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7.4. API Review

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In a paper for the American Petroleum Institute (API), Rusin et al. also reviewed the content of several regulatory impact assessments. The first two chapters of this paper provide analysis, review and comments on the regulatory process. Each of the remaining seven chapters evaluates an RIA. Most of the RIAs deal with issues of particular import to the petroleum industry.

The API study emphasizes four conclusions.

First, “existing legislation is the major administrative impediment to use of benefit cost analysis as a decision tool.” API, op. cit., p. 3. Several environmental statutes preclude or limit the application of benefit cost analysis even though it is required under Executive Orders. Note that this assertion is contradicted to some extent by Hahn.

Second,


Perhaps this second comment might be construed to mean merely that the task of producing an adequate cost benefit analysis is not impossible. The authors note that in some instances, a better RIA would have resulted from simply avoiding mistakes whereas other RIAs needed more resources invested in them.

Third,

This comment pertains to the field generally and not just to the case studies. The authors note that non-use or existence values may be an exception to their “agreed upon” claim. Possibly they could add contingent valuation as another contentious matter. The field may not be as well settled as they perceive.

Fourth,

API represents industry. In the case studies, industry comments on draft RIAs are analyzed.

Included in the introductory chapters is a section dealing with the cost of pollution abatement. Here the argument is advanced that social cost typically differs from compliance cost. RIAs rely on the latter nearly exclusively which is a criticism of all of them.

Social cost may be more or less than compliance cost, the authors explain, because the latter neglects general equilibrium considerations; there is no adaptation or substitution, just control. Further, dynamic adjustments are ignored. Social cost may be substantially more or less than compliance cost.

The extensive introductory material that precedes the case studies discusses the theory and evolution of RIAs in a general way and, although excellent, does not, for the most part, constitute a commentary on RIAs generally or specifically. We need to look at the case studies to see what the API authors perceive.


1 Reducing Lead in Gasoline

The first RIA reviewed by the API authors dealt with reducing lead in gasoline. They note:

How good was the first full benefit-cost study? The API study faults the RIA for improperly estimating nearly all benefit categories. Regarding children’s health, they object that:

They level the same objection at the largest benefit category, blood pressure reduction in adults. API, op. cit., p.26.

As to the value of lives saved, they note:

The API authors’ harshest criticism, however, was reserved for the purported economies of using unleaded gasoline:

On the cost side, the authors suspect that an underestimate was made:

The review’s overall comment on the cost-benefit analysis is sanguine even though significant objections were directed at nearly all the elements of the calculation:

Some benefit estimates seemed to the reviewers high, mainly maintenance and fuel savings, and others low, such as morbidity and mortality. Whether the resulting overall benefit estimate is biased upwards as claimed seems unclear.

That “no reasonable adjustment would ... change the overall conclusions” seems valid given that benefits were more than an order of magnitude greater than costs. The API authors, having made a telling criticism against nearly every cost and benefit item, observe correctly that the conclusion is nevertheless true. That is, the RIA succeeds despite itself because the case for the regulation is so compelling. However, fairness and charity require remarking that the API review was written more than a decade after the RIA during which time the art of benefit-cost analysis had progressed significantly.


2 The National Ambient Air Quality Standard for Carbon Monoxide

The Clean Air Act requires EPA to review scientific criteria and ambient air quality with a view to revising national ambient air quality standards (NAAQS) and to do so every five years. For this purpose, EPA reviewed the carbon monoxide (CO) standard in 1985 by preparing an RIA. Four regulatory alternatives were considered.

The API authors note that, “EPA did not attempt to monetize benefits; whether it had the technical ability to do so in 1985 is debatable ...” API, op. cit., p.31. A form of cost-effectiveness analysis was used.

They conclude by observing:

One could conclude that the API authors perceive the economics and underlying science in the RIA as deficient and that they hope for improvement on both counts as EPA repeats this process periodically.


3 Phase I and II Gasoline Volatility Regulations

EPA prepared a draft RIA in 1987 and a final RIA in 1990 dealing with gasoline volatility. The objective was to reduce evaporative losses of hydrocarbons, a precursor of ozone for which there are national standards. Neither RIA contains a complete benefit-cost analysis.

The RIA stops two steps short of monetizing benefits. What EPA did was to study cost-effectiveness.

API’s harshest criticism of the RIA is that it failed to analyze other control options such as onboard canisters. The marginal cost of RVP reduction is sensitive to the baseline which is established by other policies. Hence, policies are interrelated and, at least in principle, should therefore be analyzed jointly to find the least cost combination for a given abatement level. However, this point is to some extent contradicted by a retrospective view of the RVP regulation and the other controls:


4 Control of the Sulfur and Aromatic Hydrocarbon Content of Highway Diesel Fuel

EPA prepared an RIA leading to a 1985 rulemaking concerning vehicular particulate emissions. EPA considered only two regulatory alternatives, both affecting only fuel, which led to API’s vigorous objection:

As to the analysis of compliance costs, API notes:

API expresses skepticism about EPA claims of better engine wear resulting from reduced fuel sulfur:

The questionable engine wear claims drive the economic analysis according to API:

In its concluding remarks on this RIA, API states with reference to the engine wear matter,


5 The Proposed Great Lakes Water Quality Guidance

The Guidance document deals with point source discharges into the Great Lakes. It provides direction to the states on water quality standards and specifies criteria for certain pollutants.

API’s criticism begins with trading considerations:

The cost side of the analysis proceeded by dealing with a sample of point source dischargers and geographic subsets of the Great Lakes. API expressed reservations:

In addition to questioning the RIA cost estimates, API refers to higher, industry-supplied estimates:

The API authors were similarly concerned about the benefits side:

The API authors conclude:

6 Emissions of Hazardous Air Pollutants from Petroleum Refineries (NESHAPS)

EPA is required under the Clean Air Act to control emissions of hazardous air pollutants (HAP) from refineries which is the ostensible purpose of the proposed rulemaking for which the RIA was developed. However, most of the benefits derive from the ancillary congenial effect of diminished emissions of volatile organic compounds (VOC), precursors of ozone. API, op. cit., pp. 62-63.

On the cost side of the analysis, API expressed reservations. The EPA model involves a supply function shifting because of regulation against a demand function. Welfare triangles are summed to derive cost. The API authors dispute the elasticities used for both functions. API, op. cit., p. 59. Whether the numeric inputs to the cost calculations are appropriate can be debated but the structure conforms more closely to the social cost concept advocated in the introduction to the API document than the accounting or compliance cost measure used in other RIAs although it is partial not general equilibrium.

The API authors note with some reservation that benefits are calculated using the method of benefits transfer:

Of the seven RIAs they review, this one seems to come closest to garnering the approval of the API authors. It treats costs in a sophisticated way. It considers at least some alternatives. It is a complete benefit-cost study. But they don’t find it perfect. They wonder if
Reducing HAPs may not be the optimal way to control VOCs even if EPA is required to do the former. 7 Occupational Exposure to Asbestos

The Occupational Safety and Health Administration (OSHA) undertook to regulate exposure to asbestos under the OSHA Act and the Construction Safety Act. Asbestos is a carcinogen and can induce asbestosis.

The API authors commend OSHA for developing incrementally more stringent rules for incrementally greater exposure risk:

On the benefits side, OSHA took the analysis nearly to a successful conclusion:

The API authors are even less sanguine about the cost side:

After noting that the analysis of costs stops with firms’ compliance cost rather than capturing social costs, the API document sums up the cost side flaws in the OSHA RIA:

The API authors conclude by attempting to integrate the cost and incomplete benefit analyses:


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