to the problem of ascertaining the monetary values
equivalent to environmental changes, for which there are no market
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prices. To the extent that environmental changes affect the cost
of producing marketable commodities, there are satisfactory and
well established methods for estimating their social and economic
importance. But to the extent that environmental changes impinge
directly on public welfare, the task of evaluation is still
problematic.
This list of the difficulties that beset benefits analysis
accounts for the comparative paucity of benefits studies in Table
1. Even the studies that have been made, in general, stop well
short of completing all of the tasks that a complete analysis
requires.
Cost-effectiveness analysis is a procedure for evaluating
regulations or programs by straightforward comparison of the cost
with the degree of attainment of one of the types of benefits.
Typically, a simple ratio is computed, and the result is expressed
as either units of benefit per dollar of cost or as units of
benefit per year per dollar of cost per year. For example, the
results of a cost-effectiveness comparison might be reduction in
average lifetime intake of pollutant (in grams) per dollar of
annual cost. Clearly, this mode of comparison is most appropriate
for programs that have only a single kind of benefit or for which
one type of benefit is of preponderant importance. It can be
misleading; when a number of alternative programs are being
compared, the one with the highest cost-effectiveness ratio is not
necessarily the most effective. The reason is that the alternative
with the highest cost-effectiveness ratio might achieve an unduly
low absolute level of benefits. Referring to the last example, the
alternative with the largest reduction in lifetime intake per
dollar expended might still reduce that intake only to a level that
still is judged to be unsafe. Despite these shortcomings,
cost-effectiveness analysis has much to recommend it because of its
simplicity. It permits straightforward comparisons among
alternatives that achieve adequate levels of benefit, and it is
often applicable in many cases where the benefits analysis has had
to be truncated before completing the final stage.
Benefit-cost analysis is a family of procedures for making
more inclusive and ambitious evaluations of regulations or
abatement programs. Its simplest version applies in situations
where all of the benefits can be expressed in monetary units. Then
the excess of the discounted present value of the benefits over the
present value of the costs measures the net social value of the
regulation (or program) under study. Alternatively, the comparison
can be made by subtracting the average annual cost from the average
annual benefit. The program is acceptable only if the net social
value is positive, and then only if the level of benefits (in
physical rather than monetary units) is deemed adequate.
More often than not, however, there will be some kinds of
benefits that do not have satisfactory monetary equivalents. Then,
the benefit-cost analysis takes the form of graphic and tabular
displays designed to show the results of the alternatives under
study and to facilitate appreciation of the trade-offs among them.
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C. Review of Economic Analysis to Date*
Table 1 reviews 427 economic analyses which have been done by
or for the U.S. EPA from January 1970 through June 1979. The table
was constructed from a review of abstracts of the various studies
and by checking the characteristics of the study in the appropriate
categories. For example, a single study might be classified as
regulation specific and industry specific, as well as needing both
a cost and a cost-effectiveness analysis. One can see, by looking
at this table, that most of the Agency's analyses to date have been
industry specific, regulation specific, or plant closure studies
with the major focus on the cost of regulation. This has been
confirmed to the Science Advisory Board's Economic Analysis
Subcommittee by presentations from Agency economists. However, the
Agency has recognized the value of benefits analysis and is putting
more emphasis in this area. EPA's Fiscal Year 1981 budget includes
approximately $4.5 million for analysis of the benefits of
environmental programs.
Table 2 considers the various program offices and whether the
types of analyses conducted by or for them were cost,
cost-effectiveness, benefit-cost analyses, or benefits analyses.
This table shows that most of the Agency's effort has been in the
area of cost analysis and that OPE has played a major role in
conducting, or at least reviewing, these studies. Similarly, we
see that most of the benefit-cost analyses and benefits studies
have been done by ORD with primary responsibility for methods
development. In addition, this table shows that to date the air
and water program offices have been major performers and users of
economic analysis. One would expect the Office of Toxic Substances
to become a more active user as it begins to implement the Toxic
Substances Control Act.
Table 3 examines, in greater detail, the four categories of
economic analysis that have been done at the industry specific
level and compares the number of studies dealing with each
industrial sector with the actual reported capital expenditures
committed by that sector to comply with environmental regulations.
The percentage distribution of the studies identified generally
closely parallels the percentage distribution of expenditures by
industry, indicating that the Agency has been allocating its
analytic resources in accurate proportion to the economic costs of
its regulatory activities.
Table 4 is a matrix which examines the 48 benefits analyses
which had been done through June 1979 in terms of the damage costs
considered and the various media programs to which they relate. As
the Agency comes under increasing scrutiny concerning the costs of
* The tables in part C are based upon an analysis of EPA data by
the Executive Secretary of the Subcommittee.
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environmental regulations and is faced with the need to allocate
its budget among the various program offices, this type of study
will increase in importance.
Section III of this report presents some observations and
examination of EPA's analyses of benefits and costs.
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TABLE 1
Types of U.S. Environmental Protection Agency Economic
Studies from January 1970 through June 1979
Cost
Cost
Effective- Benefit-
ness Cost
Benefits
Macroeconomics (all acts)
Program Specific
(a number of related acts)
Regulation Specific
(section of an act)
Industry Specific
(impact of a regulation)
Methods Development
Plant Closures
Issues
(special reports)
(economic incentives)
(etc. )
9
26
133
116
15
137
29
1
5
3
47
4
34
4
-
3
12
11
5
-
4
2
26
11
—
11
-
5
Total number of studies is 427. Column totals may be greater
because some studies included more than one category.
