September 22, 1998
EPA-SAB-EEAC-ADV-98-005

Honorable Carol M. Browner
Administrator
U.S. Environmental Protection Agency
401 M. Street, SW
Washington, DC  20460

              Subject:  An SAB Advisory on Economic Research Topics and Priorities

Dear Ms. Browner:

       During its April 9, 1998 meeting, the Environmental Economics Advisory Committee
(EEAC) of the Science Advisory Board (SAB) received a briefing by representatives from EPA's
Office of Research and Development (ORD) and the Office of Policy (OP) on the Agency's
efforts to prepare a plan to guide its economics research. No specific charge was provided to the
EEAC prior to the meeting.  Rather, the SAB was asked to consider how the EEAC might help to
ensure that the best possible plan could be prepared to guide EPA's economics research.

       The EEAC agreed to prepare an Advisory that would contain member comments on a list
of topics being considered by EPA internally as candidates for Agency-sponsored economics
research. The Committee again discussed this issue at its August 19, 1998 meeting. This
Advisory, consisting of brief member commentaries on the 31 topic areas proposed by EPA,  is the
result of those discussions. In addition, the Committee's informal ranking reflecting the value it
associates with each research topic is included as Appendix A.

       This Advisory provides advice on an Agency work-in-progress  and as such, provides
information that the Agency might use for mid-course corrections to refine their ultimate research
plan. When completed, this plan may once again be brought to the SAB for additional
consideration.  If another interaction is requested on this plan, a significant number of new
participants will be added to the reviewing panel — by normal and routine processes that result in
annual changes in EEAC membership and/or inclusion of additional consultants — to ensure
independent assessment of the Agency's work.

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       A few remarks are necessary to ensure that the nature of the ranking information
contained with this Advisory is clearly understood. First, the rankings did not result from a
formal scientific survey procedure employing explicit criteria for the objective derivation of
numeric values to indicate the importance of research in each topical category. Rather, the rank
assigned to a specific topic is the simple average of rankings by individual Committee members
reflecting their own opinions on whether topics should be given high, medium, or low priority for
implementation.  The final ranking provided in Appendix A reflect an aggregation of individual
rankings for each topic derived by assigning numerical values of 3, 2, and 1 to rankings that
EEAC members submitted for high, medium, and low priorities, respectively, for the 31 research
areas.  Members were asked to base rankings on their own informal benefit-cost assessment of the
possible return from conducting research within that topic area. Further, the rankings reflect the
individual opinions only of current members of the EEAC, and may reflect their current research
interests.

       At the time the Committee members were ranking the research topics, some individuals
were aware of rankings developed by EPA during its staff survey of economic research needs.
However, members were asked to ignore those rankings in their decision making. No assessment
of members' certainty about their rankings was conducted, nor did the Committee determine
whether the individual ratings would be replicated if the exercise was conducted again. The
Committee believes, however, that the average rankings across  its members would likely be quite
similar if the exercise was repeated.

       It is also important that the process used to prepare the narratives on each research topic
be clearly understood (these narratives  are contained in Appendix B).  First, the narratives were
developed by a group of EEAC economists for use by EPA economists and staff who are
involved with EPA's economics research program. The terminology used is of a specialized
nature and it is familiar to professional economists and those involved in decision making
activities associated with environmental public policy development.

       Commentaries on each of the research topics were initially drafted by individual EEAC
members, who, for the most part, chose topics upon which they wrote (although there were some
cases where individuals were assigned topics not of their own choosing).  Thus, the initial draft of
each section generally reflected the author's own research interests and as such each narrative
reflects some individuality.   Even though the current composition of the EEAC broadly represents
the range of research interests of environmental economists in general, the coverage is neither
perfect nor complete.  It is  certainly possible that if each topic had been assigned to a different
committee member, the commentaries would have turned out differently.  However, language
used in the narratives has been accepted by all members of the Committee.

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       In conclusion, the Committee finds that the list of topics for potential economics research
being considered by the Agency is complete and reasonable but that some topics are of
significantly greater importance than others. The Committee strongly supports the conduct of
research on the economic implications of environmental actions. The SAB hopes that this
Advisory is responsive to the Agency's needs at this time and that it helps EPA in guiding its
economics research. The Committee is prepared to answer any questions that might arise in this
regard.

