Home • The Administration • Office of Management an d Budget

ABOUT 

### Leadership OMB Organization Chart Open Government Plan RSS Feeds Agency Info Bulletins Circulars Budget State and Local Governments Educational and Non -Profit Institutions Federal Procurement Federal Financial Management Federal Information Resources / Data Collection Memoranda Privacy Guidance Reports Federal Register FOIA NDA No FEAR OMB Locator 

# Circular A-4
September 17, 2003

TO THE HEADS OF EXECUTIVE AGENCIES AND ESTABLISHMEN TS Subject: Regulatory Analysis

A. Introduction B. The Need for Federal Regulatory Action C. Alternative Regulatory Approaches D. Analytical Approaches E. Identifying and Measuring Benefits and Costs F. Specialized Analytical Requirements G. Accounting Statement H. Effective Date This Circular provides the Office of Management and Budget’s (OMB's) guidance to Federal agencies on t he development of regulatory analysis as required unde r Section 6(a)(3)(c) of Executive Order12866, "Regulatory Planning and Review," the Regulatory Ri ght-to-Know Act, and a variety of related authoriti es. The Circular also provides guidance to agencies on the regulatory accounting statements that are requi red under the Regulatory Right-to-Know Act. This Circular refines OMB's "best practices" docume nt of 1996 ( http://www.whitehouse.gov/omb/inforeg/riaguide.html ), which was issued as a guidance in 2000 ( http://www.whitehouse.gov/omb/memoranda/m00-08.pdf), and reaffirmed in 2001 ( http://www.whitehouse.gov/omb/memoranda/m01-23.html ). It replaces both the 1996 "best practices" and the 2000 guidance. In developing this Circular, OMB first developed a draft that was subject to public comment, interagen cy review, and peer review. Peer reviewers included Ca ss Sunstein, University of Chicago; Lester Lave, Carnegie Mellon University; Milton C. Weinstein and James K. Hammitt of the Harvard School of Public Health; Kerry Smith, North Carolina State Universit y; Jonathan Weiner, Duke University Law School; Dou glas K. Owens, Stanford University; and W. Kip Viscusi, Harvard Law School. Although these individuals submitted comments, OMB is solely responsible for t he final content of this Circular.

A. Introduction This Circular is designed to assist analysts in the regulatory agencies by defining good regulatory an alysis, called either "regulatory analysis" or "analysis" for brevity, and standardizing the way benefits and costs of Federal regulatory actions are measured and reporte d. Executive Order 12866 requires agencies to condu ct a regulatory analysis for economically significant regulatory actions as defined by Section 3(f)(1). T his requirement applies to rulemakings that rescind or modify existing rules as well as to rulemakings tha t establish new requirements.
The Need for Analysis of Proposed Regulatory Action s 1 

### About OMBlog Budget Management Regulation & Information Intellectual Property Legislative Join Contact the WHITE HOUSE PRESIDENT BARACK OBAMA Contact Us Get Email Updates



### Search Submit Query 

### BRIEFING ROOM ISSUES THE ADMINISTRATION PARTICIPATE 1600 PENN 

# Page **1 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Regulatory analysis is a tool regulatory agencies u se to anticipate and evaluate the likely consequenc es of rules. It provides a formal way of organizing the e vidence on the key effects, good and bad, of the va rious alternatives that should be considered in developin g regulations. The motivation is to (1) learn if th e benefits of an action are likely to justify the costs or (2) discover which of various possible alternatives wo uld be the most cost-effective. A good regulatory analysis is designed to inform th e public and other parts of the Government (as well as the agency conducting the analysis) of the effects of a lternative actions. Regulatory analysis sometimes w ill show that a proposed action is misguided, but it can als o demonstrate that well-conceived actions are reaso nable and justified.
Benefit-cost analysis is a primary tool used for re gulatory analysis. 2 Where all benefits and costs can be quantified and expressed in monetary units, benefit -cost analysis provides decision makers with a clea r indication of the most efficient alternative, that is, the alternative that generates the largest net benefits to society (ignoring distributional effects). This is useful information for decision makers and the publ ic to receive, even when economic efficiency is not the o nly or the overriding public policy objective. It will not always be possible to express in moneta ry units all of the important benefits and costs. W hen it is not, the most efficient alternative will not necess arily be the one with the largest quantified and mo netized net -benefit estimate. In such cases, you should exerci se professional judgment in determining how importa nt the non-quantified benefits or costs may be in the cont ext of the overall analysis. If the non-quantified benefits and costs are likely to be important, you should ca rry out a "threshold" analysis to evaluate their si gnificance. Threshold or "break-even" analysis answers the ques tion, "How small could the value of the non-quantified benefits be (or how large would the value of the no n-quantified costs need to be) before the rule woul d yield zero net benefits?" In addition to threshold analys is you should indicate, where possible, which non-q uantified effects are most important and why. Key Elements of a Regulatory Analysis A good regulatory analysis should include the follo wing three basic elements: (1) a statement of the n eed for the proposed action, (2) an examination of alternat ive approaches, and (3) an evaluation of the benefi ts and costs—quantitative and qualitative—of the proposed action and the main alternatives identified by the analysis. To evaluate properly the benefits and costs of regu lations and their alternatives, you will need to do the following: • Explain how the actions required by the rule are l inked to the expected benefits. For example, indica te how additional safety equipment will reduce safety risks. A similar analysis should be done for each o f the alternatives. • Identify a baseline. Benefits and costs are define d in comparison with a clearly stated alternative. This normally will be a "no action" baseline: what the w orld will be like if the proposed rule is not adopt ed. Comparisons to a "next best" alternative are also e specially useful. • Identify the expected undesirable side-effects and ancillary benefits of the proposed regulatory acti on and the alternatives. These should be added to the direct benefits and costs as appropriate. With this information, you should be able to assess quantitatively the benefits and costs of the propo sed rule and its alternatives. A complete regulatory analysi s includes a discussion of non-quantified as well a s quantified benefits and costs. A non-quantified out come is a benefit or cost that has not been quantified or monetized in the analysis. When there are importantnon-monetary values at stake, you should also iden tify them in your analysis so policymakers can compare t hem with the monetary benefits and costs. When your analysis is complete, you should present a summary of the benefit and cost estimates for each alternat ive, including the qualitative and non-monetized factors affected by the rule, so that readers can evaluate them. As you design, execute, and write your regulatory a nalysis, you should seek out the opinions of those who will be affected by the regulation as well as the v iews of those individuals and organizations who maynot be affected but have special knowledge or insight into the regulatory issues. Consultation can be useful in ensuring that your analysis addresses all of the re levant issues and that you have access to all perti nent data. Early consultation can be especially helpful. You should not limit consultation to the final sta ges of your analytical efforts. You will find that you cannot conduct a good regula tory analysis according to a formula. Conducting hi ghquality analysis requires competent professional ju dgment. Different regulations may call for differen t emphases in the analysis, depending on the nature a nd complexity of the regulatory issues and the sens itivity of the benefit and cost estimates to the key assump tions. 

# Page **2 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** A good analysis is transparent. It should be possib le for a qualified third party reading the report t o see clearly how you arrived at your estimates and conclusions. For transparency's sake, you should state in your report what assumptions were used, such as the time horizo n for the analysis and the discount rates applied t o future benefits and costs. It is usually necessary to provide a sensitivity analysis to reveal whether , and to what extent, the results of the analysis are sensit ive to plausible changes in the main assumptions an d numeric inputs. A good analysis provides specific references to all sources of data, appendices with documentation of models (where necessary), and the results of formal sensit ivity and other uncertainty analyses. Your analysis should also have an executive summary, including a standardized accounting statement.
B. The Need for Federal Regulatory Action Before recommending Federal regulatory action, an a gency must demonstrate that the proposed action is necessary. If the regulatory intervention results from a statutory or judicial directive, you should d escribe the specific authority for your action, the extent of d iscretion available to you, and the regulatory inst ruments you might use. Executive Order 12866 states that "Feder al agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling need, suc h as material failures of private markets to protect or improve the health and safety of the public, the en vironment, or the well being of the American people ... ." Executive Order 12866 also states that "Each agencyshall identify the problem that it intends to address (including, where applicable, the failures of priva te markets or public institutions that warrant new agency action) as well as assess the significance of that problem." Thus, you should try to explain whether t he action is intended to address a significant market failure or to meet some other compelling public need such as improving governmental processes or promoting intan gible values such as distributional fairness or pri vacy. If the regulation is designed to correct a significantmarket failure, you should describe the failure bo th qualitatively and (where feasible) quantitatively. You should show that a government intervention is l ikely to do more good than harm. For other interventions, yo u should also provide a demonstration of compelling social purpose and the likelihood of effective acti on. Although intangible rationales do not need to b e quantified, the analysis should present and evaluat e the strengths and limitations of the relevant arg uments for these intangible values. Market Failure or Other Social Purpose The major types of market failure include: external ity, market power, and inadequate or asymmetric information. Correcting market failures is a reason for regulation, but it is not the only reason. Oth er possible justifications include improving the functioning of government, removing distributional unfairness, or promoting privacy and personal freedom. 1. Externality, common property resource and publicgood An externality occurs when one party's actions impo se uncompensated benefits or costs on another party

. Environmental problems are a classic case of extern ality. For example, the smoke from a factory may adversely affect the health of local residents whil e soiling the property in nearby neighborhoods. If bargaining were costless and all property rights were well defined, people would eliminate externalities through bargaining without the need for government regulati on. 3 From this perspective, externalities arise from hi gh transactions costs and/or poorly defined property r ights that prevent people from reaching efficient o utcomes through market transactions. Resources that may become congested or overused, su ch as fisheries or the broadcast spectrum, represen t common property resources. "Public goods," such as defense or basic scientific research, are goods whe re provision of the good to some individuals cannot oc cur without providing the same level of benefits fr ee of charge to other individuals.