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TABLE 2
Economic Studies by Program Office in the Environmental Protection
Agency from January 1970 through June 1979
Air & Planning &
Hazardous Solid Toxic Research & Mariage-
Waste Water Waste Noise Radiation Substances Development ment Enforcement
Cost
Cost
Effectiveness
Benefit-
Cost
108
3
1
18
61
6
3
10
11
1
14
1
5
1
22
1
2
1
54
7
17
40
358
45
7
12
3
Benefits
Total number of studies is 427. Column totals may be greater because
somflfcStudies included more than one category. Jtenefits include earlier
identified as harm or damage costs froni^Pollution.
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TABLE 3
Review of Industry Specific Economic Studies of U.S. Environmental
Protection Agency from January 1970 through June 1978 Compared with
New Plant and Equipment Expenditures for Pollution Abatement from
1973 to 1977
All Industry
Manufacturing
Durable Goods
Primary Metals
All Others*
Non Durable Goods
Food, Textiles, Paper
Chemicals, Petroleum
All Other Non Durable
Non-manufacturing
Mining
Public Utilities
All Others**
1
Cost
116
83
31
20
11
53
6
44
2
33
11
8
14
2
Cost
Effective
47
37
14
4
10
22
8
15
-
10
2
7
1
3
Benefit-
Cost
11
10
-
-,
-
10
-.
10
-
1
-
1
-
4
Benefit
-
-
-
-
-
r-
-
-
-
-
-
-
-
5
Total
Number
of
Studies
174
130
45
24
21
85
14
69
2
44
13
16
15
6
Percent
of
Total
Studies
100
75
26
14
12
49
8
40
1
25
7
9
9
7
Expenditures
for
1 Pollution
Abatement***
31,105
20,106
8,297
4,490
3,207
11,765
3,268
8,351
136
11,000
414
9,197
1,401
8
Percent
of
Total
Expenditures
100
65
27
14
10
38
11
27
1
35
1
30
5
Includes machinery, transportation equipment, stone, clay, glass,
etc.
** Includes transportation, communication, commericial, etc.
* **
10
New plant and equipment expenditures, unit measured in $ x
taken from Rutledge, G.L., F.J. Dreiling, and B.C. Dunlap, "Capital
Expenditures by Business for Pollution Abatement 1973-77 and
Planned 1978" Survey of Current Business, June 1978, as cited in
Environmental Economics: An Update, a report by the
Research Service for the Committee on Environment and
U.S. Senate, Serial No. 96-6, July 1979, pp. 152-153.
The Status of
Congressional
Public Works,
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TABLE 4
Media Matrix of Economic Benefit Studies by the U.S. Environmental
Protection Agency from January 1970 through June 1979
Benefits
Air and
Hazardous
Wastes
Water
Solid
Waste
Noise
Toxic
Substances
Human Health
Animal Health
Vegetation
Real Property
Maintenance
and Materials
Recreation
Aesthetic
Miscellaneous
Avoidance Costs
10
1
11
7
8
2
9
8
7
10
6
3
9
4
10
5
5
5
1
-
-
-
-
-
-
-
-
1
-
-
1
-
-
1
-
1
1
1
1
-
J
1
1
1
Total number of studies is 48. Column totals may be greater because some
studies included more than one category. Benefits includes earlier
studies identified as harm or damage costs from pollution. There were no
benefits studies identified for the offices of Enforcement or Radiation.
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III. IMPROVING THE ANALYSIS OF BENEFITS AND COSTS
A. Analysis of Benefits
The ultimate objective of environmental regulation is to
improve social welfare by making the best use of society's
resources, including environmental resources. This necessarily
entails an effort to identify and quantify beneficial and costly
effects of proposed regulations. This section examines two major
areas of EPA's regulatory responsibility so as to identify
opportunities to use economic analysis in the measurement of
beneficial effects and, in each case, to assess the state-of-the-
art and to identify needs for theoretical and methodological
development and better data.
The estimation of benefits of regulatory proposals, which can
be compared with costs, requires the identification and
quantification of beneficial effects such as reductions in
morbidity and mortality expected to result from proposed
regulations. This task is difficult because of the frequent lack
of firm knowledge of dose-response functions and other
relationships between environmental conditions and effects. In
these cases, the estimation of benefits will require basic research
into the quantitative relationships between levels of pollutants
and exposures, on the one hand, and beneficial uses of the
environment such as for recreation, health, crop production, and so
forth, on the other hand. The task is also complicated by the fact
that it is usually difficult to relate changes in ambient
conditions to specific regulations.
If monetary values are to be assigned to the benefits, the
economic theory of value is fairly well developed for those
environmental effects which impinge directly on people. However,
empirical implementation of this theoretical framework is, in many
instances, fraught with difficulties such as absence of necessary
data. Also, the theory of value is not well developed for such
non-user "benefits" as species diversity and stability.
Some of these problems are evident if we examine EPA's
analysis of the benefits of air pollution control. To estimate the
benefits to human health of air pollution control, we need improved
physical models that can separate nonpolicy effects (such as the
general level of economic activity) on pollution levels from the
effects of regulations. We also must obtain better information on
the dose-response functions for various pollutants, both singly and
in various combinations. The major difficulty in obtaining better
estimates of dose-response functions through human epidemiological
studies is poor data on the actual exposures of members of the
populations at risk. There are also problems in controlling for
other factors contributing to mortality and morbidity, especially
dietary factors, smoking, and exposures to environmental
contaminants from other sources such as food, drinking water, and
the workplace. EPA's Office of Research and Development is
supporting basic research on health effects of air pollutants.
