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1.1. Economic Analysis at the EPA

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Environmental Economics Research at EPA

What is the purpose of economic analysis at the Environmental Protection Agency? While statutory and other obligations drive much of the demand for economic analysis, 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 that requires a Regulatory Impact Analysis (RIA) prior to taking major regulatory actions. An inventory of most of the RIAs prepared can be found in the Regulatory Economic Analyses Inventory.

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, Green Lights, and Climate Wi$e.

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 the regulated community will argue its case with a litany of alleged adverse economic impacts, it is important that policy proposals from the agency be backed up with sound economic analysis. Sound economic analysis showing the potential cost savings from allowance trading was instrumental in getting for the agency the authority to control acid rain precursors with a market-based system.

Since the EPA was created in 1970, it has funded over 450 economics-oriented studies and research projects directed at developing new and improved methods for carrying out economic analyses, especially on measuring environmental costs and benefits and at actually measuring either the costs of environmental actions or the benefits of environmental attributes. The purpose of this paper is to provide a guide to this voluminous literature and to compare the work that has been done to date with the needs of the agency for economic analysis and information. The report also includes an appendix by Alan Carlin on the history of economic research and analysis in the EPA Office of Research and Development and the Office of Policy, Planning and Evaluation, its evolution over the period 1971-2005, and suggestions as to its longer-run significance.

Periodically, the agency has undertaken studies that attempt to assess the role of economics, the adequacy of economic approaches, and the structure and form that economic analyses should take. The most comprehensive single overview is a 1984 report (EE-0395), now available on-line, entitled Estimating Benefits of Environmental Regulations for Improved Decision Making at EPA, which reviews the policy analysis and research functions of the then Benefits Branch of the EPA Office of Policy, Planning and Evaluation and the role of benefit-cost analysis in improving regulatory decisions at EPA. Included are summaries of the research agendas proposed by a number of previous studies (some of which are mentioned below) and proposed agendas for future research and policy activities.

Among the more detailed studies is a 1981 report by Resources for the Future, A Program of Economics Research on Improving Estimation of Benefits from Reduced Pollution (EE-0033). This report discusses EPA information needs with respect to the measurement of economic benefits of pollution control, grouping them into three categories: (1) development of methods and further benefit assessments; (2) data needs; and (3) reduction of overall system uncertainties in national benefit estimates. The report includes several suggestions for further research:
The report also identified several data needs related to human health and pollution; participation in water-related recreation activities; and damage to materials due to pollution. Finally, the report suggested a pilot project to determine the sources and magnitude of uncertainties in national benefit estimates from air and water pollution control.

d'Arge conducted a similar exercise in planning future benefits-related research in the 1985 paper Environmental Quality Benefits Research For The Next Five Years: Some Observations and Recommendations (EE-0052). The paper offers a perspective on the status of environmental economics research on benefits methods in 1985 and makes several recommendations for future research. Among the main research recommendations:
The 1983 Survey of Federal Agency Research and Application of Economic Benefits Analysis (EE-0074) prepared by Roger Dower, and undertaken as a cooperative effort between EPA and the Office of Management and Budget (OMB), catalogues the range of research and efforts by federal agencies to measure the health, recreational and environmental benefits of their programs. Staff from several federal agencies participated in interviews: the Department of Health and Human Services, the Department of Labor, the Department of Transportation, the Environmental Protection Agency, the Department of Agriculture, the Department of the Interior, the Department of Commerce, and the U.S. Army Corps of Engineers. The survey found that most agencies had a similar perspective on what constituted a benefit and the tools that were appropriate for measuring benefits. Other than EPA and DOI, agencies did not have independent programs for research or application of benefits analysis.

Enhancing the Efficiency of Environmental Regulation (1984) by Dower and Portney (EE0055) is a brief report that discusses ways that the efficiency of environmental regulations could be improved. It begins with an assessment of compliance costs for the principal environmental programs. The total for all programs was estimated to be between $34.1 and $55.5 (1981 dollars). The high end of the range represents 1.9% of 1981 GNP. Among the conclusions regarding efficiency-enhancing improvements to environmental statutes and programs: In 1987 EPA released the study EPA’s Use of Benefit-Cost Analysis: 1981-1986 (EE-0222). Prepared as a response to a critique by the US General Accounting Office, the report reviews the 15 regulatory impact analyses prepared for 18 major rules issued during that period (Three rules were exempted by OMB because of statutory or court-imposed deadlines). Executive Order 12291 and the accompanying OMB guidelines instruct the agency to estimate the monetary value of benefits and costs where feasible. While limited scientific information and shortcomings in economic methods are a valid reason for not monetizing all effects of a regulation, the report states that EPA could have developed a more complete economic analysis for several regulations.

The report concludes that economic analysis has improved environmental regulation, with more stringent rules being developed in several instances as a result of improved economic information. In other cases, benefit-cost analysis enabled the agency to find ways of reducing the cost burden of achieving an environmental quality objective. EPA’s governing statutes limit the extent to which economic analysis can be used to shape outcomes. In just 6 of the 15 regulations was EPA able to consider the full implications of its economic analysis.

Alliance Technologies (1989) (EE0198) was asked by the agency to review how economic analysis was used in regulatory decision-making. Using an interview approach to obtain information, Alliance concluded that there was no clear consensus among agency managers as to the main purpose of economic analysis. Agency personnel had several uses for economic analysis and phrased these needs in different ways. The largest percentage of respondents stated that economic analysis helped decision makers weigh the effect on society of regulatory options. Upper-level managers at the agency tended to focus on methodological limits to economic analysis, while OGC, economists and staff were concerned about data limitations. The accuracy of underlying scientific data in the economic analyses was a source of concern to all parties.

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