Background

Regulation is one of the principal tools the federal government uses to  implement public policy. Agencies’ rulemaking processes generally share  three basic phases: (1) initiation of rulemaking actions, (2) development  of proposed rules, and (3) issuance of final rules. Agencies’ rulemaking  processes include opportunities for internal and external deliberations and  reviews, and, as appropriate, procedures for the development of an RIA.  Figure 1 provides an overview of these rulemaking phases, including how  agencies incorporate RIAs into the overall rulemaking process, when  applicable.
During initiation, agency officials identify issues that may result in a  rulemaking, including those resulting from statutory requirements or  management agendas, for example. During this phase, agencies gather  information that allows them to determine the need for a rulemaking. The  second phase of the rulemaking process starts when an agency begins  developing the proposed rule. During this phase, an agency will draft the  rule and begin to address the analytical and procedural requirements,  including commencing work on the RIA, when applicable. Rule  development generally includes input from a wide range of disciplines,  including engineers, scientists, economists, lawyers, and policy and  subject matter experts, among others. For each rule the agency or the  Administrator of the Office of Information and Regulatory Affairs (OIRA)  within OMB identifies as an economically significant regulatory action, the  agency develops the proposed rule and associated RIA and submits them  to OIRA for formal review. After OIRA completes its review, and the  agency incorporates resulting changes, the agency publishes the  proposed rule in the Federal Register for public comment. In the third  phase, development of the final rule, the agency responds to public  comments, in some cases modifying the proposed rule in response to the  comments. This phase also includes further internal and external review.  The agency submits the final RIA and rule to OIRA for review before it  publishes the final rule.
While agencies’ rulemaking processes generally share these basic  process steps, the agencies may vary in managing them. EPA uses the  Action Development Process (ADP)—a series of steps the agency follows  when it develops actions such as regulations and policy statements—to  ensure that the agency adequately addresses scientific, economic, and  policy issues at appropriate stages. In addition, the ADP provides  opportunities for senior management to provide guidance and direction to  staff and helps ensure input from across EPA offices. For economically  significant rules, ADP steps generally include forming a workgroup of  representatives from various EPA offices who will develop the action;  preparing and executing an analytic blueprint for analyses needed to  support the action; receiving early guidance from management;  developing and selecting options that best achieve the goal of the action;  drafting the proposed rule; and conducting final agency review. The lead  program office uses the ADP to direct the workgroup and their managers  who provided policy direction and to help ensure the integrity of the  process. In addition, EPA’s National Center for Environmental Economics  provides guidance for performing economic analysis and performs a  regulatory review function for the agency by reviewing economic analysis  underlying significant regulatory actions. It also conducts research and  development on methods for analyzing economic effects.
Overall, OMB guidance states RIAs should measure the benefits and  costs of a proposed action and the alternatives in comparable terms to  ensure a reasonable determination of net benefits. When estimating net  benefits, the guidance states that agencies should generally estimate  benefits and costs that accrue to society, including those that accrue only  to private entities. In addition, agencies should measure benefits and  costs against a baseline that generally describes the expected state of  the world without the regulation. The guidance also states that agencies  should monetize benefits and costs whenever possible. Where agencies  cannot monetize or quantify benefits and costs, guidance directs  agencies to present the relevant qualitative information along with a  description of the unquantified effects, and a discussion of the strengths  and limitations of the qualitative information.
According to OMB guidance, the 7 percent rate approximates the average before-tax rate  of return on capital investments in the private sector, whereas the 3 percent rate  approximates the rate at which consumers discount future consumption flows to their  present value. Generally, using a higher discount rate gives less weight to future year  benefits and gives more weight to near-term benefits. reasonably obtainable scientific, technical, and economic information.  OMB guidance allows agencies to use professional judgment regarding  the thoroughness of the analysis, while stressing the importance of full  disclosure, including whether and how clearly the agencies explained  their methods.
OMB last revised its guidance for regulatory analysis in 2003. Since that  time, greater emphasis has been placed on agencies’ ability to analyze  certain effects—including the effects of regulations on employment and  reductions in greenhouse gas emissions, such as carbon dioxide—that  OMB’s Circular A-4 does not specifically address. To ensure consistency  across agencies in estimating benefits and costs related to reducing  greenhouse gas emissions, in 2009, OMB co-convened an interagency  working group to assess the best methods for valuing the benefits of  reducing carbon dioxide emissions, known as the social cost of carbon.  The interagency working group produced a technical support document  that summarized its work, including the assumptions and uncertainties  that underlie the range of estimates it developed for quantifying the social  cost of carbon.

	EPA Generally Used RIAs to Inform Decision Making and Varied In Adherence to OMB Guidance for Selected Elements of RIAs

EPA generally used the seven RIAs we reviewed to inform decision  making during the rulemaking process but did not always adhere to OMB  guidance for selected elements of these RIAs. According to EPA officials,  the agency most commonly used these RIAs to facilitate an iterative  process with management, identify effects of regulations, and  communicate the information supporting EPA’s regulatory decisions to  Congress and the public. In addition, EPA’s adherence to OMB guidance  varied across selected elements of the RIAs we reviewed: (1) statements  of need and inclusion and usefulness of an executive summary; (2)  treatment of regulatory alternatives; (3) estimation of benefits and costs;  and (4) treatment of uncertainty, assumptions, and descriptions of data  quality.

		EPA Used RIAs to Inform Decision Making

For the seven RIAs we reviewed, EPA officials said they used RIAs to  inform decision making but did not use them as the primary basis for  selecting the final regulatory option, with one exception. For example, for  the Medium- and Heavy-Duty GHG rule, EPA officials said they used the  RIA as the primary basis for identifying and selecting from the alternatives  considered the most technically feasible option with the greatest net  benefits. However, for another rule—RFS2—EPA officials said the RIA  played no role in selecting a regulatory approach because the approach  resulted from a congressional mandate included in the Energy  Independence and Security Act of 2007. Instead, EPA used this RIA to  identify the effects of the mandate for Congress and the public, according  to EPA officials. For the other five rules, EPA officials said the RIAs  facilitated an iterative process with management and communicated  information to Congress and the public that supported the regulatory  decision. For example, for SPCC, EPA economists said they used  information gathered during the analysis to clarify misconceptions  decision makers had about the proposed regulation. In addition, EPA  used the CISWI and Boiler MACT RIAs to communicate the effects of two  standards to which their authorizing law—the Clean Air Act—refers.

		EPA Generally Adhered to Guidance to Include Statements of Need and Executive Summaries, but Overall, Information in the RIAs Was Not Always Clear or Complete