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Better information on quantitative aspects of health effects
due to air pollution would be very useful whether or not one took
the further step of assigning monetary values to changes in
morbidity and mortality. The assignment of monetary values to
health effects, especially to mortality effects, is a controversial
issue. There is a basis in economic theory for assigning values to
small reductions in the probability of dying within certain time
periods. However, efforts at empirical measurement of this
willingness to pay using data sources, such as wage differentials
across occupations with different risks of death, have yielded
widely varying results.
The greatest potential for damage to vegetation comes from
exposure to photochemical oxidants and to acid rainfall. The
former is important for the possible revision of national secondary
air quality standards for photochemical oxidants and as a basis for
establishing emissions limits for automobiles. The latter is
important in determining an appropriate policy for the control of
emissions of sulfate and nitrate compounds. To estimate the
benefits of possible changes in the national secondary air quality
standard for ozone, EPA will have to obtain better information on
the effects of low level exposures to ozone (in the range of .05 to
.15 ppm) on crop yields and then combine this with data on ambient
concentrations and cropping patterns to estimate crop losses on a
regional and/or national basis.
The effects of acid rain may be more subtle and more
far-reaching. If acid rain reduces soil pH levels, the effects on
agricultural and forest productivity could be significant. In
addition, acid rain is apparently affecting aquatic ecological
systems.
In reassessing national secondary ambient air quality
standards, the reduction of soiling, cleaning, and materials
damages may be important but is likely to be substantially less
significant in economic terms than the effects of air pollution
control on human health. The major data needs are for better
information on household and commerical cleaning behavior at
different pollution levels and on the inventories of various types
of materials exposed to different ambient pollution levels. It is
necessary to incorporate models of economic behavior and choice in
the analysis of the data.
There is a well developed methodology for utilizing
information on property value differences within an urban area to
estimate benefits of improved air quality. The major problem in
utilizing property value study data to compute benefits for
regulatory decisionmaking is the difficulty in separating the
effects of different air pollutants because of collinearity in the
pollution data. Also, it is difficult to know what categories of
benefits are captured by property value benefits data. They are
likely to reflect aesthetics, soiling costs, and damages to
materials and ornamental vegetation. But do they also reflect
impacts on human health?
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Benefits due to improved visibility at the place of residence
are likely to be incorporated in property values. Recently,
regulatory attention has been increasingly focused on gaining
improvements in visibility in rural areas/ especially in Class I
areas, as required by the Clean Air Act Amendments of 1977. At
present, there is little information to support benefit estimates
in rural areas.
Recreation benefits are primarily important in the analysis
of water pollution control programs. Although present law
establishes the objective of achieving "fishable and swimmable"
waters, very little is known about the levels of water quality
which are necessary to support these recreational activities or the
benefits of achieving these pollution control objectives.
Information is required to enable the prediction of changes in
recreation activities as a function of changes in various
parameters of water quality. Very little is known about which
parameters of water quality are most important in influencing
recreation behavior. There is a substantial number of studies
providing information on the willingness to pay for and unit values
of days of recreation activity at particular sites. However, unit
values are known to vary with water quality, other attributes of
the site, its accessibility, and the range of substitute sites
available to the recreationist. More research must be conducted on
the role of water quality in influencing willingness to pay and on
value before this data base can be utilized easily in the
estimation of recreation benefits.
The main point to emerge from the preceding discussion is
that precise measurement of monetary benefits is not feasible, in
most cases, with the existing data bases. Benefits estimation will
require further basic research to improve our knowledge of such
things as dose-response functions for health effects and behavioral
responses to changes in pollution levels. Yet, given the
increasing concern that regulation has gone too far in such areas as
consumer product safety, occupational safety and health, and
environmental regulation, it would be extremely useful to have
estimates of the magnitude of benefits actually realized from
existing environmental regulations. Also, improved knowledge of
dose-response and behavioral relationships would make it possible
to consider the beneficial effects of changes in regulations.
B. Analysis of Costs
Sound decisionmaking requires knowledge of how much things
cost. Crude and superficial estimates are not reliable enough when
important sums and important issues are at stake. EPA needs
economically sound cost estimates to make economically and socially
sound decisions.
Most of the EPA's primary research on the costs of
environmental policy is undertaken in support of the promulgation
of regulations. Because of this focus and the fact that the cost
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estimates have to be prepared in a fairly short period of time, the
level of sophistication of these analyses often may not satisfy
professional economists.
Generally the studies implicitly assume that criticism of the
estimates will come only from the industry being regulated.
Therefore, the cost estimates tend to refer to short-run, private
(not social) costs under conditions of fixed demand, because these
types of costs are of most concern to the regulated industry.
Since each regulation affects only one industry classification,
what_is ignored is the fact that a particular industry's cost may
be offset by another industry's benefit and, therefore, given the
unemployment of inefficiently employed resources, may not represent
a true social cost. Since consumer groups (and economists) rarely,
if ever, challenge promulgated regulations, there is not much
incentive to employ a broader concept of social, as opposed to
private, costs. If, as often is the case, control costs represent
a small share of total industry costs of production, sophisticated
analyses of long-run effects that allow for demand feebacks are
unnecessary. For this reason there is usually only a qualitative
assessment of market response, resulting plant closures, and
reductions in output. Finally, it simply is not worth undertaking
sophisticated analyses for those industries where challenges to the
regulations are not likely.
