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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
Augusts, 1993
OFFICE OF THE ADMINISTRATOR
SCIINCI ADVISORY BOARD
EPA-SAB-CAACAC-LTR-93-011
Honorable Carol M. Browner
Administrator
U.S. Environmental Protection Agency
401 M Street, S.W,
Washington, DC 20460
Subject: Science Advisory Board's review of the Office of Policy, Planning,
and Evaluation 's (OPPE) and the Office of Air and Radiation's
(OAR) progress on the prospective study of the impacts of the
Clean Air Act.
Dear Ms. Browner:
On June 8, 1993, the Clean Air Act Compliance Analysis Council (CAACAC)
met to address a variety of issues related to the design of the prospective Clean Air
Act (CAA) benefit/cost studies required by Section 812 of the CAA amendments of
1990. The discussions at that meeting reflected both the Charge provided to the
Council at the start of this series of reviews, and issues raised by background docu-
ments and oral presentations.
This meeting was responsive to our expressed view that CAACAC involvement
early in the design stage of this research would be desirable, and we appreciate that
responsiveness by the Agency. We believe it is critical to maintain this sort of outside
scientific involvement throughout the study process, if only as a guard against having
the EPA's unavoidable institutional stake in the outcome of the research affect design
and implementation decisions.
As a final general point, we would urge the Agency to continue to reflect on the
ultimate purpose of this activity. Is it to prepare Congress for the next round of
authorization of the CAA? Is it to develop databases, methods, or results that will be
useful in EPA decision-making? Or is some completely different purpose being
served? Is it more important to be able to analyze the 1990 CAA Amendments as a
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package or to isolate the incremental impacts of Individual provisions? (Several
Council members believe that the latter is clearly more important and that the study
design should assign most weight to provision-specific analyses. On the other hand,
all recognize the conceptual difficulty of incremental analysis of provisions that bear on
non-attainment). While all can agree at the most general level that the objective is to
produce reliable estimates of costs, benefits, and the dependence of costs and
benefits on uncertain functions and parameters, having a clear, simple vision (in
written form) of what exactly this study is Intended to accomplish is likely to help
allocate scarce research dollars efficiently. The number of objectives the study is to
satisfy should be minimized to reduce the uncertainty and cost of the effort.
The following specific issues were addressed:
a) Baseline Definition
The Council feels that it would be undesirable to employ in the prospective
study the "no CAA" baseline used in the retrospective study. Rather, the
counterfactual world used as a baseline should be one in which the 1990 CAA
Amendments were not enacted. Construction of a consistent baseline of this sort for,
say, the 1990-2010 period involves a host of complexities, of course, particularly as
regards non-attainment (Similar complexities arise in connection with projecting the
actual future, of course). Although we are sympathetic to the Agency's desire to
concentrate resources on the analysis of the actual world rather than the
counterfactual baseline world, we think it is important to keep in mind that the product
of the analysis will be statements about differences between the two. Thus the quality
of the study results will be critically dependent on the quality of the baseline. If the
baseline is not consistent and plausible, the study's results will neither be valid or
interesting.
We are sympathetic with a number of the EPA proposals for simplifying the
construction of a baseline. Thus, for instance, it probably makes sense to hold
dominant air quality standards fixed. It may be sensible to hold implementation
standards fixed at 1990 levels in the baseline world, though this is less clear. In any
case, baseline emissions should vary over time in response to economic changes
consistent with those employed in predicting actual future emissions; we do not
believe it would be plausible to hold emissions constant at 1990 (or any other) levels.
We believe it will be useful and informative to employ a range of GDP growth
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forecasts in this analysis, including at least the Administration's official forecast and
the Data Resources Incorporated (DRI) model long-term forecast.
b) Benefit and Cost Analysis
The problem of estimating benefits In the prospective study is more difficult than
in the retrospective study. The Agency staff is grappling with this problem seriously
and effectively, and we urge them to use the CAACAC as a resource in this process.
In addition, we feel obliged to repeat a point we have made before, simply because it
is so important. In assessing changes in risk for benefit analysis purposes, attention
should center on mean or median values, not on the 95th percentile or similar extreme
values that are generally employed for regulatory purposes. Thus meta-analysis
techniques are more appropriate for combining the results of multiple studies in this
context than methods that concentrate on studies with extreme results.