All seven of the RIAs we reviewed generally adhered to OMB guidance  calling for statements of need for the proposed regulatory actions, but  these statements were not always clear. OMB guidance states that an  agency must demonstrate the need for the proposed action before  recommending regulatory action and only promulgate those required by  law, necessary to interpret the law, or made necessary by a compelling  need, such as material failures of private markets to protect or improve  the health and safety of the public or the environment. Accordingly, the  guidance states that the RIA should include a statement of need that  identifies and explains the problem that the proposed regulation seeks to  address—for example, a market failure, or some other compelling public  need.
In several of the RIAs we reviewed, EPA clearly explained the problem  the regulation intended to address and did so early in the analysis. For  example, in the ELG RIA, EPA clearly identified and explained the market  failure the regulation was intended to address and the authority under  which it was promulgated. However, in other RIAs, EPA provided a less  explicit explanation. For example, the CISWI RIA included information  about the need for the rule, but it did not explicitly describe the problem  the rule sought to address. Similarly, in the RFS2 RIA, EPA explained the  need for the proposed rule—to assess the projected impacts of the  renewable fuel volumes established through the Energy Independence  and Security Act of 2007—but did not describe the problem the rule  intended to address. According to EPA officials, in both of these cases,  the preamble of the final rule published in the Federal Register included  this information. Nonetheless, without a clear description of the problem  the regulation is intended to address in the RIA, the context and rationale  for the analysis is unclear. When the agency does not clearly describe the  necessity of the action in the RIA, a third-party reader can not readily  evaluate whether or not the proposed alternative addresses the intended  need.
Each RIA we reviewed provided an executive summary, including a  standardized accounting statement with information on expected benefits  and costs in accordance with OMB guidance. Recognizing that executive  summaries need to reflect the unique circumstances of each rule, we  found that the quality and type of information included in the executive  summary was inconsistent across the RIAs. For example, two of the  standardized accounting statements—those for CISWI and Boiler  MACT—clearly summarized the overall benefits and costs for the  selected option and regulatory alternative in the executive summary and  compared costs, benefits, and net benefits in a table. Other RIAs,  however, did not clearly present this information. For example, EPA  listed, but it did not explain the benefits, costs, and other economic effects  included in the RFS2 accounting statement. In addition, EPA did not  clearly present a net benefits calculation or identify the discount rates  used for the estimates. Also, while EPA provided the chapter and section  directing readers to more detailed support for the information found in the  executive summary, the supporting information was challenging to identify  and locate in lengthy chapters, particularly where numbers differed  between the executive summaries and the support. In its review of the  draft RIA, OMB also raised concerns about the clarity of EPA’s  presentation of information in the accounting table and provided  suggestions for improving its clarity by, for example, adding details in the  executive summary explaining each row in the accounting summary  statement. When EPA does not present summary-level information in  RIAs clearly, accurately, or completely, as called for in OMB guidance,  the executive summaries do not provide decision makers and the public  with a simple and understandable summary of otherwise lengthy and  complex information underlying the rulemaking.
Moreover, for the RIAs we reviewed, EPA did not always provide or  clearly present all of the information a reader might need to understand  the analysis. OMB guidance states that RIAs should communicate the  complex and technical information that supports EPA’s regulatory  decisions to Congress and the public. Specifically, OMB guidance  states that RIAs should enable a third party to understand how the  agency arrived at its estimates and conclusions (i.e., clarity and  transparency), and Executive Order 12866 states that agencies should  provide information to the public in plain, understandable language.  However, in the Lead Opt-Out RIA, EPA neither included nor made  readily apparent the support for certain benefit estimates in the RIA  document, nor did it clearly explain in the RIA the rationale for the  regulatory option it chose. Further, in the CISWI RIA, EPA clearly  presented benefits and costs, but it did not explain the rationale for  selecting an alternative that did not yield the greatest net benefits. EPA  officials told us they included this information in the preamble of the rule  and technical memoranda that were not referenced in the RIA. EPA  officials said it was not necessary to include such information in the RIAs  because it appeared in these other documents, which are also part of the  rulemaking record. However, OMB staff told us they view the RIAs as  stand-alone documents that should include relevant information or  incorporate references to other documents, so that the support for agency  decisions is understandable. Because the RIAs we reviewed did not  always provide or clearly present key information, the RIAs’ usefulness  for providing readers with a clear understanding of the analyses EPA  conducted varied.
Senior EPA officials said the RIAs go through several reviews within the  agency’s ADP, and EPA’s National Center for Environmental Economics  sometimes participates in reviewing RIAs during their development.  Under the federal standards for internal control, federal agencies are to  employ control activities, such as management review, to help ensure  that management’s directives are carried out to achieve effective  results. However, the agency’s regulatory reviews did not fully ensure  the accuracy, transparency, and clarity of information presented in, or  among, the RIAs we reviewed. As a result, EPA has not fulfilled its  responsibility to provide the public with a clear explanation of the  economic information supporting its decision-making process consistent  with OMB guidance. We identified additional examples of limited  transparency and clarity that specifically relate to other selected elements  of the RIAs we reviewed that we describe below.

		EPA Generally Adhered to Guidance for Analyzing Regulatory Alternatives, but Its Consideration and Presentation Were Sometimes Limited

For each of the seven RIAs we reviewed, EPA generally adhered to OMB  guidance for analyzing regulatory alternatives, but its consideration of  alternatives and presentation of the underlying analysis varied. For five of  the seven RIAs, EPA analyzed more than one alternative, but, in two of  those cases, EPA analyzed only the selected option and one other  alternative, while, in the other three cases, it analyzed a broader range of  alternatives. OMB guidance recommends that agencies consider and  present a range of alternatives in an economic analysis, which could  involve varying the level of stringency, compliance dates, or requirements  for different-sized firms, for example. According to the guidance,  considering a range of alternatives can enhance an agency’s ability to  identify the alternative that yields the greatest net benefits. However, the  guidance also states that the number and choice of alternatives selected  for detailed analysis is a matter of judgment and, that in making this  decision, analysts should consider a balance between thoroughness and  practical limits on analytical capacity.
For the two RIAs in which EPA considered the selected option and one  other alternative, CISWI and Boiler MACT, EPA considered the two  options to which the law specifically refers. Specifically, under the Clean  Air Act, EPA sets emission standards based on the maximum achievable  control technology or “MACT” in a two-step process. First, EPA identifies  the “MACT floor,” which is the maximum achievable reduction in  emissions of certain air pollutants. Second, EPA selects as its standard  either the applicable MACT floor identified in the first stage or a “beyond  the floor” limitation more stringent than the MACT if such a standard is  achievable in light of costs and other considerations.
In three other RIAs—ELG, Medium- and Heavy-Duty GHG, and Lead  Opt-Out—EPA considered a broader range of alternatives. For example,  in the Medium- and Heavy-Duty GHG analysis, EPA considered five  alternatives along a continuum of stringency, with two alternatives that  were less stringent than the selected regulatory alternative and two that  were more stringent. EPA concluded in the RIA that the most stringent  alternative—the one that would reduce the most emissions—would  require advanced technologies that were likely not feasible. Nonetheless,  EPA officials said information on this alternative was useful for comparing  options in the rulemaking and for informing future decisions.
For the remaining two RIAs—RFS2 and SPCC—EPA presented  information for only the selected option. For RFS2, EPA officials said they  did not consider analyzing other alternatives because the key purpose of  the RIA was to summarize the impacts of a congressional mandate.  Specifically, the Energy Independence and Security Act of 2007 specified  the volumes of renewable fuels that must be used in transportation fuel.  According to EPA officials, committing agency resources to analyzing  additional scenarios was not justifiable given their limited discretion for  selecting other regulatory options under the mandate. For SPCC, EPA  considered alternatives for several of the amendments in the rulemaking;  however, it did not present them in the RIA. EPA officials said the agency  presented the alternatives in an RIA that supported an earlier rulemaking,  subsequently amended by the SPCC rule we reviewed and, therefore, did  not need to include them in the current version. By not including this  information, or at least a clear reference to it in the more recent RIA, it  was difficult to discern that EPA considered regulatory alternatives and  whether the selected approach provided the greatest net benefit.
As discussed above, for certain rules, EPA officials said they had limited  discretion in the type of regulatory alternative the agency could  implement. Where applicable, OMB guidance directs agencies to  consider alternative regulatory approaches that rely on economic  incentives (market-based approaches) such as fees, or informational  remedies such as product labeling requirements, and offers increased  flexibility because these approaches are generally more cost effective  than prescriptive approaches. Of the seven RIAs we reviewed, however,  only the Medium- and Heavy-Duty GHG RIA considered market-based  techniques. For example, under the alternatives analyzed in this RIA,  truck manufacturers could earn credits if they adopted certain emission  control technologies, providing some incentive to use more advanced  technologies.
In addition, several RIAs presented limited information about the  regulatory alternatives EPA analyzed. OMB guidance states that  agencies should clearly identify alternatives and explain reasons for  selecting one alternative over another. Some RIAs did not clearly present  this information or presented only limited information. For example, EPA  did not describe the alternatives it analyzed in the Boiler MACT RIA or  identify the associated net benefits for each of the alternatives in the Lead  Opt-Out RIA. As a result, it was difficult to determine what alternatives the  agency considered and whether it selected the alternative that would  provide the greatest net benefit. For CISWI, EPA selected an alternative  that did not maximize net benefits and did not explain its rationale in the  RIA. Instead, EPA officials directed us to a separate technical document  that clearly explained the rationale. By not including such an explanation  in the RIA, or providing a reference to the technical document containing  the rationale, EPA did not fulfill the direction in OMB guidance to provide  a transparent pathway for understanding the rationale for its selected  regulatory approach.

		EPA Varied in Its Adherence to Guidance for Estimating Benefits and Costs

In the RIAs we reviewed, EPA varied in its adherence to OMB’s guidance  for estimating benefits and costs. EPA did not always adhere to OMB  guidance stating that RIAs should clearly describe an economic baseline  from which the agency measured incremental economic effects. EPA  generally adhered to OMB guidance for providing information on benefits  and costs for the regulatory alternatives under consideration and using  OMB’s recommended discount rates. However, EPA faced challenges in  two key areas—monetizing certain benefits and costs and estimating the  effects of its regulations on employment—that limited the usefulness of  some of the estimates in its RIAs. Finally, in several RIAs, EPA used  current guidance to estimate the value of carbon dioxide emission  reductions and, at the same time, used OMB’s overall guidance for  conducting RIAs to estimate other benefits and costs.