While these costs analyses are generally sufficient for their
primary purpose, it may be in EPA's interest to undertake more
thorough analyses for several reasons. In the first place, the
cost estimates drawn from these studies are widely used (Some would
say misused.) for purposes other than to support the promulgation of
particular regulations. In particular, these cost estimates are
the basis of EPA and CEQ estimates of the costs of the entire
environmental program; they have been used as inputs to large
macroeconomic models to assess economy-wide impacts of regulations;
and they have been used as inputs into certain of the
industry-effects models.
Generally, these studies require cost concepts other than the
simple, short-run, fixed demand concepts characteristic of the
unsophisticated estimates. For example, the macroeconomic models
require total expenditure estimates phased over time. The
sophisticated industry-effects models require, for consistency,
long-run cost estimates that reflect new output-price equilibria.
Even if the EPA cost data were highly accurate measures of
short-run costs, short-run costs are poor proxies for these other
cost concepts.
Since EPA is both a consumer and a producer of those economic
studies that have heavily relied upon EPA cost data, EPA should
have an interest in assuring that their own cost data will not be
misused. One way to assure this is for EPA itself to take the lead
in expanding their costing efforts to generate data covering the >
wide range of cost concepts.
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However, there is another reason for EPA to undertake an
expanded, more sophisticated costing effort: namely, to upgrade
the quality of the intended short-run cost estimates. While the
cost estimates tend to reflect short-run conditions with fixed
demands, the fact is that the definitions and assumptions
underlying particular estimates are by no means clear. Presumably
the discipline required for a better costing procedure would force
more clarity with respect to definitions and assumptions.
At present, the concept of what is meant by control cost can
differ estimate-by-estimate. For example, certain EPA contractors
have attempted to estimate the incremental cost of federal
pollution control policies; pollution control costs engendered by
state and local laws or simply due to voluntary corporate efforts
are excluded. Other contractors, in spite of clear guidelines to
the contrary, have not made the same adjustment.
Still others have defined costs as the sum of expenditures to
be incurred after some specified base year to comply with the
regulation. If the base year coincides with the year of
promulgation, such an estimate comes very close to being a true
incremental policy cost estimate. However, if a later base year is
chosen, confusion arises. For example, recent EPA estimates of the
costs of pollution control for leather tanners use an apparent 1977
base year. The estimates of expenditures to be incurred include
the expected expenditures of those plants that have yet to install
1972-mandated controls, and the estimates exclude the already
incurred expenditures of those plants that meet the 1977-mandated
controls. While these expenditure estimates are of interest, they
are extremely difficult to use as estimates of the costs of either
the 1972 or the 1977 regulations.
The simple identification of costs with expenditures has also
led to inconsistent accounting for land and capital costs. Certain
contractors have neglected the costs of these factors if they were
already owned by the enterprise. (Often this is the case with
land.) Others have attempted to capture the true opportunity costs
of these already-owned factors by imputing their rental values
(although rather crudely).
If EPA should decide to upgrade its cost analyses, a
fundamental change will be required in the current approach. Under
the current procedures, costing analysis begins with an a-nalysis of
the technical requirements of proposed regulations. Indeed,
engineers--not economists—provide unit cost estimates in the
"Development Documents." The "Economic Analysis Documents" rely
upon these estimates for their analysis of industrywide cost
effects.
While this approach may appear perfectly reasonable, it
overlooks the fact that technical choice often—if not,
always--has an economic foundation. Thus, the decision to use
multiple lagoons rather than an activated sludge plant and
decisions specifying the capacity of either approach depend upon
site specific land, labor, and capital costs as well as upon
technical feasibility.
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It is quite possible (and it may be worth the experiment) to
do the economic analysis before the technical analysis—that is, to
specify a "tolerable" cost level and then ask the engineer to
specify a technology consistent with that cost. This approach
might have the advantage of stimulating innovative technical
approaches. However, it has the distinct disadvantage of ignoring
desired effluent limitations.
Therefore, it seems that a compromise approach, requiring
close interaction between engineering and economic analysis, is
called for. Establishing this close liaison will not be easy. It
will require internal changes within the EPA bureaucracy as well as
new arrangements with EPA contractors.
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IV. RECOMMENDATIONS*
1. EPA should make more use than it now does of benefit
evaluations in making decisions about programs and specific
regulations.
An estimate of the extent of the benefits which will be
gained from a program or regulation is essential for both arriving
at sound decisions and making a persuasive case for the
justifiability of a proposed decision. It does not require a
profound knowledge of economics to raise the question of what
society will gain for the resources expended on government
programs. It is a question that deserves to be answered for both
entire programs and specific regulations.
In many cases/ it will be possible to provide only a very
rough approximation of the benefits. Also, often the benefit
estimates will not be in a form to allow direct comparison with
monetary costs. Nevertheless, a reasoned comparison of the
benefits, in whatever form the estimates take, with the costs
should be an integral part of the decisionmaking process and the
public explanation of the decision.
2. EPA should expand its basic research program on methods
for estimating and evaluating benefits.
If greater use is to be made of benefit estimates, then
additional research of all kinds will be needed to improve the
quality of such estimates. Section III of this report indicated
some of the research that is necessary. Also, insofar as the
benefits will not be expressed in monetary units, as will
frequently be the case, research is needed on how best to compare
benefits in nonmonetary units with each other and with monetary
costs.
If monetary measures of benefits are to be derived for
comparison with costs, monetary values or "prices" must be
estimated for beneficial effects. In some instances, such as
agricultural crop losses, the determination of values from market
data is relatively staightforward. In other cases, such as reduced
mortality, the question of valuation is controversial and
problematic. But for a variety of issues, such as visibility or
recreation, EPA should continue its basic research program on the
development and assessment of valuation methods. As information
from these research efforts becomes available, it should be
utilized in the economic analysis of the effects of regulations and
programs.