                                  Sincerely,
  r. Joan M. Daisey, Chair                        Dr. Robert N. Stavins, Chair
Science Advisory Board                         Environmental Economics Advisory
                                          Committee
                                               Science Advisory Board

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                                   APPENDIX A

                AGGREGATED RANKINGS FOR PROPOSED
                               RESEARCH TOPICS

       A few remarks are necessary to ensure that the nature of the ranking information
contained with this Advisory is clearly understood. First, the rankings did not result from a
formal scientific survey procedure employing explicit criteria for the objective derivation of
numeric values to indicate the importance of research in each topical category. Rather, the rank
assigned to a specific topic is the simple average of rankings by individual Committee members
reflecting their own opinions on whether topics should be given high,  medium, or low priority for
implementation. The final ranking provided in Appendix A reflects an aggregation of individual
rankings for  each topic derived by assigning numerical values of 3, 2, and 1 to rankings that
EEAC members submitted for high, medium, and low priorities, respectively, for the 31 research
areas.  Members were asked to base rankings on their own informal benefit-cost assessment of the
possible return from conducting research within that topic area.  Further, the rankings reflect the
individual opinions only of current members of the EEAC, and may reflect their current research
interests.

       At the time the Committee members were ranking the research topics, some individuals
were aware of rankings developed by EPA during its staff survey of economic research needs.
However, members were asked to ignore those rankings in their decision making. No assessment
of members' certainty about their rankings was conducted, nor did the Committee determine
whether the individual ratings would be replicated if the exercise was conducted again. The
Committee believes, however, that the average rankings across its members would likely be quite
similar if the exercise was repeated.

       Voting by members yielded average scores ranging from 1.1 to 2.8. Because of ties, these
scores can be interpreted as implying fifteen levels of ranking, as follows, beginning with the
highest priority:

       1.      3B:    Trading Systems (Permits)                                       [2.8]

       2.      IE:    Methods of Valuing Ecosystem  Services                           [2.7]

       3.      IB:    Methods of Valuing Morbidity Risk Reduction                     [2.6]
              1C:    Methods of Valuing Benefits for Vulnerable Populations

       4.      1A:    Methods of Valuing Mortality Risk Reduction                      [2.5]

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5.      3 A:   Fees, Charges, Taxes, Subsidies, D-R Systems                     [2.4]
       3C:   Liability Approaches

6.      5A:   Methods of Incorporating Risk and Uncertainty                    [2.3]
       5D:   Equity and Distributional Effects of Environmental Regulations
       6 A:   Effects of Regulation on Innovation and Technology Adoption

7.      4E:   Economic Aspects of Land Use Regulations                       [2.2]

8.      IF:   Methods of Valuing Non-Use Benefits                            [2.1]
       4G:   Linkages Between International Standards, Trade, and Environmental
             Quality

9.      2A:   Methods of Estimating Direct/Indirect Regulatory Costs             [2.0]
       6B:   Retrospective Cost-Benefit Analyses

10.     1G:   Benefits Transfer Methods                                       [1.9]
       3D:   Information Approaches; Voluntary Programs for Industry
       4F:   Linkages; Environmental Quality/Other Regulatory Policies

11.     4B:   Population Growth, Economic Growth, and Environmental Quality   [1.8]
       4C:   Revision of National Income Accounts to Reflect Environment
       5C:   Baseline Definitions and Adjustments that  Affect Economic Values

12.     5E:   Effect of Information on Private Economic Behavior                [1.7]
       6D:   Sustainability Indicators

13.     ID:   Methods of Valuing Other Welfare Benefits                       [1.6]
       1H:   Resolving Sensitivity of Some Benefit Estimation Methods
       4D:   Regulatory Takings, Property Rights, and  Compensation
       6F:   Effect of Government-Provided Information on Innovation

14.     2C:   Methods of Estimating Public Monitoring/Enforcement
              Costs                                                         [1.4]
       4 A:   Economic Aspects of Pollution Prevention Strategies

15.     2B:   Methods of Estimating Private Monitoring/Enforcement Costs       [1.1]
       6C:   Economic Impacts on Business/Small Business

                                  A-2

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                                   APPENDIX B
                MEMBER COMMENTS ON EPA ECONOMIC
                               RESEARCH TOPICS

1.  BENEFIT ESTIMATION

       Topic l.A    Methods to Improve Estimation of Values for Reductions in Mortality
                    Risks
                    [Priority Rank = 4 of 15]

             We have a good sense of overall mortality risk values for accidental deaths to
       adults and some estimates for other outcomes such as cancer. We lack good estimates,
       however,  that refine these values depending on the character of the risk and the population
       bearing it, for example, involuntary environmental cancer risk versus voluntary job
       accident risk. Adjustment of values for quantities of life extension (or life years saved)
       remain problematic and controversial, and EPA often makes no quantity adjustment.  In its
       defense, there is no generally accepted reseating to account for quantity. Saving the lives
       of children, as opposed to adults, is a key missing valuation component. Resolving these
       issues will require more than  simple analogies based on job safety studies.