			EPA Did Not Always Clearly Describe an Economic Baseline from Which Benefits and Costs Were Measured

For four of the seven RIAs we reviewed, EPA clearly described economic  baselines from which it measured benefits and costs, but it did not do so  for the other three. OMB guidance identifies the need for a clearly stated  baseline to properly evaluate the benefits and costs of regulatory  alternatives. EPA clearly described and explicitly identified the baselines  used for the RFS2, SPCC, Medium- and Heavy-Duty GHG, and ELG  RIAs, but it did not do so for the CISWI, Boiler MACT, and Lead Opt-Out  RIAs. As a result, we had to speak with EPA officials to understand the  baseline the agency used in these analyses. Without clearly presenting  baselines in these three RIAs, EPA did not fulfill its obligation to  transparently provide information necessary for a third party to evaluate  the agency’s estimates and conclusions.
According to OMB guidance, baselines should reflect the expected state  of the world without the regulation. In developing baselines, OMB  guidance directs agencies to consider factors such as the evolution of the  market, changes in regulations, and the degree of compliance by  regulated entities with other regulations. Each of the RIAs we reviewed  developed and used baselines that took one or more of those factors into  account; however, one of the RIAs relied on outdated baseline  information. Specifically, the RIA for the 2009 SPCC rule used the  baseline from a 2002 SPCC rule, despite EPA having revised certain  aspects of that rule in 2006. EPA officials said their use of the older  baseline was still relevant because the revisions made in 2006 had not  yet been fully implemented. By not using a more current baseline, EPA  may not have presented the most up-to-date depiction of the expected  state of the world from which to compare regulatory alternatives.

			EPA Generally Adhered to OMB Guidance on Providing Information on Benefits and Costs of Regulatory Alternatives

In the seven RIAs we reviewed, EPA provided information on the benefits  and costs—monetized, quantitative, and qualitative—for all the  alternatives considered. According to OMB guidance, agencies should  monetize quantitative estimates wherever possible. All seven of the RIAs  we reviewed monetized some benefits for the regulatory alternatives  considered, including, for example, expected improvements in human  health as a result of air pollution reductions. All but one of the RIAs  monetized some costs. Specifically, the SPCC RIA did not quantify or  monetize the potential costs to the environment associated with reducing  the regulatory burden on farms and other entities. The remaining six RIAs  estimated both monetized benefits and costs but, for one of these, EPA  did not present net benefits—a key outcome of conducting these  analyses, according to OMB’s guidance. For the Lead Opt-Out RIA,  EPA officials said they did not present the net benefits calculation  because doing so would have implied more precision and certainty in the  benefits estimates than the data warranted. Without a reliable estimate of  net benefits for each alternative, however, a third-party reader cannot  determine whether the agency selected the alternative that maximized net  benefits.
When monetization or quantification is not possible, OMB guidance states  that agencies should explain why and present a detailed description of  the qualitative effects, as well as a discussion of the strengths and  limitations of that information.qualitative discussion of some potential benefits and costs, and most  explained why EPA could not quantify them. However, some RIAs did not  present a complete discussion of the strengths and limitations of the  qualitative information. For example, the Lead-Opt Out RIA contains more  than 10 pages of qualitative information about the health and  environmental effects associated with lead exposure, but it does not  discuss the strengths and limitations of the information as it pertains to  the regulatory action. Without such information, the potential significance  of these effects on the overall analysis is unclear.
Each of the RIAs we reviewed included a  To determine the present value of monetized benefits and costs agencies  expect to occur in future years, OMB guidance states that agencies  should apply discount rates of 3 and 7 percent, unless a different rate is   EPA generally used OMB’s recommended discount rates to  justified. estimate benefits and costs in all of the RIAs we reviewed; however, in  the RFS2 RIA, EPA did not clearly present its discounted estimates of  benefits and costs using both rates, making it difficult to discern whether  the agency used a consistent rate in the calculation.clearly presented such information. For example, in the CISWI RIA, EPA  clearly delineated the estimated benefits, costs, and net benefits at the 3  and 7 percent discount rates for both alternatives in two separate tables  that were concise and easy to follow.
In other RIAs, EPA  OMB guidance also states that, when monetizing benefit and cost  estimates in RIAs, agencies should generally estimate benefits and costs  to society and should include any significant effects of regulations on  private entities. In its analysis of the Medium- and Heavy-Duty GHG  regulation, EPA estimated that more than 80 percent of the benefits  would accrue to private entities—individual truck owners and operators— in the form of fuel cost savings. According to the final RIA, including this  private benefit in the overall benefit estimate resulted in total benefits that  exceeded overall compliance costs, yielding a positive net benefit.
According to OMB guidance, when estimated cost savings exceed  estimated compliance costs, the agency should examine and discuss why  market forces would not accomplish these gains in the absence of  regulation. The RIA discussed conceptually several reasons why truck  buyers might not purchase more fuel-efficient vehicles in the absence of  the regulation, identifying market failures such as incomplete information  or industry-wide barriers that prevent truck buyers from minimizing costs.  EPA officials told us that to estimate the value of greater fuel efficiency  and all other truck product attributes, they held constant these other  attributes, such as size and torque, before and after the regulation. By  assuming that these attributes remained constant, EPA officials reasoned  that the costs of these attributes would be higher and therefore result in a  more conservative estimate of net benefits. However, EPA’s assumptions  and associated cost adjustments were not readily transparent in the RIA.   Moreover, because EPA did not integrate both costs and consumer  behavior into one consistent model, EPA may have misstated the value or  benefits resulting from increased fuel efficiency. OMB staff said the data  needed to account for these offsetting factors often do not exist.  Moreover, EPA did not explore nonregulatory alternatives that could  correct a market failure, such as providing truck buyers with more  information about fuel economy through product labeling or other means  as OMB guidance recommends.

			EPA Faced Challenges in Two Key Areas That Limited the Usefulness of Some of the Estimates in Its RIAs