In terms of cost analysis, we are comfortable with the staffs proposal to stress
detailed analysis of a relatively few critical sectors rather than analysis of economy-
wide general equilibrium effects. While inter-industry effects may be important in an
absolute sense, we believe that the experience of the retrospective study, combined
with the much greater level of technological uncertainty here, suggest that it is likely to
be much more important to understand intra-industry effects in key industries.
We also believe it is likely to be critically important to analyze carefully the
positive and negative impacts of the 1990 CAA Amendments on technology, and this
can best be done at the industry level. While there is almost certainly some induced
innovation as a consequence of tightened environmental standards, there is also
almost certainly some reduced innovation on other fronts. Recent research suggests
that the net negative impact on productivity could be substantial. In any case, impacts
of the 1990 Amendments on the rate and direction of technical progress are likely to
be hotly debated, and they should accordingly be carefully studied.
c) Uncertainty
We believe that the prospective study must make clear how scientific, econom-
ic, and other uncertainties translate into uncertainty regarding costs and benefits.
Even more than in the retrospective study, presentation of "best estimates" without
more would be seriously misleading. We are pleased that the staff is sensitive to this
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issue and strongly support their view that the management and analysis of uncertainty
must be a central focus of the entire research effort.
We agree that because uncertainties regarding the effects of emissions are
particularly important, a good deal of the analysis of uncertainty can be done through
post-emissions-model sensitivity analyses to alternative assumptions regarding such
things as alternative emissions-exposure and exposure-response functions and
alternative valuation approaches. But we would urge the Staff not to lose sight of the
potentially important uncertain variables affecting emissions and costs - including
economic growth, relative prices of natural gas and gasoline, and costs of air toxics
control.
We appreciate the opportunity to review the progress to date on the design and
implementation of the CAA benefit/cost studies and look forward to receiving your
response to the major points raised in this letter
Sincerely,
Dr. Richard Schmalensee
Chair
Clean Air Act Compliance Analysis Council
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NOTICE
This report has been written as a part of the activities of the Science Advisory
Board, a public advisory group providing extramural scientific information and advice
to the Administrator and other officials of the Environmental Protection Agency. The
Board is structured to provide 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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Distribution List
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U.S. ENVIRONMENTAL PROTECTION AGENCY
SCIENCE ADVISORY BOARD
CLEAN AIR ACT COMPLIANCE ANALYSIS COUNCIL
CHAIR
Dr, Richard Schmalensee, Department of Economics, Massachusetts Institute of Technology,
Cambridge, MA
MEMBERS
Dr. Ronald Cummlngs, Department of Economics, University of New Mexico,
Albuquerque, NM
Dr. Daniel Dudek, Environmental Defense Fund, New York City, NY
Dr, A. Myrick Freeman, Department of Economics, Bowdoin College,
Brunswick, ME
Dr. Robert Mendelsohn, Yale School of Forestry, New Haven, CT
Dr. William Nordhaus, Department of Economics, Yale University, New Haven, CT
Dr. Wallace E. Dates, Department of Economics, University of Maryland
College Park, MD
Dr. Paul R. Portney, Resources for the Future, Washington, DC
Dr. Thomas H, Tietenbeng, Department of Economics, Colby College, Waterville, ME
Dr. W. Kip Viscusi, Department of Economics, Duke University, Durham, NC
SAB COMMITTEE LIAISONS
Dr, William Cooper (Environmental Processes and Effects Committee)
Mr. Richard Conway (Environmental Engineering Committee)
Dr. Morton Lippmann (Indoor Air Quality Committee)
Dr, Roger McClellan (Research Strategies Advisory Committee)
SAB_STAFg
Mr. Samuel Rondberg, Designated Federal Official, Science Advisory Board (A1Q1-F), U.S.
Environmental Protection Agency, Washington, DC 20460
Ms. Mary L Winston, Support Secretary, Science Advisory Board (A101-F), U.S. Environmen-
tal Protection Agency, Washington, DC 20460
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