2. Market Power Firms exercise market power when they reduce outputbelow what would be offered in a competitive indus try in order to obtain higher prices. They may exercise market power collectively or unilaterally. Governm ent action can be a source of market power, such as whe n regulatory actions exclude low-cost imports. Generally, regulations that increase market power f or selected entities should be avoided. However, th ere are some circumstances in which government may choose t o validate a monopoly. If a market can be served at lowest cost only when production is limited to a si ngle producer B local gas and electricity distribut ion services, for example B a natural monopoly is said to exist. In such cases, the government may choose to approve the monopoly and to regulate its prices and /or production decisions. Nevertheless, you should keep in mind that technological advances often affect ec onomies of scale. This can, in turn, transform whatwas once considered a natural monopoly into a market wh ere competition can flourish. 3. Inadequate or Asymmetric Information 

# Page **3 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Market failures may also result from inadequate or asymmetric information. Because information, like o ther goods, is costly to produce and disseminate, your e valuation will need to do more than demonstrate the possible existence of incomplete or asymmetric info rmation. Even though the market may supply less tha n the full amount of information, the amount it does supply may be reasonably adequate and therefore not require government regulation. Sellers have an ince ntive to provide information through advertising th at can increase sales by highlighting distinctive characte ristics of their products. Buyers may also obtain reasonably adequate information about product characteristics through other channels, such as a seller offering a warranty or a third party providing information. Even when adequate information is available, people can make mistakes by processing it poorly. Poor information-processing often occurs in cases of lowprobability, high-consequence events, but it is no t limited to such situations. For instance, people sometimes rely on mental rules-of-thumb that produce errors. If they have a clear mental image of an incident which make s it cognitively "available," they might overstate the probability that it will occur. Individuals sometim es process information in a biased manner, by being too optimistic or pessimistic, without taking sufficien t account of the fact that the outcome is exceeding ly unlikely to occur. When mistakes in information processing o ccur, markets may overreact. When it is time-consum ing or costly for consumers to evaluate complex informa tion about products or services (e.g., medical therapies), they may expect government to ensure that minimum q uality standards are met. However, the mere possibility of poor information processing is not e nough to justify regulation. If you think there is a problem of information processing that needs to be addressed, it should be carefully documented. 4. Other Social Purposes There are justifications for regulations in additio n to correcting market failures. A regulation may b e appropriate when you have a clearly identified meas ure that can make government operate more efficient ly. In addition, Congress establishes some regulatory p rograms to redistribute resources to select groups. Such regulations should be examined to ensure that they are both effective and cost-effective. Congress als o authorizes some regulations to prohibit discriminat ion that conflicts with generally accepted norms wi thin our society. Rulemaking may also be appropriate to prot ect privacy, permit more personal freedom or promot e other democratic aspirations. Showing That Regulation at the Federal Level Is theBest Way to Solve the Problem Even where a market failure clearly exists, you sho uld consider other means of dealing with the failur e before turning to Federal regulation. Alternatives to Fede ral regulation include antitrust enforcement, consu merinitiated litigation in the product liability syste m, or administrative compensation systems. In assessing whether Federal regulation is the bestsolution, you should also consider the possibilityof regulation at the State or local level. In some cas es, the nature of the market failure may itself sug gest the most appropriate governmental level of regulation. For example, problems that spill across State lines(such as acid rain whose precursors are transported widel y in the atmosphere) are probably best addressed by Federal regulation. More localized problems, includ ing those that are common to many areas, may be mor e efficiently addressed locally. The advantages of leaving regulatory issues to Stat e and local authorities can be substantial. If publ ic values and preferences differ by region, those differences can be reflected in varying State and local regula tory policies. Moreover, States and localities can serve as a testing ground for experimentation with alter native regulatory policies. One State can learn from anoth er's experience while local jurisdictions may compe te with each other to establish the best regulatory policie s. You should examine the proper extent of State an d local discretion in your rulemaking context. A diversity of rules may generate gains for the pub lic as governmental units compete with each other t o serve the public, but duplicative regulations can also be costly. Where Federal regulation is clearly approp riate to address interstate commerce issues, you should try to examine whether it would be more efficient to re tain or reduce State and local regulation. The local benefi ts of State regulation may not justify the national costs of a fragmented regulatory system. For example, the incr eased compliance costs for firms to meet different State and local regulations may exceed any advantages ass ociated with the diversity of State and local regul ation. Your analysis should consider the possibility of re ducing as well as expanding State and local rulemak ing. The role of Federal regulation in facilitating U.S. participation in global markets should also be con sidered. Harmonization of U.S. and international rules may require a strong Federal regulatory role. Concerns t hat new U.S. rules could act as non-tariff barriers to imported goods should be evaluated carefully. The Presumption Against Economic Regulation Government actions can be unintentionally harmful, and even useful regulations can impede market efficiency. For this reason, there is a presumption against certain types of regulatory action. In lig ht of both 

# Page **4 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** economic theory and actual experience, a particular ly demanding burden of proof is required to demonst rate the need for any of the following types of regulati ons: • price controls in competitive markets; • production or sales quotas in competitive markets; • mandatory uniform quality standards for goods or s ervices if the potential problem can be adequately dealt with through voluntary standards or by disclo sing information of the hazard to buyers or users; or • controls on entry into employment or production, e xcept (a) where indispensable to protect health and safety (e.g., FAA tests for commercial pilots) or ( b) to manage the use of common property resources (e.g., fisheries, airwaves, Federal lands, and offs hore areas).
C. Alternative Regulatory Approaches Once you have determined that Federal regulatory action is appropriate, you will need to consider alte rnative regulatory approaches. Ordinarily, you will be able to eliminate some alternatives through a prelimina ry analysis, leaving a manageable number of alternativ es to be evaluated according to the formal principl es of the Executive Order. The number and choice of alter natives selected for detailed analysis is a matter of judgment. There must be some balance between thorou ghness and the practical limits on your analytical capacity. With this qualification in mind, you shou ld nevertheless explore modifications of some or al l of a regulation's attributes or provisions to identify a ppropriate alternatives. The following is a list of alternative regulatory actions that you should consider. Different Choices Defined by Statute When a statute establishes a specific regulatory re quirement and the agency is considering a more stri ngent standard, you should examine the benefits and costs of reasonable alternatives that reflect the range of the agency's statutory discretion, including the specific statutory requirement. Different Compliance Dates The timing of a regulation may also have an importa nt effect on its net benefits. Benefits may vary significantly with different compliance dates where a delay in implementation may result in a substant ial loss in future benefits (e.g., a delay in implementation could result in a significant reduction in spawnin g stock and jeopardize a fishery). Similarly, the cost of a reg ulation may vary substantially with different compl iance dates for an industry that requires a year or more to pla n its production runs. In this instance, a regulati on that provides sufficient lead time is likely to achieve its goals at a much lower overall cost than a regul ation that is effective immediately.

Different Enforcement Methods Compliance alternatives for Federal, State, or loca l enforcement include on-site inspections, periodic reporting, and noncompliance penalties structured t o provide the most appropriate incentives. When alternative monitoring and reporting methods vary i n their benefits and costs, you should identify themost appropriate enforcement framework. For example, in some circumstances random monitoring or parametric monitoring will be less expensive and nearly as eff ective as continuous monitoring. Different Degrees of Stringency In general, both the benefits and costs associated with a regulation will increase with the level of s tringency (although marginal costs generally increase with st ringency, whereas marginal benefits may decrease). You should study alternative levels of stringency to un derstand more fully the relationship between string ency and the size and distribution of benefits and costs amo ng different groups. Different Requirements for Different Sized Firms You should consider setting different requirements for large and small firms, basing the requirements on estimated differences in the expected costs of comp liance or in the expected benefits. The balance of benefits and costs can shift depending on the size of the firms being regulated. Small firms may find it more costly to comply with regulation, especially if the re are large fixed costs required for regulatory co mpliance. On the other hand, it is not efficient to place a h eavier burden on one segment of a regulated industry solely because it can better afford the higher cost. This has the potential to load costs on the most product ive firms, costs that are disproportionate to the damages theycreate. You should also remember that a rule with a significant impact on a substantial number of small entities will trigger the requirements set forth i n the Regulatory Flexibility Act. (5 U.S.C. 603(c), 604). Different Requirements for Different Geographic Regions 

# Page **5 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Rarely do all regions of the country benefit unifor mly from government regulation. It is also unlikelythat costs will be uniformly distributed across the country. W here there are significant regional variations in b enefits and/or costs, you should consider the possibility o f setting different requirements for the different regions. Performance Standards Rather than Design Standards Performance standards express requirements in terms of outcomes rather than specifying the means to those ends. They are generally superior to engineer ing or design standards because performance standards give the regulated parties the flexibility to achie ve regulatory objectives in the most cost-effectiveway. In general, you should take into account both the costsavings to the regulated parties of the greater fl exibility and the costs of assuring compliance through monito ring or some other means. Market-Oriented Approaches Rather than Direct Contr ols
Market-oriented approaches that use economic incent ives should be explored. These alternatives include fees, penalties, subsidies, marketable permits or o ffsets, changes in liability or property rights (in cluding policies that alter the incentives of insurers and insured parties), and required bonds, insurance or warranties. One example of a market-oriented approach is a prog ram that allows for averaging, banking, and/or trad ing (ABT) of credits for achieving additional emission reductions beyond the required air emission standards. ABT programs can be extremely valuable in reducing costs or achieving earlier or greater benefits, particularly when the costs of achieving compliance vary across production lines, facilities, or firms . ABT can be allowed on a plant-wide, firm-wide, or region-wi de basis rather than vent by vent, provided this do es not produce unacceptable local air quality outcomes (su ch as "hot spots" from local pollution concentratio n). Informational Measures Rather than Regulation If intervention is contemplated to address a marketfailure that arises from inadequate or asymmetric information, informational remedies will often be p referred. Measures to improve the availability of i nformation include government establishment of a standardized testing and rating system (the use of which could b e mandatory or voluntary), mandatory disclosure requi rements (e.g., by advertising, labeling, or enclosu res), and government provision of information (e.g., by g overnment publications, telephone hotlines, or publ ic interest broadcast announcements). A regulatory mea sure to improve the availability of information, particularly about the concealed characteristics of products, provides consumers a greater choice than a mandatory product standard or ban. Specific informational measures should be evaluated in terms of their benefits and costs. Some effects of informational measures are easily overlooked. The c osts of a mandatory disclosure requirement for a consumer product will include not only the cost of gathering and communicating the required informatio n, but also the loss of net benefits of any information di splaced by the mandated information. The other cost s also may include the effect of providing information tha t is ignored or misinterpreted, and inefficiencies arising from the incentive that mandatory disclosure may gi ve to overinvest in a particular characteristic of a product or service.