* Dr. Wassily Leontief, Co-Chairman of the Subcommittee, has
abstained from accepting the conclusions and recommendations of
this report. His reasons are detailed in Appendix A.
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3. A uniform set of concepts, definitions, and formats
should be used in all EPA analyses of proposed regulations, except
when deviations are clearly required, in which cases these should
be pointed out and explained.
Presently there is a lack of consistency in definitions and
analytical approaches which makes it impossible to synthesize the
sectoral information developed in th separate EPA divisions. The
quality of the analyses performed also suffers from this diversity.
The recommendations of the Water Resources Council* (WRC) for
the preparation of benefit-cost analyses provide a good starting
point for a uniform set of concepts to be applied in EPA, though
some modifications will no doubt be advisable. In particular, the
proposals of the WRC for estimating and displaying the costs and
benefits accruing to significant segments of the population should
be followed. Another important step for the Agency would be to
adopt uniform projections of population and economic development,
such as the OBERS projections, as a basis for analyzing
regulations. EPA's Office of Planning and Management should assume
responsibility for developing and enforcing the use of uniform
analytical concepts, definitions, and formats. Development of an
Agencywide handbook for doing cost analyses might be a first step
in this direction.
4. To facilitate the choice among regulatory alternatives,
the report of the analysis should display prominently the terms of
"trade-offs" among them.
In notices of proposed rulemaking and other documents
describing regulatory choices, EPA now frequently describes only
one regulatory option and gives cursory attention to possible
alternatives. It would be preferable if the advantages and
disadvantages of different options were described. Specifically,
the options might be listed in order of the costs that they impose
on the industry or complying firms; tables and graphs should be
included to show for each option the additional costs it imposes in
comparison with the option that precedes it. The tables and graphs
should also compare the options on the basis of protection they
afford public health, environmental amenities, and other
significant environmental conditions. We recognize that the data
may not be available to show such trade-offs with great accuracy or
in great detail, but it is still better to show the best available
estimate of the trade-offs than to present decisionmakers or the
public with an all-or-nothing choice.
* Federal Register, Vol. 38, No. 174 (September 10, 1973),
pp. 24778 ff.
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5. The estimates of costs and benefits used by EPA should be
quantitative insofar as possible. The quantitative estimates
should be translated into monetary equivalents when reliable prices
are available or when there is some other reliable basis for making
the translation, but not otherwise. Estimates that are not
monetized should not, for that reason, be given less weight in
decisionmaking than estimates expressed in dollar terms.
Some of the benefits and costs of environmental regulations
will be represented by changes in the actual dollar costs incurred
and by dollar revenues received by households, businesses and
public bodies directly or indirectly affected by policy measures
whose effects are assessed. However, many of the most important
positive and negative effects of environmental regulations cannot
be measured in terms of directly ascertainable dollar figures. The
valuation of health, recreational facilities, and the qualities of
the natural environment in which we live would involve application
of measuring scales lying far beyond the area of directly
observable facts. That distinction is very important for efficient
organization of the assessment process.
The task of ascertaining the fact, for example, that a
particular manufacturing process is accompanied by release of a
volatile substance that, in its turn, can be expected to increase
the frequency of certain respiratory ailments and of finding out
about how many working days and income dollars can be expected to
be lost because of these illnesses is one thing. It is quite a
different thing to put a dollar value, as a number of studies have,
on the shortened or lost human lives resulting from such a sequence
of events.
The first is a technical factfinding task; the second is a
decision involving human judgment. To exercise such judgment
without possessing all possible factual information would be
irresponsible, but to assume that the knowledge of all relevant
facts could enable the policymaker to make his final choice without
an exercise of judgment is plainly wrong. Any such judgment must,
moreover, consist of a carefully considered choice between two or
more alternative scenarios—each detailed vividly with much factual
detail—not a comparison of two abstract, at least partly
arbitrary, dollar figures, one supposedly representing the total
"costs" of a given change and the other the aggregate "benefits,"
as if it were a simple commercial transaction.
6. In all cases, estimates of costs and benefits should be
accompanied by statements of ranges that indicate the degree of
imprecision and uncertainty in the estimate.
Without confidence intervals, it is impossible to judge the
validity of the data. As a general guideline, the lower end of the
range shoud be the greatest value that the analyst is confident
does not exceed the true value. Specifically, the target should be
that the true values, if they could be known, would not be below
the lower ends of the ranges more than about five percent of the
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time. The upper ends should be similarly defined. Of course, the
exact confidence values aimed at are not important; what is
important is that the confidence with which the ranges are believed
valid is the same in all analyses.
7. The economic analysis functions and capabilities of the
non-program offices of EPA should be expanded and strengthened.
There are a variety of functions or activities related to
economic analysis that should .be undertaken by a centralized
non-program office in EPA. Additional resources and the full
support of the EPA Administrator are necessary if these activities
are to be successful.
With respect to estimates of the benefits of EPA regulations
and programs, the office should 1) review existing studies of
estimates of environmental benefits; 2) assemble, on an ongoing
basis, estimates of the benefits of the total EPA regulatory
program and of specific EPA regulations; and 3) stimulate ORD to
undertake or contract for studies designed to fill in gaps which
now exist in benefit estimates or in methods to improve the
reliability of such estimates.
The office should undertake additional special studies.