In assessing EPA’s adherence to OMB guidance, we identified two key  areas in which EPA faced challenges that limited the usefulness of some  of the estimates in its RIAs—nonmonetized benefits and costs related to  the primary purpose or key impacts of the regulatory actions and EPA’s  approach for estimating the effects of regulations on employment.
In several RIAs, EPA provided quantitative estimates for the benefits and  costs related to the primary purpose or key impacts of the regulatory  action; however, EPA did not monetize some of these key benefits and  costs. OMB guidance acknowledges that monetization is not always  possible, and EPA officials said that limited data, modeling capabilities,  and time and resource constraints precluded them from monetizing these  effects in some cases. For example, in the RIA for RFS2, a rule aimed at  increasing the use of renewable fuels such as ethanol and other biofuels  through the production of agricultural and other feedstocks, EPA  quantified some adverse water quality effects of the renewable fuel  standard but did not monetize these effects. EPA officials said they used  models to quantify the amounts of nitrogen pollution in water expected  from the rule but were not able to use the model to place an economic  value on this pollution, citing that limited time and resource constraints  precluded them from developing such an economic value. Several water  quality experts we spoke with suggested that monetizing water quality  effects for this rule may have been possible, but they acknowledged  challenges to doing so. For example, experts explained that it is  challenging to monetize water quality effects at the national level. In the  SPCC RIA, EPA officials said that monetizing potential costs to the  environment associated with reducing the regulatory burden on farms and  other entities is challenging, in part, due to a lack of information about the  likelihood of an oil spill and its effects on the environment.
Further, in the RIAs for two regulations—CISWI and Boiler MACT—aimed  at reducing emissions of specific air pollutants, EPA quantified the  amount of reductions expected for particular pollutant emissions, but it did  not monetize the health benefit associated with those emissions  reductions. In the RIAs, EPA explained that methodological and time  limitations under court-ordered schedules for the CISWI and Boiler MACT  regulations precluded them from monetizing these effects. Specifically,  EPA stated in the RIAs that insufficient information existed for emissions  from specific sources that prevented the agency from modeling changes  in population exposures to ambient concentrations of hazardous air  pollutants. Nonetheless, consistent with OMB guidance, EPA included in  the RIAs monetized benefits related to reducing particulate matter—a  complex mixture of several components, including acids, metals, and soil  or dust particles—both as a surrogate for metal hazardous air pollutants  and as a secondary benefit resulting from other hazardous air pollutant  reductions. Without further research to eliminate data gaps and enhance  modeling capabilities to support monetizing additional benefits and costs,  however, EPA’s RIAs may continue to be limited in their usefulness for  understanding economic trade-offs among regulatory alternatives.
In addition, in the RIAs we reviewed, EPA estimated the effects of its  regulations on employment in two ways. Executive Order 12866 directs  agencies to assess any adverse effects on employment resulting from  regulations, but neither it nor OMB’s associated guidance provides  specific direction on estimating these effects when the outlook is for  continued high unemployment. First, in most of the RIAs we reviewed,  EPA incorporated certain labor cost estimates in its compliance cost  estimates within the benefit cost analyses. To develop these estimates,  consistent with Circular A-4, EPA generally assumed the economy was at  full employment and, accordingly, that the regulations would displace few  workers over the long term, and any individuals laid off as a result of the  regulations would quickly find new jobs at comparable wages.
During the time EPA conducted these analyses, however, the United  States experienced an economic recession followed by a sluggish  recovery with an unemployment rate of 9 percent or higher until late  2011. Some researchers have raised questions about the  reasonableness of the full employment assumption, suggesting that the  cost of job losses may be substantial and generate other social costs or  benefits when the outlook is for continued high unemployment.
Researchers and senior EPA and OMB officials said that empirically  assessing these employment effects is challenging, however, due to data  limitations and the inherent difficulty of separating the effects of  regulations from other factors in the economy. In addition, some rules  have compliance periods that begin and extend well into the future, and  EPA officials said that the employment rate during the compliance period  is more important than the employment rate when the rule is written.  Nonetheless, in the RIA for the Medium- and Heavy-Duty GHG rule,  finalized in 2011, EPA qualitatively discussed the possibility that the rule  would have a net positive effect on employment by reducing involuntary  unemployment.
Second, for three of the seven RIAs we reviewed, EPA conducted a  separate analysis of the potential effect of its regulations on changes in  the number of jobs. Specifically, in the Boiler MACT, CISWI, and ELG  RIAs, EPA quantitatively assessed the potential effect of the regulation on  employment in the directly affected industries, estimating the expected  job losses and gains for each. With limited methods, studies, and models  available for assessing the potential effects of regulation on employment,  EPA relied primarily on an economic study that had several limitations.  For example, the study was based on outdated information that  considered the effect of regulations on employment for certain years from  1979 through 1991. In addition, the study was limited to four industrial  sectors. By applying this study to its analyses, EPA effectively assumed  that the conditions at the time of the study, as well as the sectors  considered, were relevant to the conditions and industries affected by the  regulations we reviewed. EPA acknowledged in the RIAs that the study  has these limitations. In addition, senior agency officials acknowledged  the limitations in our discussions and said the authors of the underlying  study have since questioned its sufficiency for use in regulatory analyses.  However, the officials also said that the study represented the best  reasonably obtainable data when they conducted their analyses. EPA  officials said they last used the study to support quantitative estimates of  employment effects in June 2013, but that the study continues to provide  a theoretical framework for EPA’s consideration of employment effects in  RIAs. In addition, they said they have begun to explore new approaches  for analyzing employment effects. However, EPA officials were uncertain  about when such information would be available. Without additional  information and improvements in its approach for estimating employment  effects, EPA’s RIAs may be limited in their usefulness for helping decision  makers and the public understand the potential effects of the agency’s  regulations on employment.

			EPA Used Current Guidance to Estimate the Value of Carbon Dioxide Emission Reductions

In four of the RIAs we reviewed, EPA estimated the value of carbon  dioxide emission reductions using a measure known as the social cost of  carbon. A federal interagency working group, co-led by OMB and the  Council of Economic Advisers, developed social cost of carbon estimates  in a technical support document produced in 2010 and updated in 2013.  According to OMB staff, the technical support document guidance— developed by experts from numerous agencies—is an extension of the  guidance in Circular A-4, aimed specifically at estimating the value of  future reductions of carbon emissions. The 2010 technical support  document, which was applicable to most of the rules we reviewed, does  not include a clear overall statement of its relationship to Circular A-4, but  includes references to Circular A-4 in certain sections of the body that  explain how the technical support document guidance relates to the  general direction provided in Circular A-4. Similarly, the 2013 update of  the technical support document references Circular A-4 in the body, but  does not include a clear overall statement of its relationship to Circular A- 4.
The benefits and costs of reducing most greenhouse gas emissions,  including carbon dioxide, differ from other benefits and costs in at least  two respects: (1) greenhouse gas emissions contribute to global damages  even when emitted in the United States because these emissions  disperse widely throughout the atmosphere and (2) these emissions  generally remain in the atmosphere for years, causing subsequent long- term damages. As a result, the technical support document represents an  approach for estimating the value of reducing future carbon dioxide  emissions that differs from the approach for estimating other benefits and  costs described in Circular A-4 in two key ways.
First, while Circular A-4 states that agencies should generally estimate  domestic benefits and costs of regulations, it also provides latitude to  include global economic effects resulting from regulations when relevant  and states that such effects should be reported separately and in addition  to domestic effects. According to the more recent technical support  document, a global measure of benefits and costs for greenhouse gas  reductions is preferable in light of the global nature of climate change.  Accordingly, in the four RIAs, EPA estimated the value of reducing future  carbon dioxide emissions using a global value rather than focusing solely  on benefits that would accrue to the United States. In addition, the  technical support document notes that relatively few region- or country- specific models for estimating a domestic measure of the social cost of  carbon exist, and the EPA officials responsible for these analyses  reiterated this challenge. The technical support document includes a  range of values for adjusting the global social cost of carbon to estimate  domestic effects based on one model but states that the values are  “approximate, provisional, and highly speculative.” OMB staff said the  interagency working group will continue assessing whether it can  generate a more reliable domestic measure.
Second, for valuing reductions of future carbon dioxide emissions using  social cost of carbon estimates, the technical support document adapts  and revises the guidance in Circular A-4 related to discount rates. Circular  A-4 states that agencies should discount future benefits and costs using  rates of 3 and 7 percent but notes that agencies may, in addition,  consider a lower discount rate if a rule will have important  intergenerational benefits or costs. OMB has stated, however, that a 7  percent discount rate is not appropriate for valuing carbon dioxide  emissions because it does not adequately account for the impact of   Accordingly, in the  carbon dioxide emissions on future generations. RIAs we reviewed that included estimates related to reducing carbon  dioxide emissions, EPA generally applied the technical support  document’s social cost of carbon estimates based on discount rates of  2.5, 3, and 5 percent. According to OMB, these discount rates are  consistent with the latitude provided in Circular A-4 and span a plausible  range to account for disagreement in the literature on the appropriate rate  to use in this context and various uncertainties. Circular A-4 preceded the  technical support document and has not been amended and, accordingly,  it does not reference the technical support document or explain the  relationship between the two documents. Because Circular A-4 generally  suggests that agencies use discount rates of 3 and 7 percent and the  relationship to the technical support document is not clear, including  estimates of benefits at different discount rates can lead to the  appearance that EPA did not adhere to the general direction regarding  discount rates in Circular A-4.
Moreover, applying Circular A-4 and the technical support document  simultaneously can lead to an inconsistency in some of EPA’s net  benefits analyses. For example, in the Medium- and Heavy-Duty GHG  RIA, EPA estimated the value of reducing future carbon dioxide  emissions using a 3 percent discount rate, as provided in the technical  support document, and incorporated that estimate with the other non- greenhouse gas benefit and cost estimates it discounted using both the 3  percent and 7 percent discount rates suggested in Circular A-4.  Incorporating the estimate for carbon dioxide emission reductions at 3  percent with other benefits and costs discounted at 7 percent produces  an analytical inconsistency, whereas incorporating the estimate for  carbon dioxide emission reductions at 3 percent with other benefits and  costs discounted at the same rate does not. In effect, using a lower  discount rate to estimate the value of reducing future carbon dioxide  emissions than that used to estimate other benefits and costs places  greater weight on carbon dioxide emission reductions when calculating  the overall net benefits of a rule.
OMB staff said they understand the issues associated with incorporating  carbon dioxide reduction estimates discounted at a lower rate with net  benefits discounted at the 7 percent rate. However, they said this  difference in discount rates is unavoidable due to the intergenerational  nature of the benefits associated with reducing carbon dioxide emissions  and noted that the technical support document envisions this possibility— that other benefits and costs unrelated to carbon dioxide emissions will be  discounted at rates that differ from those used to develop the social cost  of carbon estimates.integrating intergenerational benefits in benefit-cost analyses is an active  area in the literature, and the interagency working group has committed to  periodically updating the technical support document. However, they told  us they have not yet determined a better approach for addressing this  analytical issue. Without increased clarity regarding the relationship  between Circular A-4 and the technical support document and additional  guidance on presenting the analytical inconsistencies, questions about  the adherence of the agency’s analyses to Circular A-4 and challenges  related to the public’s understanding of the agency’s estimates will likely  persist.