       Topic l.B    Methods to Improve Estimation of Values for Reductions in
                    Morbidity Risks
                    [Priority Rank = 3 of 15]

             Morbidity risk valuation is even more complex than mortality risk valuation
       because of the substantial variation across individuals in morbidity outcomes. Similarly
       caused ailments may have quite different valuations (for example, chronic bronchitis and
       advanced  emphysema). Contingent valuation studies or similar interview approaches can
       be useful.  Attempts to use medical ratings of health outcome severity to rescale some
       reference  health outcome value in a simple fashion are without economic foundation.
       Many of the same research issues that complicate mortality risk assessments come into
       play for morbidity risk as well.

       Topic l.C    Methods to Evaluate Economic Benefits of Projects Targeted at
                    Children, Elderly, Other Vulnerable Population
                    [Priority Rank = 3 of 15]
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       In evaluating projects that target vulnerable populations, three analytical issues
arise: (1) does the analysis adequately control for the dose of pollutant received and the
population's increased susceptibility to that dose?; (2) does the valuation of the health
endpoints acknowledge the impact of increased susceptibility on the individual's
willingness-to-pay (WTP) to avoid the health effect?; and (3) should the welfare of
vulnerable sub-populations receive greater weight in a benefit-cost analysis? The first
issue is the subject of ongoing research by epidemiologists, toxicologists, and specialists in
exposure measurement.  The second topic is the province of economic research, and it
raises some of the same issues as in areas  l.A and l.B, above.  Can we adequately control
for the character of the population bearing the risk in measuring WTP to avoid  adverse
health effects? Finally, whether the welfare of some groups should be given more weight
is a normative or policy question, not a subject for economic research.

Topic l.D     Methods to Improve Measurement of Increases in Other Welfare
              Benefits (For example, Visibility, Materials Damage, Agriculture,
              Recreation)
              [Priority Rank = 13 of 15]

       Standard economic theory leads directly to the valuation of changes in
environmental quality when the consequences of those changes are exclusively reflected in
changes in conditions of supply or demand for market goods, but when externalities,
public goods, or quasi-public goods are involved, the analysis becomes less direct and
more difficult. Visibility and recreation are two of the classic examples of non-market
goods, changes in which must be evaluated indirectly (via travel cost or hedonic property
value methods) or by using stated preference methods.  Stated preference methods are
controversial, but they are the only recourse for the valuation of goods which confer
mainly "passive use" values.  This reality will continue to drive a need for more research.
Efforts must continue to bring stated preference methods more into line with economic
theory (and vice-versa).  Research in marketing and in cognitive psychology may continue
to play a role.

       Materials damage to market goods can be evaluated in  the usual neoclassical
framework, as can damage to agricultural resources such as land (soil quality, erosion, or
any other attribute of properties traded in conventional markets). Materials damage to
structures of cultural significance (such as acid precipitation damage to monuments or
grave markers) is much more difficult to quantify. Stated preference methods of some
type are likely to be necessary here as well, and significant progress has not yet been made
on valuing many of these types of effects.
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Topic l.E     Methods to Improve Valuation of Ecosystem Services
              [Priority Rank = 2 of 15]

       There is a growing awareness that ecosystems provide a wide range of valuable
services to people, beyond the commodity flows and recreation services that have been the
focus of most attention over the past 25 years or so. In recent years, the gross air and
water pollution problems that have affected people directly have come under increasing
control. It is now becoming more important to develop the capability to analyze how
changes in the levels of environmental stressors (both increases, and policy-induced
decreases) affect the levels of a variety of ecosystem service flows and the values they
generate.

Topic l.F     Methods of Valuing Non-use Benefits
              [Priority Rank = 8 of 15]

       It is widely accepted that some form of contingent valuation is the only tool
available for estimating nonuse values.  EPA should continue to support the development
of better stated preference methods. Still needed is research aimed at improving our
understanding of how respondents to stated preference surveys construct values,
especially for commodities that they are unfamiliar with thinking about in an economic
context. The aim should be to use this understanding to improve the validity of contingent
valuation methods more generally.

Topic l.G     Benefits Transfer Methods
              [Priority Rank = 10 of 15]

       It would be prohibitively expensive to require an original study of the economic
benefits of environmental protection programs in every new instance where some value
estimate might be required.  Original research is necessary when there does not exist any
prior estimated value for the environmental good in question. It is more efficient, however,
if EPA can exploit systematic knowledge of the types of benefits that accrue in other
similar situations. Environmental economists are generally in agreement that it is
preferable to transfer models that predict economic benefits, rather than simple point
estimates of benefits, since these models can be used to simulate benefits under conditions
that differ from those under which their parameters were estimated.

       As the inventory of already-completed studies grows, it may become feasible to
discern how the features of an affected environmental resource interact with the
characteristics of the affected population to yield typical economic benefits. EPA could
simply allow the inventories of existing studies concerning significant environmental

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       problems to develop in an ad hoc fashion.  However, EPA could identify gaps in these
       inventories that prevent relevant sets of existing studies from spanning the range of
       conditions under which benefits transfer exercises are likely to be necessary. Filling these
       gaps would hasten the development of models that would allow for broader types of
       benefits transfer exercises.