Examples of such needed studies include the effect of environmental
regulations on the slowdown in productivity growth, the effect of
environmental regulations on the level of and delays in capital
investment, methods for introducing economic considerations in
setting the level of particular regulatory standards, and the
economic costs and benefits of substituting taxes, charges, and
other economic incentives for existing policies of direct
regulation. The Office of the Assistant Secretary for Planning and
Evaluation in the former Department of Health, Education and
Welfare (DHEW) and the Office of the Assistant Secretary for
Evaluation and Research in the Department of Labor (DOL) are useful
models for the way in which the EPA office should function.
The office should report periodically on the status of data
necessary for economic analysis, including a criticial evaluation
of the quality of such data. Since these data—especially cost
data—are widely consumed, EPA has a responsibility to make users
aware of the relative weaknesses or strengths of the data. Also, a
periodic report may serve to focus future data development efforts.
8. Economic and technical analysis should be fully
integrated in the preparation of estimates of the costs of
regulations,.
Currently in EPA the technical or engineering analysis
"drives" the economic analysis of the cost of a regulation. The
technical analysis implicitly assumes certain economic conditions.
In fact, the efficient technical response to a regulatory
requirement cannot be identified without taking into account its
costs to the industry, its social costs, and its other economic
effects. Thus the economic factors need to be considered at the
same time as do the technical factors.
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9. EPA analyses of regulations should incorporate
consideration of nondirect costs. The methodologies to analyze
these types of costs/ including methods to study the effects of
alternative policy implementation mechanisms, need to be improved.
Most of the current studies implicitly assume that the sole
impact of regulations on the regulated industry is due to the
direct resource costs of the regulations. However, many of the
most important economic effects of regulatory action are nondirect
costs, such as the impact of regultions on industry concentration,
innovation, capital investment, and delay and uncertainty.
Therefore these considerations should be an integral part of
regulatory analysis.
The effects on industries of policy implementation mechanisms
should be explicitly studied. The implementation mechanism and
even the method of rulemaking can have profound effects on profit
expectations and competitive structure. These factors, in turn,
can have far more effect on the economic performance of the
industry than the direct resource costs have.
10. EPA's program of basic research on the effects of
changes in pollutant levels should be continued. There should be
more consideration of economic analysis in the design of such
research.
Because of limitations in our knowledge of changes in
environmental quality associated with specific programs and
regulations and of basic physical, biological, and behavioral
relationships such as dose-effect functions for human health, it is
frequently not feasible to obtain accurate estimates of the
magnitude of beneficial effects in categories such as improved
human health, increased opportunity for water-based recreation,
improved visibility, and so forth. Yet, given the magnitude of the
resource commitments to environmental programs and the concern
about the net impacts of regulations, it would be extremely useful
to have better estimates of the magnitude of benefits actually
realized. The aggregate effects of changes in pollutant levels are
often influenced by economic adjustments (for example, changed
agricultural cropping patterns in response to changes in oxidant
levels; a person moving his residence in response to air
pollution), and data on pollution effects sometimes are not
suitable for us« in ben-efit-s analysis. Thus, there should be more
economic input into the design and implementation of basic research
strategies for assessing changes in pollutant levels.
11. Monitoring data alone are not an adequate indicator of
policy effectiveness. Modeling, at both the national and regional
levels, is necessary
Regional monitoring data systems, such as STORET, are used to
assess the progress of EPA policy. Unfortunately, this approach
fails to appreciate that ambient environmental quality is affected
by nonpolicy factors such as meteorology and the state of the
economy. Analysis, frequently utilizing models, is necessary to
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separate the effects of EPA policy from the effects of nonpolicy
factors.
12. Within the context of additional modeling, EPA should
explore the use of existing sectoral and regional models (both
inside and outside of government) to estimate the impacts of EPA
policies and, when feasible, to establish operating versions of
existing models within EPA.
Numerous multisectoral, general equilibrium models have been
developed to estimate the sectoral (industry, occupation) and
regional impacts of public policy measures. These models employ a
variety of data (e.g., microdata, statistically estimated
behavioral relationships, etc.) and analytical methods (e.g.,
first-round simulations, simultaneous equilibrium solutions, etc.).
Moreover, these models are at a variety of levels of development
and reliability and are very costly to construct, develop,
maintain, and improve. Many of these models do have significant
potential for policy analysis—in particular, economic analysis of
environmental regulations. The Subcommittee's recommendation is
intended to encourage the realization of this potential while
recognizing the high costs associated with such models.
13. EPA economists should work closely with the
macroeconometric modelers responsible for the annual EPA - CEQ
macroeconomic studies to improve the reliability of the cost and
expenditure estimates used in the models and to specify and examine
the relationships between environmental policy measures and
economic behavior assumed in the models.
The EPA (in conjunction with CEQ) analyses, as represented by
The Cost of Clean Water, The Cost of Clean Air, and the annual
macroeconometric studies (first through the Chase and later the DRI
models), have been valuable contributions to understanding the
impact of environmental policies on the nation's economy. The
quality and analytic rigor of these studies have improved with
time.
Although the fundamental structures of the macroeconometric
models employed have weaknesses, they do represent the current
state-of-the-art. But the use of these models for estimating the
macroeconomic impacts of environmental policies requires adaptation
of these models and the use of assumed relationships between
environmental policy measures and economic behavior. The estimates
yielded by the models depend crucially upon these assumptions and
upon the reliability of industry-specific cost and expenditure
estimates developed by EPA. These estimates have serious
weaknesses. The Subcommittee recommends that EPA undertake a major
effort to improve the reliability of the cost and expenditure
estimates and the incidence of these costs and expenditures over
time. The macroeconomic analyses should be accompanied by
sensitivity analyses to reflect the uncertainty of the cost and
expenditure estimates. The estimates should also recognize the
possibility of alternative technologies and innovations within
industries. The existence of these choices and technical changes--
as well as other economic considerations—can lead to order-of-
magnitude differences in the estimates.