		EPA Generally Adhered to Guidance on Analyzing Uncertainty and Describing Data Quality

EPA generally adhered to OMB guidance on analyzing uncertainties with  key assumptions underlying its RIAs although, in some cases, its  assessment of uncertainty was limited. OMB guidance states that  analyzing and presenting important uncertainties as part of the overall  regulatory analysis can inform the public and decision makers about the  effects of these uncertainties on the benefits and costs of alternative  regulatory actions. For example, a sensitivity analysis can show how  benefit and cost estimates may change under different assumptions.  OMB guidance also states that agencies should conduct a formal  quantitative analysis of the relevant uncertainties about benefits and costs  for rules with estimated annual effects of $1 billion or more.
For all of the RIAs we reviewed, EPA assessed the uncertainty of some  key assumptions. For three of the four RIAs with estimated annual effects  of $1 billion or more, EPA conducted a formal quantitative analysis.  However, for these three RIAs, EPA did not conduct such an analysis of  all of the relevant uncertainties, as OMB guidance directs. OMB staff  acknowledged that time and resources limitations can hinder agencies’  ability to conduct such analyses. In some cases, EPA cited data  limitations as the reason for not doing so. In the Boiler MACT RIA, for  example, EPA used experts’ judgments, among other methods, to assess  the variability in one important component of its benefit estimates—the  extent to which emissions of certain air pollutants lead to premature  mortality. EPA officials said, however, they did not analyze other relevant  uncertainties related to other aspects of these pollutants because of data  limitations. Also, in this RIA, EPA did not analyze the uncertainties  associated with its cost estimates. EPA officials said that, in weighing  time and resource constraints against additional uncertainty analyses for  cost estimates, they determined additional analysis was not worthwhile  because the benefits of the rule far outweighed the costs, and additional  analysis under alternative assumptions would not likely change that  conclusion. However, by not assessing uncertainty associated with the  cost estimates, the RIA implied greater precision than was warranted.
For the other three RIAs we reviewed, EPA had greater flexibility under  OMB guidance because the annual effects of the rule totaled less than $1  billion. Specifically, for rules expected to range in annual effects from  $100 million to $1 billion, the guidance suggests that agencies consider  using techniques ranging in complexity from a sensitivity analysis to more  formal uncertainty analysis. While each of these RIAs analyzed some  uncertainties, only one of the three RIAs analyzed most of the relevant  uncertainties. For example, in one RIA, EPA did not analyze the  uncertainties associated with the cost estimates.
In addition, EPA generally described the quality of data, models, and  assumptions underlying its analysis or whether the information had  undergone peer review. According to OMB guidance, agencies should  rely on peer-reviewed literature, where available, to document their use of  the best reasonably obtainable scientific, technical, and economic  information in RIAs. In many instances, EPA described the quality of the  underlying data and models and the use of peer-reviewed data. For  example, in the RFS2 RIA, EPA used a new peer-reviewed model to  calculate an important piece of the final analysis, which improved the  estimates between the proposed and final rules, according to EPA  officials. In other instances, however, EPA did not describe the quality of  the underlying data and models. Although EPA explained to us that they  aim to have their models peer-reviewed, for CISWI and Boiler MACT,  EPA used a non-peer reviewed multimarket model to estimate social  costs and benefits because, according to EPA officials, no peer-reviewed  model was available. EPA officials said they used this model,  nonetheless, because at the time of the analysis it was considered an  appropriate approach. Disclosing such information about the underlying  model in the RIA would provide readers with its potential limitations and  areas for future improvement. Ultimately, the peer review—completed  after EPA used the estimates in the analysis—criticized a number of the  assumptions and data used in the model, raising questions about the  reliability of these estimates. EPA officials said they no longer use the  model and that they plan to revise it in response to the peer review.

	Conclusions

RIAs are valuable tools for helping agencies assess whether the benefits  of an action justify the costs and identify the regulatory alternative that  yields the greatest net benefits. In addition, RIAs provide affected entities,  government agencies, Congress, and the public with important  information about the potential effects of new regulations, which can  result in significant benefits and costs. Because the information in RIAs  can be complex and technical, it is important that agencies clearly present  how they arrived at their estimates and conclusions. OMB guidance  provides best practices for conducting regulatory analysis and  communicating this information; however, EPA did not always adhere to  this guidance. In particular, EPA’s regulatory review process does not  ensure that the information about selected elements that should appear in  the analyses—such as clear descriptions of baselines and alternatives  considered—is transparent or clear, within and across its RIAs. Without  enhancements to its review process targeted at improving adherence to  OMB guidance, EPA cannot ensure that its RIAs provide the public with a  clear understanding of its decision making. In addition, executive  summaries are a key focal point of these lengthy, complex RIAs. When  the executive summaries are not clearly or accurately linked to the  detailed analyses, they do not provide decision makers and the public  with simple, understandable explanations of the expected economic  effects of the regulations.
In addition, EPA faced challenges in two key areas that limited the  usefulness of some of the estimates in its RIAs. First, resource and data  limitations constrained EPA’s ability to monetize certain benefits and  costs related to the primary purposes or key impacts of the rules we  reviewed, such as the health benefits of reducing hazardous air pollutants  and water quality effects. A key aspect of regulatory analysis is  monetizing the benefits and costs, but OMB guidance acknowledges this  is not always possible. However, when EPA does not monetize key  benefits and costs, the RIAs may be limited in their usefulness for helping  decision makers and the public understand economic trade-offs among  different regulatory alternatives. Second, because EPA relied on an  outdated and limited study to estimate the effects of regulations on  employment, it may have inaccurately characterized the relationship  between those regulations and employment. EPA officials said they have  begun to explore new approaches for analyzing employment effects.  However, EPA officials were uncertain about when such information  would be available. Without additional information and improvements in  its approach for estimating employment effects, EPA’s RIAs may be  limited in their usefulness for helping decision makers and the public  understand the potential effects of the agency’s regulations on  employment.
Finally, in response to increased emphasis on agencies’ ability to  monetize the effects of regulations on reductions of carbon dioxide  emissions—the effects of which are long lasting and global in nature—a  federal interagency working group, co-led by OMB and the Council of  Economic Advisers, developed a technical support document for  estimating these effects to supplement the guidance in OMB’s Circular A- 4. EPA’s use of the technical support document for estimating the value  of reducing future carbon dioxide emissions and Circular A-4 for  estimating other benefits and costs in its RIAs has raised questions about  the agency’s adherence to Circular A-4 and has introduced an  inconsistency in EPA’s analyses. Without increased clarity regarding the  relationship between Circular A-4 and the technical support document,  and additional guidance on presenting the analytical inconsistencies,  questions about the adherence of agencies’ analyses to Circular A-4 and  challenges related to the public’s understanding of their estimates will  likely persist.

	Recommendations for Executive Action

We are making six recommendations in this report.
To improve future adherence to OMB guidance for conducting RIAs, we  recommend that the EPA Administrator take the following two actions: enhance the agency’s review process for RIAs to ensure the  transparency and clarity of information presented for selected  elements in and across RIAs; and  improve the accuracy, transparency, and clarity of the information  included in the executive summaries of each RIA.
In addition, to enhance the usefulness of EPA’s RIAs, we recommend  that the EPA Administrator take the following two actions:  identify and prioritize for research key categories of benefits and costs  that the agency cannot currently monetize that, once monetized,  would most enhance the agency’s ability to consider economic trade- offs associated with different regulatory alternatives; and  continue efforts to update and improve the agency’s approach to  estimating employment effects.
To clarify the relationship between OMB Circular A-4 and an Interagency  Working Group’s Technical Support document for estimating the effects  of changes in carbon dioxide emissions, and the approach agencies  should use when informing decision makers and the public of their  findings, we recommend that the Director of OMB consider taking the  following two actions:  clarify the relationship between OMB Circular A-4 and the Technical  Support Document by increasing the visibility of relevant language in  the Technical Support Document; and  continue monitoring the economic literature and working with  agencies to identify approaches for presenting social cost of carbon  estimates with other analytical results that have been discounted at  different rates to help agencies more transparently communicate  about the circumstances unique to assessing the long-term effects of  changes in carbon dioxide emissions.