       Topic l.H    Model Uncertainty; Resolving the Sensitivity of Some Benefit
                     Estimation Methods to Model Specification
                     [Priority Rank = 13 of 15]

              Many revealed and stated preference models can generate quite different welfare
       estimates, depending upon their model specifications.  Due to the highly non-nested nature
       of these models, standard goodness-of-fit tests are often inappropriate, and other methods
       for assessing the validity of the models must be considered.  There is a continuing need for
       research aimed at learning how widespread this problem is, and, where it occurs,
       developing appropriate model  selection criteria. Furthermore, EPA can play a role by
       supporting the documentation  and archiving of empirical data, including not only data
       from the studies EPA funds, but also from other studies.  Only if data are adequately
       preserved can the processes of replication and verification by external analysts examine the
       robustness of benefit estimates or reveal sensitivity to researchers' specification choices.

2. COST ESTIMATION

       Topic 2.A    Methods to Improve Estimation of the Direct and Indirect Costs of
                     Environmental Regulations to Regulated Parties
                     [Priority Rank = 9 of 15]

              In most Regulatory Impact Analyses, direct compliance costs are estimated using
       an engineering cost approach.  It is of interest to know how such calculations compare
       with econometric estimates of abatement costs, which (in theory) should capture the full
       range of adjustments that firms make to environmental regulations.  Case studies could be
       conducted for major generators of pollution to compare the two approaches. This, of
       course, requires data on the inputs and outputs of firms, input and output prices, and the
       levels of effluents emitted.  A reasonable task for EPA is to assure that such data are
       available.  With the demise of the Pollutant Abatement Costs and Expenditures (PACE)
       survey, it would be appropriate to consider joining forces with other agencies to assure
       that data collected from firms are appropriate for estimating the costs of environmental
       regulations.  In cases where regulations are likely to have significant general equilibrium
       effects, it is necessary that the  indirect costs of regulations be estimated as well.
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       Topic 2.B    Methods to Improve Estimation of Monitoring Costs Incurred by the
                    Regulated Parties
                    [Priority Rank = 15 of 15]

              Surveys to collect data on compliance costs should include questions about
       expenditures to monitor effluents. Accurate estimation of monitoring costs might not be
       accorded a high priority on the grounds that these costs are small relative to abatement
       costs. But the marginal cost of collecting these data should also be small.

       Topic 2.C    Methods to Improve Estimation of Monitoring and Enforcement
                    Costs Incurred by the Regulating Agency
                    [Priority Rank = 14 of 15]

              If information does not currently exist on the monitoring and enforcement actions
       of state EPAs, it would be useful to conduct a survey to collect this information, including
       expenditures on monitoring and enforcement costs.  This should be a relatively
       inexpensive survey to conduct.  There are research questions that need to control for
       regulatory resources before judging regulatory outcomes. Few environmental regulatory
       agencies retain any more than just current data on their budgets, number of personnel,
       etc., and there is no centralized depository for these data.  Panel data (combining cross-
       sectional and time series data) on these variables would make it easier to judge whether
       regulatory outcomes are partly explained by differing monitoring and enforcement
       resources.

3. ECONOMIC INCENTIVES

       Topic 3.A    Fees, Charges and Taxes; Subsidies; Deposit Refund Systems
                    [Priority Rank = 5 of 15]

              The bulk of the work on price-based economic incentives that EPA needs to carry
       out is in the realm of implementation. For the most part, research questions are associated
       with measuring the effectiveness of existing programs that use this type of incentive. This
       would include unit pricing for trash disposal, fees for hazardous waste generation and
       disposal and tax-based subsidies. Research could effectively investigate existing
       programs, not only in the U.S., but also overseas. There remains a need to investigate the
       efficiency properties of less direct economic incentives, such as fees based only on
       observation of ambient quality, and fees on inputs or outputs related to effluent
       production.
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Topic 3.B    Trading Systems (Permits)
              [Priority Rank = 1 of 15]

       The attention given to developing tradeable permit systems for various
environmental problems continues to increase. Much research has already been dedicated
to examining the feasibility of these systems for new applications, but too much of this
work has contrasted perfectly-functioning tradeable permit systems (i.e.  cost-effective
systems that perfectly equate marginal abatement among sources) with conventional policy
approaches. More attention needs to be devoted to assessing reasonably constrained
prospective programs, taking account of such impinging factors as transaction costs,
market concentration, and the pre-existing regulatory environment (including interactions
with existing, distortionary taxes). Even more valuable, at this point, would be better
retrospective analyses of existing or past tradeable permit systems, including the Emissions
Trading Program, the leaded gasoline phasedown, the SO2 allowance trading program,
Regional Clean Air Incentives Market (RECLAIM), and others. With the exception of the
SO2 program, empirical assessments have been limited by data availability, particularly
with regard to trading volume and prices. Were such data made available and the
scholarly research community made aware of its availability, research would be initiated,
even without EPA funding.