Where information on the benefits and costs of alte rnative informational measures is insufficient to p rovide a clear choice between them, you should consider the least intrusive informational alternative sufficien t to accomplish the regulatory objective. To correct an informational market failure it may be sufficient f or government to establish a standardized testing and rating system without mandating its use, because competing firms that score well according to the sy stem should thereby have an incentive to publicize the fact.
D. Analytical Approaches Both benefit-cost analysis (BCA) and cost-effective ness analysis (CEA) provide a systematic framework for identifying and evaluating the likely outcomes of a lternative regulatory choices. A major rulemaking s hould be supported by both types of analysis wherever possib le. Specifically, you should prepare a CEA for all major rulemakings for which the primary benefits are impr oved public health and safety to the extent that a valid effectiveness measure can be developed to representexpected health and safety outcomes. You should al so perform a BCA for major health and safety rulemakin gs to the extent that valid monetary values can be assigned to the primary expected health and safety outcomes. In undertaking these analyses, it is impo rtant to keep in mind the larger objective of analytical consistency in estimating benefits and costs across regulations and agencies, subject to statutory limi tations. Failure to maintain such consistency may p revent achievement of the most risk reduction for a given level of resource expenditure. For all other major rulemakings, you should carry out a BCA. If some of the primary benefit categories cannot be expressed in monetary units, you should also conduct a CEA. In u nusual cases where no quantified information on benefits, costs and effectiveness can be produced, the regulatory analysis should present a qualitativ e discussion of the issues and evidence. Benefit-Cost Analysis 

# Page **6 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** A distinctive feature of BCA is that both benefits and costs are expressed in monetary units, which al lows you to evaluate different regulatory options with a var iety of attributes using a common measure. 4By measuring incremental benefits and costs of successively more stringent regulatory alternatives, you can identif y the alternative that maximizes net benefits.
The size of net benefits, the absolute difference b etween the projected benefits and costs, indicates whether one policy is more efficient than another. The rati o of benefits to costs is not a meaningful indicato r of net benefits and should not be used for that purpose. I t is well known that considering such ratios alone can yield misleading results. Even when a benefit or cost cannot be expressed in monetary units, you should still try to measure it in terms of its physical units. If it is not possible to mea sure the physical units, you should still describe the benefit or cost qualitatively. For more information on describ ing qualitative information, see the section " Developing Benefit and Cost Estimates ." When important benefits and costs cannot be express ed in monetary units, BCA is less useful, and it ca n even be misleading, because the calculation of net benefits in such cases does not provide a full eval uation of all relevant benefits and costs. You should exercise professional judgment in identi fying the importance of non-quantified factors and assess as best you can how they might change the ranking o f alternatives based on estimated net benefits. If the non-quantified benefits and costs are likely to be important, you should recommend which of the nonquantified factors are of sufficient importance to justify consideration in the regulatory decision. T his discussion should also include a clear explanation that support designating these non-quantified facto rs as important. In this case, you should also consider c onducting a threshold analysis to help decision mak ers and other users of the analysis to understand the poten tial significance of these factors to the overall a nalysis.
Cost-Effectiveness Analysis 5
Cost-effectiveness analysis can provide a rigorous way to identify options that achieve the most effec tive use of the resources available without requiring moneti zation of all of relevant benefits or costs. Genera lly, costeffectiveness analysis is designed to compare a setof regulatory actions with the same primary outcom e (e.g., an increase in the acres of wetlands protect ed) or multiple outcomes that can be integrated int o a single numerical index (e.g., units of health improvement)

. Cost-effectiveness results based on averages need t o be treated with great care. They suffer from the same drawbacks as benefit-cost ratios. The alternative t hat exhibits the smallest cost-effectiveness ratio may not be the best option, just as the alternative with the h ighest benefit-cost ratio is not always the one tha t maximizes net benefits. Incremental cost-effectiveness analys is (discussed below) can help to avoid mistakes tha t can occur when policy choices are based on average cost -effectiveness. CEA can also be misleading when the "effectiveness" measure does not appropriately weight the consequences of the alternatives. For example, when effectiveness is measured in tons of reduced pollu tant emissions, cost-effectiveness estimates will be mis leading unless the reduced emissions of diverse pol lutants result in the same health and environmental benefit s. When you have identified a range of alternatives (e .g., different levels of stringency), you should de termine the cost-effectiveness of each option compared with the baseline as well as its incremental cost-effec tiveness compared with successively more stringent requireme nts. Ideally, your CEA would present an array of co steffectiveness estimates that would allow comparison across different alternatives. However, analyzing all possible combinations is not practical when there a re many options (including possible interaction eff ects). In these cases, you should use your judgment to choose reasonable alternatives for careful consideration. When constructing and comparing incremental cost-ef fectiveness ratios, you should be careful to determ ine whether the various alternatives are mutually exclu sive or whether they can be combined. If they can b e combined, you should consider which might be favore d under different regulatory budget constraints (im plicit or explicit). You should also make sure that inferi or alternatives identified by the principles of str ong and weak dominance are eliminated from consideration. 6

The value of CEA is enhanced when there is consiste ncy in the analysis across a diverse set of possibl e regulatory actions. To achieve consistency, you nee d to carefully construct the two key components of any CEA: the cost and the "effectiveness" or performanc e measures for the alternative policy options. With regard to measuring costs, you should be sure to include all the relevant costs to society B whet her public or private. Rulemakings may also yield cost savings (e.g., energy savings associated with new technologies). The numerator in the cost-effectiven ess ratio should reflect net costs, defined as the gross cost incurred to comply with the requirements (some times called "total" costs) minus any cost savings. You should be careful to avoid double-counting effects in both the numerator and the denominator of the co st

# Page **7 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** effectiveness ratios. For example, it would be inco rrect to reduce gross costs by an estimated monetar y value on life extension if life-years are already used as the effectiveness measure in the denominator. In constructing measures of "effectiveness", final outcomes, such as lives saved or life-years saved, are preferred to measures of intermediate outputs, such as tons of pollution reduced, crashes avoided, or cases of disease avoided. Where the quality of the measur ed unit varies (e.g., acres of wetlands vary substa ntially in terms of their ecological benefits), it is impor tant that the measure capture the variability in th e value of the selected "outcome" measure. You should provide an e xplanation of your choice of effectiveness measure. Where regulation may yield several different benefi cial outcomes, a cost-effectiveness comparison beco mes more difficult to interpret because there is more t han one measure of effectiveness to incorporate in the analysis. To arrive at a single measure you will ne ed to weight the value of disparate benefit categor ies, but this computation raises some of the same difficulti es you will encounter in BCA. If you can assign a reasonable monetary value to all of the regulation' s different benefits, then you should do so. But in this case, you will be doing BCA, not CEA. When you can estimate the monetary value of some bu t not all of the ancillary benefits of a regulation , but cannot assign a monetary value to the primary measu re of effectiveness, you should subtract the moneta ry estimate of the ancillary benefits from the gross c ost estimate to yield an estimated net cost. (This net cost estimate for the rule may turn out to be negative B that is, the monetized benefits exceed the cost of the rule.) If you are unable to estimate the value of some of the ancillary benefits, the cost-effectiveness rati o will be overstated, and this should be acknowledged in your analysis. CEA does not yield an unambiguous choice when there are benefits or costs that have not been incorporated in the net-cost estimates. You also m ay use CEA to compare regulatory alternatives in cases whe re the statute specifies the level of benefits to b e achieved.
The Effectiveness Metric for Public Health and Safe ty Rulemakings When CEA is applied to public health and safety rul emakings, one or more measures of effectiveness mus t be selected that permits comparison of regulatory a lternatives. Agencies currently use a variety of effectiveness measures. There are relatively simple measures such as the nu mber of lives saved, cases of cancer reduced, and c ases of paraplegia prevented. Sometimes these measures a ccount only for mortality information, such as the number of lives saved and the number of years of li fe saved. There are also more comprehensive, integr ated measures of effectiveness such as the number of "eq uivalent lives" (ELs) saved and the number of "qual ityadjusted life years" (QALYs) saved. The main advantage of the integrated measures of ef fectiveness is that they account for a rule's impac t on morbidity (nonfatal illness, injury, impairment and quality of life) as well as premature death. The i nclusion of morbidity effects is important because (a) some ill nesses (e.g., asthma) cause more instances of pain and suffering than they do premature death, (b) some po pulation groups are known to experience elevated ra tes of morbidity (e.g, the elderly and the poor) and th us have a strong interest in morbidity measurement 7 , and (c) some regulatory alternatives may be more effective at preventing morbidity than premature death (e.g., some advanced airbag designs may diminish the nonfatal i njuries caused by airbag inflation without changing the frequency of fatal injury prevented by airbags). However, the main drawback of these integrated meas ures is that they must meet some restrictive assumptions to represent a valid measure of individ ual preferences. 8 For example, a QALY measure implicitly assumes that the fraction of remaining lifespan an individual would give up for an improvement in heal threlated quality of life does not depend on the rema ining lifespan. Thus, if an individual is willing t o give up 10 years of life among 50 remaining years for a given health improvement, he or she would also be willing to give up 1 year of life among 5 remaining years. To the extent that individual preferences deviate from these assumptions, analytic results from CEA using QALYs could differ from analytic results based on willing nessto-pay-measures. Though willingness to pay is generally the preferred economic method for evaluating preferences, the CEA method, as applied in medicine and health, does not evaluate health changes using individual willingness to pay. When performing CEA, you should consider using at least one integrated measure of effectiveness when a rule creates a sign ificant impact on both mortality and morbidity. When CEA is performed in specific rulemaking contexts, you should be prepared to make appropriate adjustments to ensure fair treatment of all segment s of the population. Fairness is important in the c hoice and execution of effectiveness measures. For example, i f QALYs are used to evaluate a lifesaving rule aime d at a population that happens to experience a high rate o f disability (i.e., where the rule is not designed to affect the disability), the number of life years saved sho uld not necessarily be diminished simply because th e rule saves the lives of people with life-shortening disa bilities. Both analytic simplicity and fairness sug gest that the estimated number of life years saved for the disabl ed population should be based on average life expec tancy information for the relevant age cohorts. More gene rally, when numeric adjustments are made for life 

