This report provides an introduction to the use of economic analysis by the U.S. Environmental Protection Agency as an element in the development of environmental regulations. The term economic analysis is taken to include the measurement of costs and benefits, comparisons of benefits and costs, the distribution of costs and benefits to different portions of the population, and impacts on economic measures such as inflation, employment, trade and the like.
The purpose of economic analysis
Statutory obligations and requirements of executive orders of the president drive much of the demand for economic analysis. In addition, decision makers increasingly request economic information prior to making important regulatory decisions. Individual statutes carry significant obligations to perform economic analyses. For example, the 1990 Clean Air Act Amendments required that the agency conduct a retrospective assessment of benefits and costs under the act The Benefits and Costs of the Clean Air Act, 1970 to 1990 (also known as the ‘Section 812 report’). Undoubtedly the most important non-statutory obligation is that of Executive Order 12866 and its antecedent E.O. 12291. Executive Order 12866 requires an "Economic Analysis" of proposed major regulations. Executive Order 12291 required a Regulatory Impact Analysis (RIA). An inventory of most of the documents prepared to comply with these executive orders can be found in the Regulatory Economic Analyses Inventory Database.
A second need originates within the agency as it strives to improve the environment while not imposing unreasonable cost burdens on society. Historically, the agency has undertaken a number of initiatives to improve the efficiency of environmental regulation that are not required by law. Historically, the agency has given considerable weight to the cost-effectiveness of its proposed regulations for specific industries, recognizing that ambient environmental quality goals can be achieved more efficiently if the costs per unit of pollution controlled are not too widely divergent across sources. Policies that are implemented through market-based economic instruments are the logical extension of the cost-effectiveness criterion. Within EPA a number of these approaches have been developed, including the air emissions trading policy, which later was codified into law, water effluent trading, and the several recent voluntary initiatives such as Project XL, 33/50, and Green Lights. More than twenty distinct volunatry programs are described on EPA's Partners for the Environment home page.
A third and related need stems from a desire by the agency to be proactive when its governing statutes come up for reauthorization. The agency may seek changes to expand the scope of regulation or to modify the way it currently regulates an activity. Since economic impacts usually are an important consideration in the legislative process, policy proposals from the agency need to be supported by sound economic analysis. Economic analysis showing the potential cost savings from allowance trading was instrumental in gaining authority for the agency to control acid rain precursors with a market-based system.
The Economic Analysis Division of the Office of Policy Analysis began a systematic collection of RIAs and RIA-related materials in 1989. That database now contains over 1,200 records. The Regulatory Economic Analyses database currently has eight views: title; downloadable title; document type; status; EPA office originating the document; availability; assessment topic; and reference number in the database to assist in locating the paper file copy. Over 50 titles currently are downloadable reports.
The database currently contains 19 types of documents:
- background benefit assessments (approximately 10 records)
- background cost assessments (approximately 90 records)
- benefits analyses (approximately 30 records)
- Code of Federal Regulations Section (3 records)
- cost-benefit analyses (approximately 60 records)
- cost-effectiveness analyses (approximately 50 records)
- cost analysis (approximately 80 records)
- economic impact assessment (approximately 250 records)
- environmental impact assessment (approximately 20 records)
- environmental justice assessment (2 records)
- Federal Register notices (approximately 310 records)
- other document (approximately 70 records)
- other equity-related document (1 record)
- other regulatory background document (approximately 20 records)
- regulatory flexibility analysis (approximately 20 records)
- regulatory impact analysis (approximately 320 records)
- regulatory option development (approximately 20 records)
- risk assessment (approximately 10 records)
- small business impacts (approximately 10 records).
After this introduction, the report turns to the historical developments, particularly executive orders issued by every president since the early days of EPA, that led to present-day mandates for economic analyses of major rederal regulations affecting health, safety and the environment. Many of these developments also are described in EPA's 1987 report, EPA's Use of Benefit-Cost Analysis 1981-1986. The next major section examines legal requirements for economic analyses of environmental regulations. This section updates and extends information in EPA's 1987 report. All of the key environmental statutes contain requirements for economic analysis of regulatory activities, though the nature and scope of these requirements varies considerably among the statutes, from cost considerations only to thorough benefit-cost analyses.
Three sections follow, each of which reviews a number of individual economic analyses covering air pollution, water pollution, and solid and hazardous waste regulatory activities. The reviews constitute a small sample of the database and are intended to provide the reader with a perspective on the larger contents. Each review describes the nature of the regulation - including statutory requirements, the alternatives that EPA considered, cost estimates, benefit estimates, and the economic analysis of benefits and costs.
It is difficult in this report to characterize adequately the great volume of material in the database. Rather than attempt a detailed, systematic evaluation of the more than 1200 documents, the last section of this report summarizes findings of other researchers who have examined many of the economic analyses.