Topic 3.C    Liability Approaches
              [Priority Rank = 5 of 15]

       The existing liability system has proven to have high transactions costs,  to deal
poorly with assessment of scientific information,  and to yield inconsistent results across
jurisdictions and cases. Research is needed to investigate whether institutional remedies
for these defects can be found in specific applications, such as CERCLA and toxic torts.
Research is also needed to learn how significant the deterrent effect of the liability system
has been, and to evaluate the extent to which possible insolvency affects  this deterrent
effect.

Topic 3.D    Information Approaches; Voluntary Programs for Industry
              [Priority Rank = 10 of 15]

       There is some evidence that such approaches have been cost-effective.  However,
absent proper experimental design in the programs' construction, evaluations have been
hampered and subject to possibly severe selection bias. Proper evaluation processes and
data collection should be built into the design of voluntary and informational programs.
Research is also needed to clarify which information disclosure requirements are effective
in bringing about change, which incentives (and implicit threats) are effective in motivating

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       voluntary actions, and which issues are most (and least) amenable to informational
       approaches.

4.  ECONOMIC POLICY

       Topic 4.A    Economic Aspects of Pollution Prevention Strategies
                    [Priority Rank = 14 of 15]

             Although industrialists increasingly espouse "ecoefficiency" — reducing pollution
       profitably by eliminating resource waste — economists debate whether such win-win
       opportunities are significant. The key issue is whether market, regulatory, and
       informational barriers act as obstacles to implementing win-win possibilities to reduce
       pollution and save money. Useful research would involve EPA in partnerships to
       investigate important industrial sub-sectors to try to identify such obstacles. There would
       need to be a commitment on government's side to try to eliminate obstacles that are found,
       if possible, and on industry's side to undertake the pollution prevention investments, if
       possible.

       Topic 4.B    The Relationship Between Population Growth, Economic Growth,
                    and Environmental Quality
                    [Priority Rank = 11 of 15]

             The linkages between population growth, economic growth, and environmental
       quality have received only limited attention by EPA. To deal with this broad issue, is it
       useful to consider the macroeconomy as an open subsystem of the larger biophysical
       ecosystem, dependent on the larger system for inputs of low-entropy resources and
       absorption of high-entropy waste? If such a viewpoint is adopted, then is it not reasonable
       to ask how large a burden of extraction and insertion the economy can impose on the
       larger system, and at what point marginal costs of ecological disruption outweigh the
       marginal benefits of expansion of the economy? In other words, is there not an optimal
       physical scale of the economic subsystem relative to the containing ecosystem? In
       microeconomics, the Marginal Benefits = Marginal Costs (MB = MC) rule of optimization
       is sometimes aptly called the "when to stop" rule. An analogous rule is lacking in
       macroeconomics, even at the conceptual level. EPA could sponsor fundamental
       theoretical and empirical research on developing a macroeconomic analog to the
       microeconomic logic or show why the "when to stop" rule has no relevant analog in
       macroeconomics.

             There are other issues regarding how the environment and ecosystem affect the
       macroeconomy.  An understanding of the relationship among environmental quality,

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economic growth, and population growth is an important component in analysis of the
global macroeconomy. At the national level, the role of scarce environmental resources
and valuable ecosystem services in the macroeconomy is also poorly understood. There
are other important issues involving the interaction between population growth, economic
growth, and natural resource degradation in developing countries.  Poverty and population
growth may lead to deforestation, with concomitant problems of soil erosion,
desertificaiton, and the release of greenhouse gases. Research in this area is needed to
better quantify these relationships and to understand how various policies could influence
the rate of environmental degradation.

Topic 4.C     Methods to Revise National Income Accounting Procedures to Better
              Reflect Environmental Aspects of Changes in Productivity, Assets,
              and Welfare (Green Accounting)
              [Priority Rank = 11 of 15]

       Conventional national income accounts are not intended to provide measures of
welfare, but policy makers around the world, and the general public as well, tend to focus
on changes in gross domestic product as the central measure of national economic health.
Is Hicksian income the theoretical concept that the net national income account should try
to approximate? If not, what is? Is a part of what we currently measure in Net National
Product (NNP) is really consumption of natural capital?  If so, should not that capital
consumption be subtracted from gross income, as is consumption of manmade capital?
Are not "defensive expenditures" more in the nature of intermediate costs of other
products than final goods, and if so should they not be excluded from net national income?
What is the evidence that, in the U.S. today, further growth in aggregate NNP really
increases welfare? To what extent might mismeasures of NNP and a loose connection
between NNP and welfare bias policy decisions, especially those related to the
environment? Although considerable research has been done over the past decade to
identify improvements in national income accounts that would reflect depreciation of
natural capital, more work needs to be done. This is an area where EPA could reasonably
partner with other agencies, such as the Departments of Commerce and Labor, if it has not
already done so.