# Page **8 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** expectancy or quality of life, analysts should prefer use of population averages rather than informati on derived from subgroups dominated by a particular de mographic or income group. OMB does not require agencies to use any specific m easure of effectiveness. In fact, OMB encourages agencies to report results with multiple measures o f effectiveness that offer different insights and perspectives. The regulatory analysis should explai n which measures were selected and why, and how the y were implemented. The analytic discretion provided in choice of effec tiveness measure will create some inconsistency in how agencies evaluate the same injuries and diseases, a nd it will be difficult for OMB and the public to d raw meaningful comparisons between rulemakings that emp loy different effectiveness measures. As a result, agencies should use their web site to provide OMB a nd the public with the underlying data, including m ortality and morbidity data, the age distribution of the affected populations, and the severity and duration of disease conditions and trauma, so that OMB and the public c an construct apples-to-apples comparisons between rulemakings that employ different measures.

There are sensitive technical and ethical issues as sociated with choosing one or more of these integra ted measures for use throughout the Federal government. The Institute of Medicine (IOM) may assemble a pan el of specialists in cost-effectiveness analysis and b ioethics to evaluate the advantages and disadvantag es of these different measures and other measures that ha ve been suggested in the academic literature. OMB believes that the IOM guidance will provide Federal agencies and OMB useful insight into how to improv e the measurement of effectiveness of public health and s afety regulations.

Distributional Effects Those who bear the costs of a regulation and those who enjoy its benefits often are not the same peopl e. The term "distributional effect" refers to the impact o f a regulatory action across the population and eco nomy, divided up in various ways (e.g., income groups, ra ce, sex, industrial sector, geography). Benefits an d costs of a regulation may also be distributed unevenly ov er time, perhaps spanning several generations. Distributional effects may arise through "transfer payments" that stem from a regulatory action as wel l. For example, the revenue collected through a fee, surch arge in excess of the cost of services provided, or tax is a transfer payment. Your regulatory analysis should provide a separate description of distributional effects (i.e., how bo th benefits and costs are distributed among sub-populations of particular concern) so that decision makers can pro perly consider them along with the effects on economic ef ficiency. Executive Order 12866 authorizes this approach. Where distributive effects are thought to be important, the effects of various regulatory al ternatives should be described quantitatively to the extent po ssible, including the magnitude, likelihood, and se verity of impacts on particular groups. You should be alert for situations in which regulatory alternatives resu lt in significant changes in treatment or outcomes for di fferent groups. Effects on the distribution of inco me that are transmitted through changes in market prices ca n be important, albeit sometimes difficult to asses s. Your analysis should also present information on the str eams of benefits and costs over time in order to pr ovide a basis for assessing intertemporal distributional co nsequences, particularly where intergenerational ef fects are concerned.
E. Identifying and Measuring Benefits and Costs This Section provides guidelines for your preparati on of the benefit and cost estimates required by Ex ecutive Order 12866 and the "Regulatory Right-to-Know Act." The discussions in previous sections will help you identify a workable number of alternatives for cons ideration in your analysis and an appropriate analytical approach to use.

General Issues 1. Scope of Analysis Your analysis should focus on benefits and costs th at accrue to citizens and residents of the United S tates. Where you choose to evaluate a regulation that is l ikely to have effects beyond the borders of the Uni ted States, these effects should be reported separately . The time frame for your analysis should cover a p eriod long enough to encompass all the important benefits and costs likely to result from the rule. 2. Developing a Baseline

You need to measure the benefits and costs of a rul e against a baseline. This baseline should be the b est assessment of the way the world would look absent t he proposed action. The choice of an appropriate baseline may require consideration of a wide range of potential factors, including:
• evolution of the market, 

# Page **9 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** • changes in external factors affecting expected ben efits and costs, • changes in regulations promulgated by the agency o r other government entities, and • the degree of compliance by regulated entities wit h other regulations. It may be reasonable to forecast that the world abs ent the regulation will resemble the present. If th is is the case, however, your baseline should reflect the fut ure effect of current government programs and polic ies. For review of an existing regulation, a baseline as suming "no change" in the regulatory program genera lly provides an appropriate basis for evaluating regula tory alternatives. When more than one baseline is reasonable and the choice of baseline will signific antly affect estimated benefits and costs, you shou ld consider measuring benefits and costs against alter native baselines. In doing so you can analyze the e ffects on benefits and costs of making different assumptio ns about other agencies' regulations, or the degree of compliance with your own existing rules. In all cas es, you must evaluate benefits and costs against th e same baseline. You should also discuss the reasonablenes s of the baselines used in the sensitivity analyses . For each baseline you use, you should identify the key uncertainties in your forecast. EPA's 1998 final PCB disposal rule provides a good example of using different baselines. EPA used seve ral alternative baselines, each reflecting a different interpretation of existing regulatory requirements. In particular, one baseline reflected a literal interp retation of EPA's 1979 rule and another the actual implementation of that rule in the year immediatelypreceding the 1998 revision. The use of multiple b aselines illustrated the substantial effect changes in EPA'simplementation policy could have on the cost of a regulatory program. In the years after EPA adopted the 1979 PCB disposal rule, changes in EPA policy - - especially allowing the disposal of automobile "shr edder fluff" in municipal landfills -- reduced the cost of the program by more than $500 million per year. In some cases, substantial portions of a rule may s imply restate statutory requirements that would be selfimplementing, even in the absence of the regulatoryaction. In these cases, you should use a pre-statu te baseline. If you are able to separate out those are as where the agency has discretion, you may also us e a post-statute baseline to evaluate the discretionaryelements of the action.

3. Evaluation of Alternatives You should describe the alternatives available to y ou and the reasons for choosing one alternative ove r another. As noted previously, alternatives that rel y on incentives and offer increased flexibility are often more cost-effective than more prescriptive approaches. F or instance, user fees and information disseminatio n may be good alternatives to direct command-and-control regulation. Within a command-and-control regulatory program, performance-based standards generally offe r advantages over standards specifying design, behavior, or manner of compliance. You should carefully consider all appropriate alter natives for the key attributes or provisions of the rule. The previous discussion outlines examples of appropriat e alternatives. Where there is a "continuum" of alternatives for a standard (such as the level of s tringency), you generally should analyze at least t hree options: the preferred option; a more stringent opt ion that achieves additional benefits (and presumab ly costs more) beyond those realized by the preferred option ; and a less stringent option that costs less (and presumably generates fewer benefits) than the prefe rred option. You should choose reasonable alternatives deserving careful consideration. In some cases, a regulatory program will focus on an option that is near or at the limit of technical feasibility. In this case, t he analysis would not need to examine a more stringent option. For each of the options analyzed, you should compar e the anticipated benefits to the corresponding costs

. It is not adequate simply to report a comparison of the agency's preferred option to the chosen baseli ne. Whenever you report the benefits and costs of alter native options, you should present both total and incremental benefits and costs. You should present incremental benefits and costs as differences from the corresponding estimates associated with the next le ss-stringent alternative. 10It is important to emphasize that incremental effects are simply differences between successively more stringent alternatives. Results i nvolving a comparison to a "next best" alternative may be es pecially useful. In some cases, you may decide to analyze a wide array of options. In 1998, DOE analyzed a large number of options in setting new energy efficiency standards for refrigerators and freezers and produced a rich amount of information on their relative effects. This anal ysis -- examining more than 20 alternative performa nce standards for one class of refrigerators with top-m ounted freezers -- enabled DOE to select an option that produced $200 more in estimated net benefits per re frigerator than the least attractive option. You should analyze the benefits and costs of differ ent regulatory provisions separately when a rule in cludes a number of distinct provisions. If the existence of one provision affects the benefits or costs arising from another provision, the analysis becomes more compli cated, but the need to examine provisions separatel y 