	Agency Comments and Our Evaluation

We provided a draft of this report to EPA and OMB for review and  comment. In written comments, which are reproduced in appendix III,  EPA generally agreed with our recommendations and described actions it  intends to take to address them. Additionally, EPA provided comments on  areas in the report where it believes that our findings and conclusions are  incomplete or would benefit from a clearer and more robust consideration  of context as well as technical comments, which we incorporated as  appropriate. In oral comments on behalf of OMB, OMB staff commented  on both recommendations and suggested several changes and  clarifications, which we used to modify the recommendations. We  discussed these changes and clarifications with OMB staff, who said they  neither agreed nor disagreed with the revised recommendations but saw  some merit in them. OMB staff also commented on technical issues,  which we addressed as appropriate.
Regarding the first two recommendations to the EPA Administrator, in its  comment letter, although the agency agrees with our recommendations,  EPA stated that our findings do not point to systemic deficiencies with  respect to the accuracy of the agency’s analytic work. EPA also stated  that it supports our emphasis on the importance of transparency and  clarity and will continue to strive to enhance these qualities in its RIAs.  EPA then described actions it plans to take to address these  recommendations. In its comments on our findings concerning RIAs, EPA  characterized the seven rules we reviewed as a very small subset of RIAs  for the rules that EPA has issued in recent years. We disagree with this  characterization. The seven rules we reviewed represent more than one- third of the 20 economically significant rules EPA finalized from 2009  through 2011, the period from which we sampled rules. In addition, four of  the rules had economic effects of over $1 billion, a threshold beyond  which OMB guidance directs agencies to conduct additional analysis  because of the significance of these effects. EPA correctly stated that our  findings cannot be generalized, which we acknowledged in our report.
Also in its comments on our findings concerning RIAs, EPA stated that  the report suggests that the agency’s use of the discount rates in the  interagency support document for the social cost of carbon raised  questions about the agency’s adherence to OMB Circular A-4 and about  the consistency of analysis in certain RIAs. We believe that our report  includes a robust discussion of this issue and related context. Specifically,  our report describes the fact that EPA relied on two different guidance  documents—OMB Circular A-4 and a Technical Support Document that  was developed by OMB and the White House Council of Economic  Advisers—for estimating certain benefits and costs. In this context, we  identified a challenge related to the clarity of the relationship between  these two documents that can lead to confusion about whether EPA  adhered to OMB Circular A-4—the primary guidance document that  agencies should use when conducting economic analysis. We therefore  recommended that OMB enhance the clarity of the relationship between  the two documents.
Regarding the third recommendation to the EPA Administrator, in its  comment letter, EPA stated that the agency agreed with the importance  of making continual improvements in valuing the benefits and costs of its  regulatory actions and is constantly working to improve in these areas.  The agency also stated that it will continue to invest in areas that will  support improvements in its ability to quantify important benefits and  costs, including areas we identified such as water quality benefits and  hazardous chemical impacts. In its comments on our related findings  concerning the monetization of benefits and costs, EPA accurately  characterized the flexibility agencies have to design analyses in ways that  optimize the use of limited resources while providing appropriate  information about policy options. Furthermore, our report acknowledges  this flexibility and identifies challenges EPA faces in monetizing certain  types of benefits. In some cases, however, EPA was not able to monetize  benefits and costs related to the primary purpose or key impacts of the  regulatory action. In these cases, our report points out that this can limit  the usefulness of RIAs in helping decision makers and the public  understand the potential effects of EPA rules.
Regarding the fourth recommendation to the EPA Administrator, in its  comment letter, EPA stated that while the agency considers its current  practices to be up-to-date and consistent with sound science and  economics, it continues to explore the relevant theoretical and empirical  literature and to seek public comments on analysis of economically  significant regulations to ensure that the way it characterizes the  employment effects of its regulations is valid and informative. In its  comments on our findings concerning the agency’s analysis of  employment impacts, EPA stated that it was important for us to recognize  that the agency relied on the best available peer-reviewed research that  existed at the time that EPA conducted its RIAs and that the agency’s  treatment transparently recognized the limitations of the study where it  was applied. Although EPA discussed the potential limitations associated  with using the study in RIAs we reviewed, the RIAs did not analyze  whether factors such as the time period and the industries reflected in the  employment study were appropriate for use in these RIAs. In addition, the  lead author of the employment study has since indicated that the study  should not be used to estimate employment effects in regulatory  analyses.
Regarding the first recommendation to the OMB Director, our draft report  recommended that OMB draw an explicit link between Circular A-4—the  primary guidance document for conducting economic analysis issued in  2003—and later guidance issued in 2010 and updated in 2013 on  estimating the effects of changes in carbon dioxide emissions because it  was difficult to determine whether EPA’s use of the later guidance  adhered to Circular A-4. In their oral comments, OMB staff said that an  explicit link already exists in the 2010 guidance. We agree that the 2010  guidance had some language explaining the relationship between it and  Circular A-4 but that this language did not feature prominently in the 2010  guidance or appear in Circular A-4. As a result, the relationship between  the two sets of guidance was still unclear. In response to the OMB  comments, we modified the recommendation to say that the Director of  OMB should consider clarifying the relationship between the two sets of  guidance to assist the public and decision makers in understanding the  results of analyses that follow both guidance documents.
Regarding the second recommendation to the OMB Director, our draft  report recommended that OMB provide further guidance on how agencies  should present estimates of the benefits of regulations when agencies  discount different types of benefits (including changes in carbon dioxide  emissions) at different rates because this can introduce inconsistencies in  the analytical results that make it difficult for the public and decision  makers to understand. OMB staff said that the existing economic  literature was unresolved on addressing this issue and that issuing further  guidance would thus be premature. In response to the OMB comments,  we modified the recommendation to say that the Director of OMB should  continue monitoring the economic literature and working with agencies on  approaches for presenting estimates of changes in carbon dioxide  emissions along with other types of economic effects that have been  discounted at different rates.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Administrator of EPA, the Director of OMB, the appropriate congressional  committees, and other interested parties. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or gomezj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report examines how the Environmental Protection Agency (EPA)  has used economic analyses in its decision making during the rulemaking  process and the extent to which EPA adhered to Office of Management  and Budget (OMB) guidance in conducting selected elements of the  economic analyses the agency used to support recent rulemakings.
To identify the economic analyses for our review, we used OMB’s  historical lists of rules it has reviewed to compile a list of the economically  significant rules—those with an annual effect on the economy of  $100 million or more or that have a material adverse effect on a sector of  the economy; productivity; competition; jobs; the environment; public  health or safety; or state, local, or tribal governments or communities— EPA finalized in 2009 through 2011. This yielded a total of 20 rules from  which we eliminated from consideration four rules: (1) a rule related to  National Ambient Air Quality Standards because EPA is statutorily  prohibited from considering costs in setting these standards; (2) a rule  that EPA identified as erroneously appearing on OMB’s list of  economically significant rules; and (3) two rules because they applied to  specific states, rather than the nation. This reduced our universe of  possible rules for consideration to 16 rules. From these, we selected a  nonprobability sample of seven EPA rules that met the following criteria:  (1) they were considered economically significant under Executive Order  12866; (2) they were finalized from 2009 through 2011; (3) they were  conducted by four different EPA program offices (Air and Radiation,  Chemical Safety and Pollution Prevention, Solid Waste and Emergency  Response, and Water); and (4) they were expected to have a varying  range of effects on the economy. Because this was a nonprobability  sample, findings from our review of the seven rules cannot be generalized  to those we did not review.
To examine how EPA used economic analyses in its decision making, we  interviewed EPA officials that prepared the Regulatory Impact Analyses  (RIA) and other documentation for each rule, as well as officials from  EPA’s Office of Policy. They provided detailed explanations about the  regulatory decision-making process for each rule and how RIAs were  used in that process. In addition, we reviewed the final RIAs for the seven  selected rules. To assess the extent to which EPA adhered to OMB’s  guidance in Circular A-4 for selected elements of the RIAs, we developed  a checklist that included questions related to each element and applied  the checklist to all seven rules. For each RIA, two analysts (including one  economist) independently reviewed the analyses and subsequently came  to consensus about each element’s adherence to OMB guidance. For  each rule, we also reviewed the relevant Federal Register notices  prepared during the course of the rulemaking, draft RIAs, and other  relevant technical documents. We compiled the individual checklists into  a summary checklist to assess the extent to which the rules as a group  adhered with specific elements of OMB Circular A-4 principles. The  selected elements we examined included: the analyses’ overall  transparency and use of executive summaries and statements of need;  treatment of regulatory alternatives; estimation of benefits and costs; and  treatment of uncertainty, assumptions, and descriptions of data quality.
To enhance our understanding of the analyses, we interviewed the EPA  officials that prepared the RIAs from the four EPA offices, including the  Offices of Air and Radiation, Chemical Safety and Pollution Prevention,  Solid Waste and Emergency Response, and Water. In addition, to  increase our understanding about specific categories of estimates, we  reviewed economic literature and interviewed a convenience sample of  economists, selected because of their knowledge and expertise regarding  specific technical issues that appeared in the seven RIAs. Finally, we  interviewed OMB staff to discuss specific elements of OMB Circular A-4  and technical guidance related to estimating the economic effects of  reducing greenhouse gases.
We conducted this performance audit from February 2012 to July 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Rule Descriptions

This appendix includes a brief description of the seven rules we reviewed.

	Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy- Duty Engines and Vehicles (Medium- and Heavy-Duty GHG)

On September 15, 2011, the Environmental Protection Agency (EPA) and  the Department of Transportation’s National Highway Traffic Safety  Administration (NHTSA) finalized regulations in a joint rulemaking to  establish a comprehensive Heavy-Duty National Program. The respective  rules responded to a May 21, 2010, presidential directive and constituted  the first-ever program to reduce greenhouse gas emissions and fuel  consumption in the heavy-duty highway vehicle sector. In this rulemaking,  EPA finalized carbon dioxide emissions standards, and NHTSA  concurrently finalized fuel consumption standards for three regulatory  categories of heavy-duty vehicles: combination tractors; heavy-duty  pickup trucks and vans; and vocational vehicles. EPA set additional  standards in its rule, including final hydrofluorocarbon standards to control  leakage from air-conditioning systems, and final nitrous oxide and  methane emissions standards for combination tractors and heavy-duty  pickup trucks and vans. In this rule, EPA also finalized provisions allowing  light-duty vehicle manufacturers to use carbon dioxide credits to meet the  light-duty vehicle nitrous oxide and methane standards, technical  amendments to the fuel economy provisions for light-duty vehicles, and a  technical amendment to the criteria pollutant emissions requirements for  certain switch locomotives. EPA’s final greenhouse gas emission  standards under the Clean Air Act begins with model year 2014 and will  be fully phased in by 2018. This phase of the Heavy-Duty National  Program did not regulate commercial trailers.
The agencies estimated that the combined standards will reduce carbon  dioxide emissions by approximately 270 million metric tons and save 530  million barrels of oil over the life of vehicles sold during the 2014 through  2018 model years and yield $49 billion in net benefits at a 3 percent  discount rate and $33 billion in net benefits at a 7 percent discount rate.
On March 21, 2011, EPA finalized this rule, which requires industrial,  commercial, and institutional boilers and process heaters located at major  sources to meet hazardous air pollutants standards reflecting the  application of the maximum achievable control technology (MACT).  Under section 112(d) of the Clean Air Act, EPA must set these emissions  limits for both existing and new sources. For existing sources, the MACT  standards must be at least as stringent as the average emissions  limitation achieved by the best performing 12 percent of existing sources  for which there is emissions information. For new sources, the MACT  standards must be at least as stringent as the control level achieved in  practice by the best controlled similar source. In both scenarios, these  levels are referred to as the MACT floor. EPA also must consider more  stringent “beyond-the-floor” control options and, in doing so, must take  into account the maximum degree of reduction in emissions of hazardous  air pollutants, costs, energy, and nonair environmental impacts. The final  rule regulated the following hazardous air pollutants: hydrogen chloride  (as a surrogate for acid gases); particulate matter (as a surrogate for  nonmercury hazardous air pollutant metals); carbon monoxide (as a  surrogate for nondioxin and furan organic hazardous air pollutants);  mercury; and dioxin and furan emissions.
EPA estimated the net benefits of this rule to range from $20.5 to $52.5  billion at a 3 percent discount rate and from $18.5 to $47.5 billion at a 7  percent discount rate. The monetized benefits reflect the health benefits  associated with reducing exposure to fine particulate matter through  directly emitted particulate matter and precursors (such as sulfur dioxide),  as well as reducing ozone exposure through reductions of volatile organic  compounds. In addition to the monetized benefits, EPA estimated that the  rule would reduce 112,000 tons of carbon monoxide; 30,000 tons of  hydrogen chloride; 820 tons of hydrogen fluoride; 2,800 pounds of  mercury; 2,700 tons of other metals; and 23 grams of dioxins and furans.

	Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program (RFS2)

On March 26, 2010, EPA issued a final rule implementing changes to the  National Renewable Fuel Standard program as required under the Clean  Air Act Section 211(o), as amended by the Energy Independence and  Security Act of 2007 (EISA). The 2007 act expanded the renewable fuel  standard established by the Energy Policy Act (EPAct) of 2005. The  renewable fuel standard is the mandated minimum volume of biofuels  used in the national transportation fuel (gasoline and diesel) supply each  year. EISA mandated the use of 36 billion gallons of renewable fuel by  2022, a significant increase over the requirement in EPAct 2005. EISA  also required that an increased amount of the mandate be met with  advanced biofuels—certain biofuels produced from feedstocks other than  corn starch—compared with conventional corn-based ethanol.  Specifically, 21 billion of the 36 billion gallon mandate of renewable fuel is  expected to come from advanced biofuels by 2022. EPA expects the  revised RFS2 to lay the foundation for achieving significant reductions of  greenhouse gas emissions from the use of renewable fuels, reducing  imported petroleum, and encouraging the development and expansion of  our nation’s renewable fuels sector.
EPA estimated net benefits of the mandated volumes ranging from $13 to  $26 billion. The measure does not include the costs of investments  needed to increase renewable fuel production. The agency estimated  those capital costs to total $90.5 billion through 2022.
On March 21, 2011, EPA finalized a rule to implement section 129 of the  Clean Air Act, which required EPA to develop and adopt standards for  new and existing commercial and industrial solid waste incineration units  (CISWI), including emissions limitations for nine specific pollutants— particulate matter (total and fine), opacity (as appropriate), sulfur dioxide,  hydrogen chloride, nitrogen oxides, carbon monoxide, lead, cadmium,  mercury, and dioxins and dibenzofurans. Enacted in 1990, Section 129  required EPA to issue standards for solid waste incinerators that were  more stringent than those EPA had proposed in 1989. Under section  129, EPA must set emissions limits based on MACT for both new and  existing sources. The rule also requires CISWI units to demonstrate  compliance through testing and monitoring.
Five of the nine pollutants subject to section 129 are also regulated as  hazardous air pollutants under section 112(c)(6) of the act. During the  development of the CISWI rule, EPA was under a court order to issue  regulations under section 112(c)(6) by January 16, 2011. Because some  CISWI units, including those burning solid waste for energy recovery, are  also subject to section 112(c)(6), EPA determined that the CISWI rule  was subject to this court-ordered deadline.
In the 2011 rule, EPA expected few new CISWI units to be constructed  over the subsequent 5-year time frame, and that those few would be  constructed to replace existing units. Standards for both new and existing  units are generally more stringent than those previously in effect.
EPA estimated the net benefits of this rule to range from $60 to $550  million at a 3 percent discount rate, and from $30 to $470 million at a 7  percent discount rate.

	Lead; Amendment to the Opt-out and Recordkeeping Provisions in the Renovation, Repair, and Painting Program (Lead Opt-Out)

In 2008, EPA issued a rule regulating renovation and remodeling  activities that create health hazards arising from lead paint (RRP rule).  Among the provisions in the rule was an “opt-out” provision, which  exempted owner-occupied housing from the rule’s requirements if the  homeowner certified that no pregnant women or young children lived  there. In addition, the RRP rule established certain training, certification,  accreditation, and recordkeeping requirements. EPA noted in the 2008  final rule that most commenters did not agree with the opt-out provision  as EPA had proposed, but the agency retained the provision in the final  rule, though in a somewhat narrower form than originally proposed.  Shortly after the rule was published, several petitions challenged the rule,  including several from environmental and children’s health advocacy  groups. On August 24, 2009, EPA signed an agreement with these  groups in settlement of their petitions. In this agreement, EPA committed  to propose several changes to the RRP rule, including proposing to  remove the opt-out provision.
In May 2010, EPA finalized an amendment to the RRP rule removing the  opt-out provision, concluding that it is important to require RRP work  practices and training and certification requirements in target housing  even if there is no child under age 6 or pregnant woman residing there.  EPA further supported the amendment stating that implementing the  regulations without the opt-out provision promotes, to a greater extent,  the Toxic Substances Control Act directive to promulgate regulations  covering renovation activities in target housing.
Following the removal of the opt-out provision, trade associations  petitioned a federal appellate court for review of the rule. One petitioner,  the National Association of Home Builders, argued that EPA’s removal of  the opt-out amendment was unauthorized because the “only event of note  between the inclusion and removal of the opt-out provision was a  settlement agreement which obligated the Agency to undertake certain  actions.” In rejecting this argument and upholding the 2010 rule, the court  held that there were two other events which preceded the settlement that  explained why EPA reconsidered the opt-out provision: a new President  and a new EPA Administrator. The court similarly rejected the  contention that EPA’s change in position was invalid because EPA had  merely revisited old evidence and arguments, rather than relying on new  data or experience.
EPA estimated that the rule would cost between $246 and $295 million at  a 3 percent discount rate and between $267 and $320 million 7 percent  discount rate and yield benefits ranging from $866 million to $3.1 billion at  a 3 percent discount rate and from $920 million to $3.3 billion at a 7  percent discount rate.