Topic 4.D     Regulatory Takings, Property Rights, and Compensation
              [Priority Rank = 13 of 15]

       This issue requires input from both law and economics. The weighting of the
sovereignty of land ownership versus the externalities associated with certain land uses is
at the heart of this issue.  Society's ability to address certain types of resource losses will
hinge on resolution of takings issues. Research might reasonably involve both conceptual,

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interdisciplinary work and case studies of the ultimate impact on property values of
apparent "takings."

Topic 4.E     Economic Aspects of Land Use Regulations
              [Priority Rank = 7 of 15]

       The term "land use regulation" generally refers to state and local government
regulations that affect the taxation of different types of land use and the regulation of the
location and configuration of development. Since land use and land use patterns are the
principal drivers of non-point source pollution, the effect of these regulations on land use
conversion decisions has implications for the environment.  Land use regulations also
affect the siting of industry and thus have implications for the spatial distribution of point
sources. Research on plant siting has a longer history than the more recent work on
changes in land use patterns (specifically conversion of forest and farmland into residential
and commercial use.) In the last  several years, state and local governments have become
especially interested in using a variety of land use management tools to try to "direct"
growth in patterns that mitigate rapidly rising expenditures on public goods. However,
because they affect land use patterns, these tools can have significant ecological effects.
Although EPA does not typically have regulatory authority in land use management, EPA-
sponsored research in this area that explores how land use conversion decisions are
affected by land-use regulations would be useful.  This would assist local governments,
which are in no position to do this research themselves, and could identify the ecological
and public finance consequences of these land-use regulations.

Topic 4.F     Economic Aspects of Linkages Between Environmental Quality and
              Other Regulatory Policies (urban planning, transportation, energy,
              agriculture, etc.)
              [Priority Rank = 10  of 15]

       The previous section concerned those regulations that directly affect conversion
among different land uses and thus alter the spatial patterns of land uses.  In addition,
there are many other regulatory policies that either indirectly affect land use conversion or
that alter the "practices" associated with any given land use.  An example of the former is
the building  of a major road or the reduction of the gas tax, either one of which would
increase the  value of a more remote location for residential construction.  An example  of
the latter might be agriculture or urban best management practices. The importance to
EPA once again hinges largely on the importance of non-point sources of pollution. The
impact of EPA research on decision-makers' responses to these policies depends to some
extent on how many of these policies can be influenced by EPA. There are many
researchers working on the agriculture-environment interface; the problem here is not

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       lack of research interest, but confidentiality of data.  Environmental economists have been
       working on air quality issues surrounding the Intermodal Surface Transfer Efficiency Act
       (ISTEA), but the land use implications have not been sufficiently studied.  There may be
       many counterproductive, inconsistent policies promulgated by different agencies.  An
       assessment of the most seriously  conflicting policies, together with developing a means to
       address them (jointly with other agencies) could have considerable payoff.

       Topic 4.G    The Linkages Between International Standards and Trade and Effects
                    on Environmental Quality
                     [Priority Rank = 8 of 15]

             This remains a poorly understood area of economics. Although there has been
       some research, both empirical and theoretical, the complex relationships among
       environmental regulations, international trade, and environmental quality are not fully
       understood. If environmental regulations can affect trade, then we may expect to see
       pressures to relax environmental regulations, as the world becomes more economically
       integrated. Furthermore, as environmental problems evolve that are more international in
       scope and as the world economy becomes more integrated, this  is bound to be a significant
       area for EPA investigation.

5.  OTHER ISSUES AFFECTING  OR RELATED TO ECONOMIC ANALYSES

       Topic 5.A    Methods of Incorporating  Risk and Uncertainty into Economic
                    Analyses and Risk Assessments
                     [Priority Rank = 6 of 15]

             The problems of dealing with risk and uncertainty in economic analysis are
       significant for EPA, whether the sources of the uncertainty are economic or from the
       underlying natural  science. Clearly risk and uncertainty will be dominant themes in the
       environmental problems that EPA will be facing in coming decades.  Although we have
       some basic understanding of how to incorporate risk into analysis, at least theoretically,
       our knowledge is incomplete at the level of implementation.  This is particularly the case
       for making regulatory decisions that involve intertemporal issues with long time horizons,
       such as climate change and species preservation.
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Topic 5.C     Baseline Definition and Adjustments That Affect Economic Values
              [Priority Rank = 11 of 15]

       This topic refers to the difficulties involved in linking human preferences to
scientific environmental indicators.  Economic theory provides little or no guidance as to
what environmental measures enter individual preference functions. Researchers often
arbitrarily choose quantitative environmental measures for use in empirical studies
depending largely on data availability and/or simple intuition of the analyst.  The degree to
which these arbitrary decisions  may bias resulting benefit measures has received little
attention, yet benefit  estimates might be quite sensitive to these choices. This is
fundamentally a measurement error problem.  Reducing these measurement errors may
provide large returns in the form of more accurate benefit estimates from research. Such
work would likely require interdisciplinary teams where environmental economists would
work with wildlife biologists, ecologists, or other physical scientists to develop an
understanding of these linkages.