# Page **10 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** remains. In this case, you should evaluate each spe cific provision by determining the net benefits of the proposed regulation with and without it. Analyzing all possible combinations of provisions i s impractical if the number is large and interactio n effects are widespread. You need to use judgment to select the most significant or relevant provisions for suc h analysis. You are expected to document all of the a lternatives that were considered in a list or table and which were selected for emphasis in the main analys is. You should also discuss the statutory requirements that affect the selection of regulatory approaches. If legal constraints prevent the selection of a regulatory a ction that best satisfies the philosophy and princi ples of Executive Order 12866, you should identify these co nstraints and estimate their opportunity cost. Such information may be useful to Congress under the Reg ulatory Right-to-Know Act. 4. Transparency and Reproducibility of Results Because of its influential nature and its special role in the rulemaking process, it is appropriate toset minimum quality standards for regulatory analysis. You should provide documentation that the analysis is based on the best reasonably obtainable scientific, technical, and economic information available. To achieve this, you should rely on peer-reviewed literature, where available, and provide the source for all ori ginal information. A good analysis should be transparent and your resu lts must be reproducible. You should clearly set ou t the basic assumptions, methods, and data underlying the analysis and discuss the uncertainties associated with the estimates. A qualified third party reading the analysis should be able to understand the basic ele ments of your analysis and the way in which you developed yo ur estimates. To provide greater access to your analysis, you sho uld generally post it, with all the supporting docu ments, on the internet so the public can review the findin gs. You should also disclose the use of outside con sultants, their qualifications, and history of contracts and employment with the agency (e.g., in a preface to t he RIA). Where other compelling interests (such as privacy, intellectual property, trade secrets, etc.) preventthe public release of data or key elements of the analysis, yo u should apply especially rigorous robustness check s to analytic results and document the analytical checks used. Finally, you should assure compliance with the Info rmation Quality Guidelines for your agency and OMB' s "Guidelines for Ensuring and Maximizing the Quality , Objectivity, Utility, and Integrity of Informatio n Disseminated by Federal Agencies" ("data quality gu idelines") http://www.whitehouse.gov/omb/fedreg/reproducible.h tml

. Developing Benefit and Cost Estimates

1. Some General Considerations The analysis document should discuss the expected b enefits and costs of the selected regulatory option and any reasonable alternatives. How is the proposed ac tion expected to provide the anticipated benefits a nd costs? What are the monetized values of the potenti al real incremental benefits and costs to society? To present your results, you should: • include separate schedules of the monetized benefi ts and costs that show the type and timing of benefits and costs, and express the estimates in th is table in constant, undiscounted dollars (for more on discounting see "Discount Rates" below); • list the benefits and costs you can quantify, but cannot monetize, including their timing; • describe benefits and costs you cannot quantify; a nd • identify or cross-reference the data or studies on which you base the benefit and cost estimates. When benefit and cost estimates are uncertain (for more on this see " Treatment of Uncertainty " below), you should report benefit and cost estimates (including benefits of risk reductions) that reflect the full probability distribution of potential consequences. Where possi ble, present probability distributions of benefits and costs and include the upper and lower bound estimates as complements to central tendency and other estimates

. If fundamental scientific disagreement or lack of k nowledge prevents construction of a scientifically defensible probability distribution, you should describe benefits or costs under plausible scenarios and characte rize the evidence and assumptions underlying each alternativ e scenario. 2. The Key Concepts Needed to Estimate Benefits and Costs "Opportunity cost" is the appropriate concept for v aluing both benefits and costs. The principle of "w illingnessto-pay" (WTP) captures the notion of opportunity co st by measuring what individuals are willing to for go to 

# Page **11 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** enjoy a particular benefit. In general, economists tend to view WTP as the most appropriate measure of opportunity cost, but an individual's "willingness- to-accept" (WTA) compensation for not receiving the improvement can also provide a valid measure of opp ortunity cost.
WTP and WTA are comparable measures under special c ircumstances. WTP and WTA measures may be comparable in the following situations: if a regula tion affects a price change rather than a quantity change; the change being evaluated is small; there are reas onably close substitutes available; and the income effect is small. 11 However, empirical evidence from experimental econ omics and psychology shows that even when income/wealth effects are "small", the measured dif ferences between WTP and WTA can be large. 12 WTP is generally considered to be more readily measurable. Adoption of WTP as the measure of value implies th at individual preferences of the affected population s hould be a guiding factor in the regulatory analysi s. Market prices provide rich data for estimating bene fits and costs based on willingness-to-pay if the g oods and services affected by the regulation are traded in w ell-functioning competitive markets. The opportunit y cost of an alternative includes the value of the benefits forgone as a result of choosing that alternative. Th e opportunity cost of banning a product -- a drug, fo od additive, or hazardous chemical -- is the forgon e net benefit (i.e., lost consumer and producer surplus 13 ) of that product, taking into account the mitigati ng effects of potential substitutes. The use of any resource has an opportunity cost reg ardless of whether the resource is already owned or has to be purchased. That opportunity cost is equal to the net benefit the resource would have provided in the absence of the requirement. For example, if regulat ion of an industrial plant affects the use of addit ional land or buildings within the existing plant boundary, th e cost analysis should include the opportunity costof using the additional land or facilities. To the extent possible, you should monetize any suc h forgone benefits and add them to the other costs of that alternative. You should also try to monetize a ny cost savings as a result of an alternative and e ither add it to the benefits or subtract it from the costs of that alternative. However, you should not assume t hat the "avoided" costs of not doing another regulatory alt ernative represent the benefits of a regulatory act ion where there is no direct, necessary relationship between the two. You should also be careful when the costs avoided are attributable to an existing regulation. Even when there is a direct relationship between t he two regulatory actions, the use of avoided costs is pro blematic because the existing regulation may not ma ximize net benefits and thus may itself be questionable po licy. (See the section, "Direct Use of Market Data, " for more detail.) Estimating benefits and costs when market prices are hard to measure or markets do not exist is more difficult. In these cases, you need to develop appropriate proxies that simulate market exchange. Esti mates of willingness-to-pay based on revealed preference methods can be quite useful. As one example, analys ts sometimes use "hedonic price equations" based on mu ltiple regression analysis of market behavior to simulate market prices for the commodity of interes t. The hedonic technique allows analysts to develop an estimate of the price for specific attributes assoc iated with a product. For instance, a house is a product characterized by a variety of attributes including the number of rooms, total floor area, and type of heating and cooling. If there are enough data on transactio ns in the housing market, it is possible to develop an estimate of the implicit price for specific attribu tes, such as the implicit price of an additional ba throom or for central air conditioning. This technique can be ext ended, as well, to develop an estimate for the impl icit price of public goods that are not directly traded in mar kets. An analyst can develop implicit price estimat es for public goods like air quality and access to public parks by assessing the effects of these goods on th e housing market. Going through the analytical proces s of deriving benefit estimates by simulating marke ts may also suggest alternative regulatory strategies that create such markets. You need to guard against double-counting, since so me attributes are embedded in other broader measure s. To illustrate, when a regulation improves the quali ty of the environment in a community, the value of real estate in the community generally rises to reflect the greater attractiveness of living in a better en vironment. Simply adding the increase in property values to th e estimated value of improved public health would b e double counting if the increase in property values reflects the improvement in public health. To avoid this problem you should separate the embedded effects on the value of property arising from improved public health. At the same time, an analysis that fails toincorporate the consequence of land use changes wh en accounting for costs will not capture the full effe cts of regulation.

3. Revealed Preference Methods Revealed preference methods develop estimates of th e value of goods and services -- or attributes of t hose goods and services -- based on actual market decisi ons by consumers, workers and other market participants. If the market participant is well inf ormed and confronted with a real choice, it may be feasible to determine accurately and precisely the monetary val ue needed for a rulemaking. There is a large and we lldeveloped literature on revealed preference in the peer-reviewed, applied economics literature. 

# Page **12 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Although these methods are well grounded in economi c theory, they are sometimes difficult to implement given the complexity of market transactions and the paucity of relevant data. When designing or evalua ting a revealed preference study, the following principles should be considered: • the market should be competitive. If the market is n't competitive (e.g., monopoly, oligopoly), then y ou should consider making adjustments such that the pr ice reflects the true value to society (often calle d the "shadow price"); • the market should not exhibit a significant inform ation gap or asymmetric information problem. If the market suffers from information problems, then you should discuss the divergence of the price from the underlying shadow price and consider possible adjus tments to reflect the underlying shadow price; • the market should not exhibit an externality. In t his case, you should discuss the divergence of the price from the underlying shadow price and consider possi ble adjustments to reflect the underlying shadow price; • the specific market participants being studied sho uld be representative of the target populations to be affected by the rulemaking under consideration; • a valid research design and framework for analysis should be adopted. Examples include using data and/or model specifications that include the market s for substitute and complementary goods and services and using reasonably unrestricted function al forms. When specifying substitute and complementary goods, the analysis should preferablybe based on data about the range of alternatives perceived by market participants. If such data are not available, you should adopt plausible assumptions and describe the limitations of the ana lysis. • the statistical and econometric models employed sh ould be appropriate for the application and the resulting estimates should be robust in response toplausible changes in model specification and estimation technique; and • the results should be consistent with economic the ory. You should also determine whether there are multipl e revealed-preference studies of the same good or service and whether anything can be learned by comp aring the methods, data and findings from different studies. Professional judgment is required to deter mine whether a particular study is of sufficient qu ality to justify use in regulatory analysis. When studies are used in regulatory analysis despite their technic al weaknesses (e.g., due to the absence of other evide nce), the regulatory analysis should discuss any bi ases or uncertainties that are likely to arise due to th ose weaknesses. If a study has major weaknesses, th e study should not be used in regulatory analysis.