	Oil Pollution Prevention; Spill Prevention, Control, and Countermeasure Rule—Amendments (SPCC)

Under the Clean Water Act, EPA must issue requirements establishing  procedures, methods, and equipment to prevent discharges of oil from  facilities to navigable waters. The Spill Prevention, Control, and  Countermeasure (SPCC) Rule, first promulgated in 1973, outlined actions  regulated facilities must take to prevent, prepare for, and respond to oil  spills before they reach navigable waters or adjoining shorelines. The rule  required each owner or operator of a regulated facility to prepare or  amend and implement a plan that describes how the facility is designed,  operated, and maintained to prevent the discharge of oil into navigable  waters or adjoining shorelines. The plan must include measures to  control, contain, clean up, and alleviate the effects of an oil spill to prevent  such spills from reaching any navigable waters or adjoining shorelines.  Facilities may incur significant costs to develop, revise, and implement an  SPCC plan. The costs depend on, among other things, the size and type  of facility and whether the facility is new or existing.
In December 2008, EPA amended the SPCC rule to, among other things,  exempt several types of facilities from some or all of the rule’s  requirements. The effective rulemaking date, however was delayed and  upon additional review was amended. On November 13, 2009, EPA  promulgated a new rule that amended the December 2008 SPCC  amendments to, among other things, make technical corrections and  remove three provisions it had previously finalized as exemptions.  Specifically, upon additional review, and after consideration of additional  public comments, EPA removed the exclusion of farms and oil production  facilities from the loading/unloading rack requirements because EPA did  not believe there was a basis to treat these facilities differently from other  facilities with loading/unloading racks. In addition, EPA removed two other  exemptions—the exemption for produced water containers and the  alternative qualified facility eligibility criteria, both applicable to oil  production facilities—because EPA determined that these measures  would not effectively protect the environment from oil discharges. EPA  stated that removal of these provisions would increase compliance costs  but reduce the risk of oil spills.
Overall, EPA estimated total cost savings for the final amendments of $95  million at a 7 percent discount rate. The agency did not present a net  benefit calculation as it did not monetize the costs associated with the  rule.

	Effluent Limitations Guidelines and Standards for the Construction and Development Point Source Category (ELG)

On December 1, 2009, EPA finalized regulations establishing Clean  Water Act technology-based effluent limitations guidelines (ELG) and new  source performance standards for storm water discharges from the  construction and development industry. The regulations require that  discharges from construction sites disturbing 10 or more acres of land at  one time meet a numeric turbidity limit, among other things. In addition, all  construction sites that are currently required to obtain a National Pollutant  Discharge Elimination System permit must limit erosion and control  sediment discharges from construction sites. The final rule became  effective on February 1, 2010. In January 2011, EPA stayed  implementation of the numeric limit. The other portions of the rule  remain in effect.
EPA planned to phase in the numeric ELG over 4 years. Beginning 18  months after the effective date of the final rule, construction sites that  disturb 20 or more acres at one time would have been required to monitor  site discharges and comply with the numeric effluent limitation. Beginning  4 years after the effective date of the final rule, construction sites that  disturb 10 or more acres at one time would have been required to monitor  site discharges and comply with the numeric effluent limitation.
EPA estimated that compliance with the ELG and new source  performance standards would reduce the amount of sediment and other  pollutants discharged from construction and development sites by  approximately 4 billion pounds per year. The agency also estimated that  compliance with this regulation would provide approximately $369 million  in annual monetized societal benefits and $959 million in annual societal  costs, which would result in a negative net benefit (or net cost) of $590  million at a 3 percent discount rate.

Appendix III: Comments from the U.S. Environmental Protection Agency

Appendix IV: GAO Contact and Staff Acknowledgments

	GAO Contact

	Staff Acknowledgments

In addition to the individual named above, Michael Hix, Assistant Director;  Ulana Bihun; Barbara El Osta; Cindy Gilbert; Tim Guinane; Richard P.  Johnson; Jamie Meuwissen; Susan Offutt; and Alison O’Neill made key  contributions to this report. Armetha Liles and Justin Mausel also  contributed to this report.

Summary:
Why GAO Did This Study

Federal regulations, especially those addressing health, safety, and the environment, can generate hundreds of billions of dollars in benefits and costs to society annually. Various statutes, executive orders, and OMB guidance direct federal agencies to analyze the benefits and costs of proposed regulations. These analyses—known as RIAs—can also provide affected entities, agencies, Congress, and the public with important information about the potential effects of new regulations.
According to OMB, EPA regulations account for the majority of the estimated benefits and costs of major federal regulations. GAO was asked to review EPA's RIAs for recent regulations. This report examines how EPA has used RIAs during the rulemaking process and the extent to which EPA adhered to OMB guidance on selected elements of RIAs for recent rules. GAO reviewed RIAs from a nonprobability sample of seven recent air, water, and other environmental regulations, assessed them against relevant OMB guidance, and interviewed agency officials.

What GAO Found

The Environmental Protection Agency (EPA) used the seven Regulatory Impact Analyses (RIA) GAO reviewed to inform decision making, and its adherence to relevant Office of Management and Budget (OMB) guidance varied. According to senior EPA officials, the agency used these RIAs to facilitate communication with management throughout the rulemaking process and communicate information that supported its regulatory decisions to Congress and the public. However, it generally did not use them as the primary basis for final regulatory decisions.
EPA generally adhered to many aspects of OMB's Circular A-4 guidance for analyzing the economic effects of regulations including, for example, considering regulatory alternatives and analyzing uncertainties underlying its RIAs. However, EPA did not always adhere to other aspects. Specifically, the information EPA included and presented in the RIAs was not always clear. According to OMB guidance, RIAs should communicate information supporting regulatory decisions and enable a third party to understand how the agency arrives at its conclusions. In addition, EPA's review process does not ensure that the information about selected elements that should appear in the analyses—such as descriptions of baselines and alternatives considered—is transparent or clear, within and across its RIAs. As a result, EPA cannot ensure that its RIAs adhere to OMB's guidance to provide the public with a clear understanding of its decision making.
In addition to using Circular A-4 (issued in 2003) to analyze the effects of regulations, EPA used more recent guidance developed by an interagency working group co-led by OMB and another White House office in 2010 for valuing carbon dioxide emissions. Applying this guidance while using Circular A-4 to estimate other benefits and costs yielded inconsistencies in some of EPA's estimates and has raised questions about whether its approach was consistent with Circular A-4. Circular A-4 does not reference the new guidance and the new guidance does not include an overall statement explaining its relationship to Circular A-4. Without increased clarity about the relationship, questions about the agencies' adherence to OMB guidance will likely persist.
In assessing EPA's adherence to OMB guidance, GAO identified two other areas in which EPA faced challenges that limited the usefulness of some of its estimates. First, EPA did not monetize certain benefits and costs related to the primary purposes or key impacts of the rules GAO reviewed, such as reducing hazardous air pollutants and water quality effects. EPA officials said resource and data limitations constrained the agency's ability to monetize these effects. OMB guidance acknowledges that monetizing effects is not always possible. However, without doing so, the public may face challenges understanding the trade-offs associated with regulatory alternatives. Second, EPA estimated effects of its regulations on employment, in part, using a study that, according to EPA officials, represented the best reasonably obtainable data when they conducted their analyses. However, the study was based on data that were more than 20 years old and may not have represented the regulated entities addressed in the RIAs. EPA officials said they are exploring new approaches for analyzing these effects but were uncertain about when such results would be available. Without improvements in its estimates, EPA's RIAs may be limited in their usefulness for helping decision makers and the public understand these important effects.

What GAO Recommends

GAO recommends that EPA improve adherence to OMB guidance and enhance the usefulness of its RIAs, and that OMB clarify the application of guidance for estimating the benefits of reducing greenhouse gas emissions. In commenting on a draft of this report, EPA stated that it generally agreed with GAO's recommendations. On behalf of OMB, in oral comments OMB staff said that they neither agreed nor disagreed with the recommendations but saw some merit in them.