Topic 5.D.    Equity Issues and Distributional Effects of Environmental Regulations
              [Priority Rank = 6 of 15]

       In recent years,  increasing attention has been paid to environmental justice or,
more generally, to which households and individuals bear costs and which receive benefits.
Unfortunately, much  of the discussion of the incidence of costs and benefits has been
anecdotal and impressionistic. The reasons for not being more systematic typically include
lack of data, lack of time, or both. EPA could foster research aimed at developing
standard, disaggregated (household-level?) data sets and methods of analysis that would
enable investigators to obtain useful approximations (if not necessarily exact information)
on the incidence of costs and benefits associated with environmental protection. If it were
likely to succeed, this project might merit high priority, but since the likelihood of success
may not be very great, EPA ought not spend very much to develop a system for incidence
analysis.  Nevertheless, EPA might develop one or more small contracts for, in effect,
preparation of a detailed proposal for the development of such a system.

Topic 5.E     Effect of Information on Private Economic Behavior
              [Priority Rank = 12 of 15]

       The area of greatest payoff may be studying which socio-demographic groups
benefit from what type of information, and what form of information provision from what
types of sources is effective for these various groups (television advertisements, school
education programs,  web pages, hot lines, etc.).  Given the  concerns associated with risks
                                   B-ll

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       such as radon, lead poisoning, asbestos, and climate change, such research seems
       appropriate.

6.  OTHER ECONOMIC ISSUES FOR RESEARCH

       Topic 6.A    Effect of Regulation on Innovation and Technology Adoption
                    [Priority Rank = 6 of 15]

              There are two major economic dimensions along which various types of
       environmental policy instruments are thought to differ:  static cost-effectiveness; and
       dynamic incentives for the adoption of environmentally superior technologies.  This
       second category might be summarized as "dynamic cost-effectiveness," that is, the present
       discounted value of the future stream of abatement costs, affected by the rate and
       direction of technological change. There are substantial literatures that examine in
       theoretical terms the cost effectiveness and the dynamic efficiency properties of alternative
       environmental policy instruments, but there have been exceptionally few empirical
       analyses of the relative dynamic efficiency attributes of alternative policy instruments.

              In order to achieve widespread benefits from a new technology, three steps are
       required: invention -- the development of a new technical idea; innovation -- the
       incorporation of a new idea into a commercial product  or process and the first
       marketplace implementation thereof; and diffusion — the typically gradual process by
       which improved products or processes become widely used.  All types of environmental
       policy instruments have  the potential for inducing or forcing some amount of technological
       change, but empirical (most likely, econometric) analyses are required of the effects  of
       alternative environmental policy instruments on the invention, innovation, and diffusion of
       new technologies, and of the effects that these induced changes have on pollution
       abatement costs.

       Topic 6.B    Retrospective Cost-Benefit Analyses (Includes Comparative ex ante
                    and ex post Evaluations of Costs)
                    [Priority Rank = 9 of 15]

              Section 812 of the 1990 Clean Air Act Amendments reflected an argument
       accepted by many observers: there is much to be learned through the careful evaluation of
       the actual effects of ongoing programs. Instead, most analytical energy is devoted to
       prediction of the effects of proposed programs. Conventional wisdom (and experience
       with the 812 studies) has also made clear the difficulty of having an agency candidly
       evaluate its own programs and activities.  The 812 experience reinforced the importance
       of asking useful questions: knowing the overall costs and benefits of clean air programs

                                          B-12

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does not help make any real decisions, for instance. Regular performance of retrospective
analysis will be of value, but we believe it should be performed outside EPA, preferably by
entities that do not depend on EPA for the bulk of their revenues. We would also suggest
that the selection of retrospective analysis proposals for funding should be done by a
committee on which EPA employees play at most a minority role.

       Studies comparing ex ante and ex post evaluations of costs could provide valuable
information, but only if undertaken primarily to improve ex ante cost estimation methods.
Simple comparisons do not seem to be of much potential use in this regard.  Finding that
past ex ante estimates have overstated ex post costs by some percent on average, for
instance, invites a simple adjustment to future ex ante estimates.  This sort of adjustment
will be resisted on the grounds that the ex ante situation being considered differs from the
average of the past situations studied and that different methods of cost estimation have
been employed. More useful would be a study that explained past errors as a plausible
function of observables.  We think it unlikely,  however, that useful and persuasive results
will be obtained, in part because we lack the tools necessary to forecast technical progress
with any accuracy.