a. Direct Uses of Market Data Economists ordinarily consider market prices as the most accurate measure of the marginal value of goods and services to society. In some instances, h owever, market prices may not reflect the true valu e of goods and services due to market imperfections or g overnment intervention. If a regulation involves changes to goods or services where the market price is not a good measure of the value to society, you should use an estimate that reflects the shadow pri ce. Suppose a particular air pollutant damages crop s. One of the benefits of controlling that pollutant i s the value of the crop yield increase as a result of the controls. That value is typically measured by the p rice of the crop. However, if the price is held abo ve the market price by a government program that affects s upply, a value estimate based on this price may not reflect the true benefits of controlling the pollut ant. In this case, you should calculate the value t o society of the increase in crop yields by estimating the shadow price, which reflects the value to society of the marginal use of the crop. If the marginal use is fo r exports, you should use the world price. If the m arginal use is to add to very large surplus stockpiles, you should use the value of the last units released fr om storage minus storage cost. If stockpiles are large and growing, the shadow price may be low or even negative. Other goods whose market prices may not reflect the ir true value include those whose production or consumption results in substantial (1) positive or negative external effects or (2) transfer payments. For example, the observed market price of gasoline may not reflect marginal social value due to the inclus ion of taxes, other government interventions, and negat ive externalities (e.g., pollution). This shadow pr ice may also be needed for goods whose market price is substantially affected by existing regulations thatdo not maximize net benefits.

b. Indirect Uses of Market Data Many goods or attributes of goods that are affected by regulation--such as preserving environmental or cultural amenities--are not traded directly in mark ets. The value for these goods or attributes arise both from use and non-use. Estimation of these values is difficult because of the absence of an organized market. However, overlooking or ignoring these valu es in your regulatory analysis may significantly understate the benefits and/or costs of regulatory action. 

# Page **13 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** "Use values" arise where an individual derives sati sfaction from using the resource, either now or in the future. Use values are associated with activities s uch as swimming, hunting, and hiking where the individual makes use of the natural environment. "Non-use values" arise where an individual places v alue on a resource, good or service even though the individual will not use the resource, now or in the future. Non-use value includes bequest and existen ce values.
General altruism for the health and welfare of othe rs is a closely related concept but may not be stri ctly considered a "non-use" value. 14 A general concern for the welfare of others should supplement benefits and costs equally; hence, it is not necessary to me asure the size of general altruism in regulatory an alysis. If there is evidence of selective altruism, it need s to be considered specifically in both benefits an d costs. Some goods and services are indirectly traded in ma rkets, which means that their value is reflected in the prices of related goods and services that are direc tly traded in markets. Their use values are typical ly estimated through revealed preference methods. Exam ples include estimates of the values of environmental amenities derived from travel-cost st udies, and hedonic price models that measure differences or changes in the value of real estate. It is important that you utilize revealed preferen ce models that adhere to economic criteria that are co nsistent with utility maximizing behavior. Also, yo u should take particular care in designing protocols for reliably estimating the values of these attribu tes.

4. Stated Preference Methods Stated Preference Methods (SPM) have been developed and used in the peer-reviewed literature to estima te both "use" and "non-use" values of goods and servic es. They have also been widely used in regulatory analyses by Federal agencies, in part, because thes e methods can be creatively employed to address a w ide variety of goods and services that are not easy to study through revealed preference methods. The distinguishing feature of these methods is thathypothetical questions about use or non-use values are posed to survey respondents in order to obtain will ingness-to-pay estimates relevant to benefit or cos t estimation. Some examples of SPM include contingentvaluation, conjoint analysis and risk-tradeoff ana lysis. The surveys used to obtain the health-utility value s used in CEA are similar to stated-preference surv eys but do not entail monetary measurement of value. Nevert heless, the principles governing quality statedpreference research, with some obvious exceptions i nvolving monetization, are also relevant in designi ng quality health-utility research. When you are designing or evaluating a stated-prefe rence study, the following principles should be considered: • the good or service being evaluated should be expl ained to the respondent in a clear, complete and objective fashion, and the survey instrument should be pre-tested; • willingness-to-pay questions should be designed to focus the respondent on the reality of budgetary limitations and alerted to the availability of subs titute goods and alternative expenditure options; • the survey instrument should be designed to probe beyond general attitudes (e.g., a "warm glow" effec t for a particular use or non-use value) and focus on the magnitude of the respondent's economic valuation; • the analytic results should be consistent with eco nomic theory using both "internal" (within responde nt) and "external" (between respondent) scope tests suc h as the willingness to pay is larger (smaller) when more (less) of a good is provided; • the subjects being interviewed should be selected/sampled in a statistically appropriate manner. The sample frame should adequately cover the target pop ulation. The sample should be drawn using probability methods in order to generalize the resu lts to the target population; • response rates should be as high as reasonably pos sible. Best survey practices should be followed to achieve high response rates. Low response rates inc rease the potential for bias and raise concerns about the generalizability of the results. If respo nse rates are not adequate, you should conduct an analysis of non-response bias or further study. Cau tion should be used in assessing the representativeness of the sample based solely on de mographic profiles. Statistical adjustments to reduce non-response bias should be undertaken whene ver feasible and appropriate; • the mode of administration of surveys (in-person, phone, mail, computer, internet or multiple modes ) should be appropriate in light of the nature of the questions being posed to respondents and the lengt h and complexity of the instrument; • documentation should be provided about the target population, the sampling frame used and its coverage of the target population, the design of th e sample including any stratification or clustering , the cumulative response rate (including response rate a t each stage of selection if applicable); the item non -response rate for critical questions; the exact wo rding and sequence of questions and other 

# Page **14 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** information provided to respondents; and the traini ng of interviewers and techniques they employed (as appropriate); • the statistical and econometric methods used to an alyze the collected data should be transparent, wel l suited for the analysis, and applied with rigor and care. Professional judgment is necessary to apply these c riteria to one or more studies, and thus there is n o mechanical formula that can be used to determine wh ether a particular study is of sufficient quality t o justify use in regulatory analysis. When studies are used d espite having weaknesses on one or more of these criteria, those weaknesses should be acknowledged i n the regulatory analysis, including any resulting biases or uncertainties that are likely to result. If a st udy has too many weaknesses with unknown consequenc es for the quality of the data, the study should not be us ed. The challenge in designing quality stated-preferenc e studies is arguably greater for non-use values an d unfamiliar use values than for familiar goods or se rvices that are traded (directly or indirectly) in market transactions. The good being valued may have little meaning to respondents, and respondents may be forming their valuations for the first time in resp onse to the questions posed. Since these values are effectively constructed by the respondent during th e elicitation, the instrument and mode of administr ation should be rigorously pre-tested to make sure that r esponses are not simply an artifact of specific fea tures of instrument design and/or mode of administration. Since SPM generate data from respondents in a hypot hetical setting, often on complex and unfamiliar go ods, special care is demanded in the design and executio n of surveys, analysis of the results, and characte rization of the uncertainties. A stated-preference study maybe the only way to obtain quantitative information about non-use values, though a number based on a poor qua lity study is not necessarily superior to no number at all. Non-use values that are not quantified should be presented as an "intangible" benefit or cost. If both revealed-preference and stated-preference s tudies that are directly applicable to regulatory a nalysis are available, you should consider both kinds of ev idence and compare the findings. If the results div erge significantly, you should compare the overall size and quality of the two bodies of evidence. Other th ings equal, you should prefer revealed preference data o ver stated preference data because revealed prefere nce data are based on actual decisions, where market pa rticipants enjoy or suffer the consequences of thei r decisions. This is not generally the case for respo ndents in stated preference surveys, where responde nts may not have sufficient incentives to offer thoughtful responses that are more consistent with their preferences or may be inclined to bias their respon ses for one reason or another.
5. Benefit-Transfer Methods It is often preferable to collect original data on revealed preference or stated preference to supportregulatory analysis. Yet conducting an original study may not be feasible due to the time and expense involved. O ne alternative to conducting an original study is the use of "benefit transfer" methods. (The transfer ma y involve cost determination as well). The practice of "benefit transfer" began with transferring existing estim ates obtained from indirect market and stated preference studies to new contexts (i.e., the context posed b y the rulemaking). The principles that guide transferring estimates from indirect market and stated preferen ce studies should apply to direct market studies as we ll. Although benefit-transfer can provide a quick, low- cost approach for obtaining desired monetary values , the methods are often associated with uncertainties and potential biases of unknown magnitude. It should therefore be treated as a last-resort option and no t used without explicit justification. In conducting benefit transfer, the first step is t o specify the value to be estimated for the rulemak ing. You should identify the relevant measure of the policy change at this initial stage. For instance, you can derive the relevant willingness-to-pay measure by specifying a n indirect utility function. This identification al lows you to "zero in" on key aspects of the benefit transfer. The next step is to identify appropriate studies to conduct benefit transfer. In selecting transfer st udies for either point transfers or function transfers, you s hould base your choices on the following criteria:
• The selected studies should be based on adequate d ata, sound and defensible empirical methods and techniques. • The selected studies should document parameter est imates of the valuation function. • The study context and policy context should have s imilar populations (e.g., demographic characteristics). The market size (e.g., target pop ulation) between the study site and the policy site should be similar. For example, a study valuing wat er quality improvement in Rhode Island should not be used to value policy that will affect water qual ity throughout the United States. • The good, and the magnitude of change in that good , should be similar in the study and policy contexts. 