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14. EPA should initiate conceptual planning for an
integrating analytical system to incorporate different data bases
and analytical models.
One of the more valuable roles that economists can perform in
a research organization is to provide a framework for integrating
the different research efforts and to link these efforts with the
decisionmaking process. This should be reflected in an integrated
system of models and data bases which promotes assemblage and
analysis of data in a systematic context.
EPA did attempt to support the development of such a system
several years ago. Called the Strategic Environmental Assessment
System (SEAS), it attempted to combine all information into one
huge computer model. There were a number of shortcomings with this
effort, and after several years it was essentially dropped. This
proposal is not for the resurrection of SEAS. However, the work
done for that effort and many of the lessons learned during that
period provide a strong starting point for the development of a
more useful integrating analytical system. The resulting system
would probably differ from SEAS in many respects but would also
make use of some of the components of SEAS. The fact that these
components already exist (and in some cases have undergone further
development and improvement elsewhere), combined with the
expectation that many of the functions undertaken by the
integrating system ought to be done whether there were such a
system or not, makes this proposal a less expensive development
effort than might otherwise be expected.
Currently EPA spends substantial amounts of money collecting
data on such items as the number of firms in an industry,
production, consumption, emissions, health effects, and the general
state of the environment. But these data are so collected and
processed that they can be used for only very limited purposes—if
they are used at all. There is no attempt made to fit the data
together and preserve them in a way in which they can be easily
used for subsequent analysis. There is also a distressing lack of
quality control and consistency in the data collection efforts.
Some of the important functions that an integrating model can
provide follow:
1. It can provide a depository for data, one that is
designed to be used not just to provide dead
storage.
2. It can automatically provide a method of linking
the various data sets.
3. It can force a measure of quality control and
consistency on the data collection efforts.
4. It can allow the same basic data to be analyzed
from many different perspectives.
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Thus, the development of an integrating model, undertaken
with a specific purpose of incorporating the data presently being
collected by the Agency, becomes a major tool in improving data
collection, lowerig data processing costs, improving data analysis,
and providing a guide for new data collection.
The majority of the Subcommittee, although recognizing the
utility of an integrating analytical system, believes that such a
system has important limitations and would not replace the need for
sectoral and other types of models to analyze regulatory impacts.
The Subcommittee is also concerned that the resources devoted to
such a system be kept within strict limits and not be diverted from
other types of analytical efforts.
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APPENDIX A
Views of Dr. Leontief
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NEW YORK UNIVERSITY
Institute for Economic Analysis
Wassity Leonucf, Director
May 22, 1980
Mr. J. Clarence Davies
Executive Vice President
The Conservation Foundation
1717 Massachusetts Avenue, N.W.
Washington, D. C. 20036
Dear Terry:
As far as I am able to judge, your Draft presents
an adequate description of the role that economic analysis
now plays in the activities of the EPA and it expresses
very well the general endorsement by an overwhelming ma-
jority of members of our committee of the continued use
by EPA economists of the conventional "economists' tool
kit"--as one of our colleagues has called it—on which
they have been relying up to now. I, on my part, find
this approach to be quite inadequate particularly in deal-
ing with problems involving close collaboration with
scientists and engineers on the one hand, and biologists,
ecologists, and health experts en the other.
I am fully aware of the problems encountered eight
years ago with SEAS. But our Committee would not have
been appointed if the economic work as carried on now had
satisfied the present, not to speak of the future, needs
of the EPA.
A shift from a well established old system to a new
more ambitious system would take time, but I am convinced
that it will not take place at all unless a carefully for-
mulated program of transition from one system to another
were put into effect.
Mercer Street c N«w York « New York 10012 • (212) i$S-2181
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Mr. J. Clarence Davies
May 22, 1980
Page Two
A fuller more systematic presentation of the role
that economic analysis should, play in the development
and implementation of National Environmental Policies
was offered in the report of the Economic Solutions Ad-
visory Group, entitled, "Evaluation of Current Environ-
mental Research and Establishment of Priorities," and
also in the brief memorandum, "Preliminary Observations
on Assessment of Costs and Benefits of Environmental
Regulations," that I sent to you on December 6, 1979.
I hope that after reading this statement the other
members of our committee, as well as the readers of this
report, will understand why I have decided to abstain
from signing it.
Sincerely yours,
WL/mh
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December 6, 1979
Preliminary Observations on Assessment of Costs
and Benefits of Environmental Regulations
The assessment of benefits and costs of environmental
regulations should in my opinion be carried out in two distinct,
separate steps.
The first should aim at a systematic, detailed and,
whenever possible, quantative description of all relevant
direct and indirect repercussions of a policy action (or a
combination of policy actions) the benefits or cost of which
have to be assessed. The chains of anticipated affects will
in most instances be found to stretch forward from immediate
physical and chemical to biological and finally human health
effects, aesthetic effects and backward through construction
of requisite abatement facilities and additional labor and
energy required to operate them toward more general economic
repercussions such as shifts in industrial location, plant
closings with resulting unemployments and so on.
The fact finding and analytical tasks involved in this
first step will obviously require a close cooperation between
experts in many different fields, only one of which is economics.