Topic 6.C     Economic Impacts on Business/Small Business
              [Priority Rank = 15 of 15]

       General equilibrium effects aside, it is not conceptually difficult to evaluate effects
of particular programs on particular sectors. Apart from a general shortage of data,
analysis of impacts on small business poses no novel general issues.  There is a widespread
perception that costs imposed on small firms are borne by less wealthy people than are
costs imposed on large firms. It would be interesting to know how true this is, but this is
a difficult issue to study (in part because it is hard to identify the owners of small firms)
and not of central importance to EPA.
Topic 6.D     Sustainability Indicators
              [Priority Rank = 12 of 15]
       The word "sustainability" came to have political value and meaning for policy
makers before many economists had given direct attention to the concept.  But research
has begun to examine what sustainability might mean from an economic perspective.
Numerous questions remain.  Does Hicksian income already embody the idea of
sustainability and therefore provide the best conceptual basis for elaborating and
measuring sustainability? Is there a better basis?  If we start with the concept of Hicksian
income, then would not the relevant operational indicators be measures of total capital,
consisting of manmade and natural capital? What is the best way to measure natural

                                   B-13

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capital? Must both categories be maintained intact, or only the sum of the two? This
depends on whether manmade and natural capital are fundamentally substitutes or
complements. Even before this issue is resolved, would partial physical indicators of
natural capital levels and changes be useful?  What set of partial physical indicators best
reflects overall changes in the state of natural capital?

Topic 6.F    Effect of Government-Provided Information on Innovation
              [Priority Rank = 13 of 15]

       In section 6 A, above, we considered research on the effects of alternative types of
environmental regulation on the rates of technology innovation and diffusion.
Government-provided information is one such type of policy instrument.  In the recent
past, a number of studies have examined the effects of specific government information
programs on the rate and direction of technological change,  particularly but not
exclusively in the context of government energy-efficiency labeling programs.  More work
should be carried out.
                                   B-14

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CERCLA

CV

ISTEA

MB

MC

NNP

PACE

RECLAIM
                                 APPENDIX C
                              ABBREVIATIONS
Comprehensive Environmental Response, Compensation, and Liability Act
Contingent Valuation
Intermodal Surface Transportation Efficiency Act

Marginal Benefits
Marginal Costs
Net National Product
Pollutant Abatement Costs and Expenditures survey

Regional Clean Air Incentives Market
                                      C-1

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                                       NOTICE
       This report has been written as part of the activities of the Science Advisory Board, a
public advisory group providing extramural scientific information and advice to the Administrator
and other officials of the Environmental Protection Agency. The Board is structured to provide
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.

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                       EPA SCIENCE ADVISORY BOARD
       ENVIRONMENTAL ECONOMICS ADVISORY COMMITTEE

CHAIR
Dr. Robert N. Stavins, Albert Pratt Professor of Business and Government, John F. Kennedy School of
       Government, Harvard University, Cambridge, MA

MEMBERS/CONSULTANTS
Dr. Nancy E. Bockstael, Professor, Department of Agricultural and Resource Economics, University of
       Maryland, College Park, MD

Dr. Trudy Ann Cameron, Professor, Department of Economics, University of California at Los Angeles,
       CA

Dr. Maureen L. Cropper, Senior Economist, The World Bank, Washington, DC

Dr. Herman E. Daly, Senior Research Scholar, School of Public Affairs, University of Maryland, College
       Park, MD

Dr. A. Myrick Freeman, Professor, Department of Economics, Bowdoin College, Brunswick, ME

Dr. Dale W. Jorgenson, Frederic Eaton Abbe Professor of Economics, Department of Economics, and
       Director, Program on Technology and Economic Policy, John F. Kennedy School of Government,
       Harvard University, Cambridge, MA

Dr. Catherine Kling, Professor, Department of Economics, Iowa State University, Ames, Iowa

Dr. Charles D. Kolstad, Professor, Department of Economics, University of California at Santa Barbara,
       CA

Dr. Robert Repetto, Director, Economic Research Program, World Resources Institute, Boulder, CO

Dr. Richard L. Revesz, Professor of Law, New York University School of Law, New York, NY

Dr. Richard Schmalensee, Professor, Sloan School of Management, Massachusetts Institute of Technology,
       Cambridge, MA

Dr. W. Kip Viscusi,  John F. Cogan Professor of Law and Economics, Harvard Law School, Cambridge,
       MA

SCIENCE ADVISORY BOARD STAFF
Mr. Thomas  O. Miller, Designated Federal Officer, US EPA, Science Advisory Board, Washington, DC

Ms. Dorothy Clark, Management Assistant, US EPA, Science Advisory Board, Washington, DC

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