# Page **15 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** • The relevant characteristics of the study and the policy contexts should be similar. For example, the effects examined in the original study should be "reversible" or "irreversible" to a degree that is si milar to the regulatory actions under consideration. • The distribution of property rights should be simi lar so that the analysis uses the same welfare measure. If the property rights in the study contex t support the use of WTA measures while the rights in the rulemaking context support the use of WTP measu res, benefit transfer is not appropriate. • The availability of substitutes across study and p olicy contexts should be similar. If you can choose between transferring a function o r a point estimate, you should transfer the entire demand function (referred to as benefit function transfer)rather than adopting a single point estimate (refe rred to as benefit point transfer). 15
Finally, you should not use benefit transfer in est imating benefits if:
• resources are unique or have unique attributes. Fo r example, if a policy change affects snowmobile use in Yellowstone National Park, then a study valu ing snowmobile use in the state of Michigan should not be used to value changes in snowmobile use in t he Yellowstone National Park. • If the study examines a resource that is unique or has unique attributes, you should not transfer ben efit estimates or benefit functions to value a differentresource and vice versa. For example, if a study values visibility improvements at the Grand Canyon, these results should not be used to value visibili ty improvements in urban areas. • There are significant problems with applying an " ex ante " valuation estimate to an "ex post" policy context. If a policy yields a significant change in the attributes of the good, you should not use the study estimates to value the change using a benefit trans fer approach. • You also should not use a value developed from a s tudy involving, small marginal changes in a policy context involving large changes in the quantity of the good. Clearly, all of these criteria are difficult to mee t. However, you should attempt to satisfy as many a s possible when choosing studies from the existing economic li terature. Professional judgment is required in dete rmining whether a particular transfer is too speculative to use in regulatory analysis. 6. Ancillary Benefits and Countervailing Risks Your analysis should look beyond the direct benefit s and direct costs of your rulemaking and consider any important ancillary benefits and countervailing ris ks. An ancillary benefit is a favorable impact of t he rule that is typically unrelated or secondary to the statutor y purpose of the rulemaking (e.g., reduced refinery emissions due to more stringent fuel economy standa rds for light trucks) while a countervailing risk i s an adverse economic, health, safety, or environmental consequence that occurs due to a rule and is not al ready accounted for in the direct cost of the rule (e.g., adverse safety impacts from more stringent fuel-ec onomy standards for light trucks). You should begin by considering and perhaps listing the possible ancillary benefits and countervailing risks. However, highly speculative or minor consequences m ay not be worth further formal analysis. Analytic p riority should be given to those ancillary benefits and cou ntervailing risks that are important enough to pote ntially change the rank ordering of the main alternatives i n the analysis. In some cases the mere consideratio n of these secondary effects may help in the generation of a superior regulatory alternative with strong an cillary benefits and fewer countervailing risks. For instan ce, a recent study suggested that weight-based, fue leconomy standards could achieve energy savings with fewer safety risks and employment losses than woul d occur under the current regulatory structure.
Like other benefits and costs, an effort should be made to quantify and monetize ancillary benefits an d countervailing risks. If monetization is not feasib le, quantification should be attempted through use of informative physical units. If both monetization an d quantification are not feasible, then these issue s should be presented as non-quantified benefits and costs. The same standards of information and analysis qual ity that apply to direct benefits and costs should be a pplied to ancillary benefits and countervailing ris ks. One way to combine ancillary benefits and counterva iling risks is to evaluate these effects separatelyand then put both of these effects on the benefits side , not on the cost side. Although it is theoreticall y appropriate to include disbenefits on the cost side, legal and programmatic considerations generally support subtracting the disbenefits from direct benefits. 7. Methods for Treating Non-Monetized Benefits and Costs Sound quantitative estimates of benefits and costs, where feasible, are preferable to qualitative desc riptions of benefits and costs because they help decision ma kers understand the magnitudes of the effects of alternative actions. However, some important benefi ts and costs (e.g., privacy protection) may be inhe rently too difficult to quantify or monetize given currentdata and methods. You should carry out a careful e valuation 

# Page **16 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** of non-quantified benefits and costs. Some authorit ies 16refer to these non-monetized and non-quantified effects as "intangible".

a. Benefits and Costs that are Difficult to Monetize You should monetize quantitative estimates whenever possible. Use sound and defensible values or procedures to monetize benefits and costs, and ensu re that key analytical assumptions are defensible. If monetization is impossible, explain why and presentall available quantitative information. For exampl e, if you can quantify but cannot monetize increases in w ater quality and fish populations resulting from wa ter quality regulation, you can describe benefits in te rms of stream miles of improved water quality for b oaters and increases in game fish populations for anglers. You should describe the timing and likelihood of s uch effects and avoid double-counting of benefits when estimates of monetized and physical effects are mix ed in the same analysis.
b. Benefits and Costs that are Difficult to Quantify If you are not able to quantify the effects, you sh ould present any relevant quantitative information along with a description of the unquantified effects, suc h as ecological gains, improvements in quality of l ife, and aesthetic beauty. You should provide a discussion o f the strengths and limitations of the qualitative information. This should include information on the key reason(s) why they cannot be quantified. In on e instance, you may know with certainty the magnitudeof a risk to which a substantial, but unknown, number of individuals are exposed. In another insta nce, the existence of a risk may be based on highly speculative assumptions, and the magnitude of the r isk may be unknown. For cases in which the unquantified benefits or cos ts affect a policy choice, you should provide a cle ar explanation of the rationale behind the choice. Suc h an explanation could include detailed information on the nature, timing, likelihood, location, and distr ibution of the unquantified benefits and costs. Als o, please include a summary table that lists all the unquanti fied benefits and costs, and use your professional judgment to highlight (e.g., with categories or ran k ordering) those that you believe are most importa nt (e.g., by considering factors such as the degree of certainty, expected magnitude, and reversibility o f effects). While the focus is often placed on difficult to qua ntify benefits of regulatory action, some costs aredifficult to quantify as well. Certain permitting requirement s (e.g., EPA's New Source Review program) restrict the decisions of production facilities to shift to new products and adopt innovative methods of production

. While these programs may impose substantial costs o n the economy, it is very difficult to quantify and monetize these effects. Similarly, regulations thatestablish emission standards for recreational vehi cles, like motor bikes, may adversely affect the performa nce of the vehicles in terms of driveability and 0 to 60 miles per hour acceleration. Again, the cost associ ated with the loss of these attributes may be diffi cult to quantify and monetize. They need to be analyzed qua litatively.
8. Monetizing Health and Safety Benefits and Costs We expect you to provide a benefit-cost analysis of major health and safety rulemakings in addition toa CEA. The BCA provides additional insight because (a) it provides some indication of what the public is will ing to pay for improvements in health and safety and (b) i t offers additional information on preferences for health using a different research design than is used in C EA. Since the health-preference methods used to sup port CEA and BCA have some different strengths and drawb acks, it is important that you provide decision mak ers with both perspectives. In monetizing health benefits, a WTP measure is the conceptually appropriate measure as compared to ot her alternatives (e.g., cost of illness or lifetime ear nings), in part because it attempts to capture pain and suffering and other quality-of-life effects. Using the WTP me asure for health and safety allows you to directly compare your results to the other benefits and costs in you r analysis, which will typically be based on WTP. If well-conducted revealed-preference studies of re levant health and safety risks are available, you s hould consider using them in developing your monetary est imates. If appropriate revealed-preference data are not available, you should use valid and relevant data f rom stated-preference studies. You will need to use your professional judgment when you are faced with limit ed information on revealed preference studies and substantial information based on stated preference studies. A key advantage of stated-preference and health-uti lity methods compared to revealed preference method s is that they can be tailored to address the ranges of probabilities, types of health risks and specifi c populations affected by your rule. In many rulemaki ngs there will be no relevant information from reve aledpreference studies. In this situation you should co nsider commissioning a stated-preference study or u sing values from published stated-preference studies. Fo r the reasons discussed previously, you should be 

# Page **17 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** cautious about using values from stated-preference studies and describe in the analysis the drawbacks of this approach. a. Nonfatal Health and Safety Risks With regard to nonfatal health and safety risks, th ere is enormous diversity in the nature and severity of impaired health states. A traumatic injury that can be treated effectively in the emergency room witho ut hospitalization or long-term care is different from a traumatic injury resulting in paraplegia. Severi ty differences are also important in evaluation of chr onic diseases. A severe bout of bronchitis, though perhaps less frequent, is far more painful and debi litating than the more frequent bouts of mild bronc hitis. The duration of an impaired health state, which can range from a day or two to several years or even a lifetime (e.g., birth defects inducing mental retardation), need to be considered carefully. Informati on on both the severity and duration of an impaired healt h state is necessary before the task of monetizatio n can be performed. When monetizing nonfatal health effects, it is impo rtant to consider two components: (1) the private demand for prevention of the nonfatal health effect , to be represented by the preferences of the targe t population at risk, and (2) the net financial exter nalities associated with poor health such as net ch anges in public medical costs and any net changes in econ omic production that are not experienced by the target population. Revealed-preference or stated-preferenc e studies are necessary to estimate the private demand; health economics data from published source s can typically be used to estimate the financial externalities caused by changes in health status. I f you use literature values to monetize nonfatal he alth and safety risks, it is important to make sure thatthe values you have selected are appropriate for t he severity and duration of health effects to be addre ssed by your rule. If data are not available to support monetization, you might consider an alternative approach that mak es use of health-utility studies. Although the economi cs literature on the monetary valuation of impaired health states is growing, there is a much larger cl inical literature on how patients, providers and community residents value diverse health states. Th is literature typically measures health utilities b ased on the standard gamble, the time tradeoff or the ra ting scale methods. This health utility information may be combined with known monetary values for well-defined health states to estimate monetary values for a wide range of health states of different severity a nd duration. If you use this approach, you should b e careful to acknowledge your assumptions and the lim itations of your estimates.
b. Fatality Risks Since agencies often design health and safety regul ation to reduce risks to life, evaluation of these benefits can be the key part of the analysis. A goo d analysis must present these benefits clearly and show their importance. Agencies may choose to monetize t hese benefits. The willingness-to-pay approach is t he best methodology to use if reductions in fatality r isk are monetized. Some describe the monetized value of small changes in fatality risk as the "value of statistical life" (VSL) or, less precisely, the "value of a life." The latt er phrase can be misleading because it suggests erroneously that the monetization exercise tries to place a "value" on individual lives. You should ma ke clear that these terms refer to the measurement of willingness to pay for reductions in only small ris ks of premature death. They have no application to an ide ntifiable individual or to very large reductions in individual risks. They do not suggest that any indi vidual's life can be expressed in monetary terms. T heir sole purpose is to help describe better the likely benefits of a regulatory action.
Confusion about the term "statistical life" is also widespread. This term refers to the sum of risk re ductions expected in a population. For example, if the annua l risk of death is reduced by one in a million for each of two million people, that is said to represent two " statistical lives" extended per year (2 million peo ple x 1/1,000,000 = 2). If the annual risk of death is re duced by one in 10 million for each of 20 million p eople, that also represents two statistical lives extended