Methods of measurement will at this stage have to be
different from field to field; particulars' emissions are
usually measured in pounds, health effects in term frequencies
of certain types of ailments, life expectation or number of
labor days lost because of that. Capital requirements and unit
costs and incomes are usually measured in dollars, employment
in man years, output levels of steel in tons, energy in KWH's.
The second phase of the assessment process should
consist of a final comparison of costs and benefits assigned
separately or in toto to the direct and indirect repercussions
of the policy action in question, repercussions which should
have been already ascertained and systematically described in
the first phase.
Some of these benefits and losses will be found to be
represented by changes in the actual dollar costs incurred and
dollar revenues received by households, businesses and public
bodies directly or indirectly affected by policy meas'-iras
whose effects we try to assess. However, many of the most
important positive and negative effects of environmental
regulations cannot be measured in terms of directly ascertainable
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dollar figures. The valuation of health, of recreational
facilities, of the qualities of natural environment in
which we live, would involve application of measuring scales
lying far beyond the area of directly observable facts.
That distinction is very important for efficient organization
of the assessment process.
The task of ascertaining the fact that a particular
manufacturing process is accompanied by release of a volatile
substance that in its turn can be expected to increase the
frequence of certain respiratory ailments and of finding
out about how many working days and income dollars can be
expected to be lost because of these illnesses is one thing.
It is a quite different thing to put a dollar value on the
physical discomfort or, as the casa may be, the shortened or
lost human lives resulting from such a sequence of events.
The first is a technical fact-finding task, the second
is a decision involving human judgement. To exercise such
judgement without possessing all possible factual information
would be irresponsible, but to assume that the knowledge of
all relevant facts could enable the policy maker to make his
final choice without an exercise of judgement is plainly wrong.
And such judgement must moreover consist of a carefully con-
sidered choice between two or more alternative scenarios --
each detailed vividly with much factual detail — not a
comparison of two abstract, at least partly arbitrary, dollar
figures, one supposedly representing the total "costs" of
a given change and the other the aggregate "benefits" — as
if it were a simple commercial transaction.
My second set of comments is in favor of employing a
unified, systematic modelling approach to be used not only in
(aggregative) analysis of the general economic repercussion at
environmental policies but also in tracing the direct and
indirect (positive and negative) effects of special rules and
regulations. The Report on Economic Solutions prepared by my
working group at the symposium on "Evaluation of Current
Environmental Research" held at the University of Pennsylvania
in May, 1979, (made'available to members of our committee)
contains a similar recommendationvhich presents the arguments
summarized below much more fully. Since at least one and
possibly more members of our committee seem to disagree with
that position, I anticipate the possibility that our final
report might have to contain two separate statements on that
subject.
The arguments in favor of comprehensive modelling approach
and against continuing reliance on the "conventional economic
tool kit" now employed in the EPA, can be summarized as
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follows:
1. Comprehensive formal modelling is the only viable
approach to factual description of the structure and analysis of
functional properties of large, complex systems within which
the policy makers in the field of environmental regulations
have to operate. It is the only approach that permits
systematic tracing of multidimensional relationships between
the physical, biological, economic and social repercussions
of any single or a given combination of several environmental
regulations. It does provide at the same time and for the
same reason concrete detailed specifications for construction
and maintenance of the unified data base indispensible for
shaping and implementation of efficient and effective
environmental legislation.
2. The SAES system constructed some eight or nine years
ago did not perform as well as originally expected precisely
because:
a) it was the first and only try, within the EPA,
in this particular direction — a "spruce goose" (I refer
to Howard Hughes' giant wooden plane) that was not permitted
to be followed up by future efforts that could have been con-
fidently expected to lead toward development of an efficient
and well behaving modern "747" model.
b) not only the construction of that model and the
compilation of the requisite data base, but even its operational
use was put in the hands of several outside contractors.
Experience has shown that to gather the practical benefits
of a new modelling enterprise it is imperative to carry it out
with fullest possible cooperation and participation on the
one hand of all those members of the organization (in this
case the different divisions of the EPA regional laboratories,
as well as local, i.e., state and municipal environmental
agencies) that is expected to benefit from its practical use
and on the other — of thos.e insiders and outsiders who happen to be
in possession of the various types ot primary information that
will have to be included in the models data base.
3. Reliance on the "economist's usual tool kit" means
continuation of the present free wheeling casual approach to
the economic assessment as it is being practiced now. Adding
more economists here and there and changing the organization
chart would mean not more than increasing the si?.e of the
orchestra and rearranging its seating order; the music will
remain the same and it will continue to sound as it does now —-
more like the tuning up of the different instruments rather than
performance of a well composed piece.
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APPENDIX B
Charge to the Subcommittee
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* UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
"
"csoit~ WASHINGTON. D.C. 20460
MAY '2 4 1979
THE ADMINISTRATOR
Dr. John E. Cantlon
Chairman
Science Advisory (A-101)
U.S. Environmental Protection Agency
Washington, D.C. 20460
Dear Dr. Cantlon:
As recommended by the Executive Committee of the Science
Advisory .Board I agree with the need for the formation of a
subcommittee to review the "state of the art" of economic
analysis as it is done by the Agency. I welcome the
establishment of the Economic Analysis Subcommittee and look
forward to receiving their comments on the following issues:
o What resources is EPA devoting to economic analysis
o What steps should the Agency take to improve the
analysis of the benefits of its regulations
o An examination of EPA's research and analytical
efforts on the costs of regulatory measures
Again, I look, forward with interest to receiving your
advice.
M. Cos tie
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