. The adoption of a value for the projected reduction in the risk of premature mortality is the subject of continuing discussion within the economic and publi c policy analysis community. A considerable body of academic literature is available on this subject. T his literature involves either explicit or implicitvaluation of fatality risks, and generally involves the use of e stimates of VSL from studies on wage compensation for occupational hazards (which generally are in the ra nge of 10-4 annually), on consumer product purchase and use decisions, or from an emerging literature u sing stated preference approaches. A substantial majority of the resulting estimates of VSL vary fro m roughly $1 million to $10 million per statistical life. 17
There is a continuing debate within the economic an d public policy analysis community on the merits of using a single VSL for all situations versus adjust ing the VSL estimates to reflect the specific rule context. A variety of factors have been identified, includin g whether the mortality risk involves sudden death, the fear of cancer, and the extent to which the risk is voluntarily incurred. 18The consensus of EPA's recent Science Advisory Board (SAB) review of this issue w as that the available literature does not support 

# Page **18 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** adjustments of VSL for most of these factors. The p anel did conclude that it was appropriate to adjustVSL to reflect changes in income and any time lag in th e occurrence of adverse health effects. The age of the affected population has also been id entified as an important factor in the theoretical literature. However, the empirical evidence on age and VSL is mixed. In light of the continuing questi ons over the effect of age on VSL estimates, you should not use an age-adjustment factor in an analysis us ing VSL estimates. 19
Another way that has been used to express reduction s in fatality risks is to use the life expectancy method, the "value of statistical life-years (VSLY)extended." If a regulation protects individuals wh ose average remaining life expectancy is 40 years, a ri sk reduction of one fatality is expressed as "40 li feyears extended." Those who favor this alternative a pproach emphasize that the value of a statistical l ife is not a single number relevant for all situations. In particular, when there are significant differencesbetween the effect on life expectancy for the population af fected by a particular health risk and the populati ons studied in the labor market studies, they prefer toadopt a VSLY approach to reflect those differences . You should consider providing estimates of both VSL and VSLY, while recognizing the developing state of knowledge in this area. Longevity may be only one of a number of relevant c onsiderations pertaining to the rule. You should ke ep in mind that regulations with greater numbers of li fe-years extended are not necessarily better than regulations with fewer numbers of life-years extend ed. In any event, when you present estimates based on the VSLY method, you should adopt a larger VSLY est imate for senior citizens because senior citizens face larger overall health risks from all causes an d they may have accumulated savings to spend on the ir health and safety. 20
The valuation of fatality risk reduction is an evol ving area in both results and methodology. Hence, y ou should utilize valuation methods that you consider appropriate for the regulatory circumstances. Since the literature-based VSL estimates may not be entirely appropriate for the risk being evaluated (e.g., the use of occupational risk premia to value reductions in risks from environmental hazards), you should expla in your selection of estimates and any adjustments of the estimates to reflect the nature of the risk bei ng evaluated. You should present estimates based on al ternative approaches, and if you monetize mortality risk reduction, you should do so on a consistent ba sis to the extent feasible. You should clearly indi cate the methodology used and document your choice of a particular methodology. You should explain any significant deviations from the prevailing state of knowledge. If you use different methodologies in d ifferent rules, you should clearly disclose the fact and exp lain your choices.
c. Valuation of Reductions in Health and Safety Risk s to Children
The valuation of health outcomes for children and i nfants poses special challenges. It is rarely feasi ble to measure a child's willingness to pay for health imp rovement and an adult's concern for his or her own health is not necessarily relevant to valuation of child health. For example, the wage premiums demand ed by workers to accept hazardous jobs are not readilytransferred to rules that accomplish health gains for children. There are a few studies that examine parental willi ngness to pay to invest in health and safety for th eir children. Some of these studies suggest that parent s may value children’s health more strongly than th eir own health. Although this parental perspective is a promising research strategy, it may need to be expanded to include a societal interest in child he alth and safety. Where the primary objective of a rule is to reduce the risk of injury, disease or mortality among chil dren, you should conduct a cost-effectiveness analysis of the rule. You may also develop a benefit-cost anal ysis to the extent that valid monetary values can be ass igned to the primary expected health outcomes. For rules where health gains are expected among both ch ildren and adults and you decide to perform a benefit-cost analysis, the monetary values for chil dren should be at least as large as the values for adults (for the same probabilities and outcomes) unless th ere is specific and compelling evidence to suggest otherwise. 21

Discount Rates Benefits and costs do not always take place in the same time period. When they do not, it is incorrectsimply to add all of the expected net benefits or costs wi thout taking account of when the actually occur. If benefits or costs are delayed or otherwise separated in time from each other, the difference in timing should b e reflected in your analysis. As a first step, you should present the annual timestream of benefits and costs expected to result from the rule, clearly identifying when the benefits and cos ts are expected to occur. The beginning point for y our stream of estimates should be the year in which the final rule will begin to have effects, even if tha t is 

# Page **19 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** expected to be some time in the future. The ending point should be far enough in the future to encompa ss all the significant benefits and costs likely to resultfrom the rule. In presenting the stream of benefits and costs, it is important to measure them in constant dollars to avoid the misleading effects of inflation in your estimates. If the benefits and costs are initially measured in prices reflecting expected future inflation, you can conve rt them to constant dollars by dividing through by an appropriate inflation index, one that corresponds t o the inflation rate underlying the initial estimat es of benefits or costs. 1. The Rationale for Discounting Once these preliminaries are out of the way, you ca n begin to adjust your estimates for differences in timing. (This is a separate calculation from the adjustmentneeded to remove the effects of future inflation.)Benefits or costs that occur sooner are generally more valua ble. The main rationales for the discounting of fut ure impacts are:
(a) Resources that are invested will normally earn a positive return, so current consumption is more expensive than future consumption, since you are gi ving up that expected return on investment when you consume today. (b) Postponed benefits also have a cost because peo ple generally prefer present to future consumption. They are said to have positive time preference. (c) Also, if consumption continues to increase overtime, as it has for most of U.S. history, an incre ment of consumption will be less valuable in the future tha n it would be today, because the principle of dimin ishing marginal utility implies that as total consumption increases, the value of a marginal unit of consumpt ion tends to decline. There is wide agreement with point (a). Capital inv estment is productive, but that point is not suffic ient by itself to explain positive interest rates and obser ved saving behavior. To understand these phenomena, points (b) and (c) are also necessary. If people ar e really indifferent between consumption now and la ter, then they should be willing to forgo current consum ption in order to consume an equal or slightly grea ter amount in the future. That would cause saving ratesand investment to rise until interest rates were d riven to zero and capital was no longer productive. As long as we observe positive interest rates and saving ra tes below 100 percent, people must be placing a higher value on current consumption than on future consumption. To reflect this preference, a discount factor shoul d be used to adjust the estimated benefits and cost s for differences in timing. The further in the future th e benefits and costs are expected to occur, the mor e they should be discounted. The discount factor can be ca lculated given a discount rate. The formula is 1/ ( 1+ the discount rate)t where "t" measures the number of ye ars in the future that the benefits or costs are ex pected to occur. Benefits or costs that have been adjusted in this way are called "discounted present values" or simply Apresent values". When, and only when, the estimate d benefits and costs have been discounted, they can be added to determine the overall value of net benefit s.
2. Real Discount Rates of 3 Percent and 7 Percent OMB's basic guidance on the discount rate is provid ed in OMB Circular A-94 ( http://www.whitehouse.gov/omb/circulars/index.html ). This Circular points out that the analytically p referred method of handling temporal differences between ben efits and costs is to adjust all the benefits and c osts to reflect their value in equivalent units of consumpt ion and to discount them at the rate consumers and savers would normally use in discounting future consumptio n benefits. This is sometimes called the "shadow pr ice" approach to discounting because doing such calculat ions requires you to value benefits and costs using shadow prices, especially for capital goods, to cor rect for market distortions. These shadow prices ar e not well established for the United States. Furthermore , the distribution of impacts from regulations on c apital and consumption are not always well known. Consequently , any agency that wishes to tackle this challenging analytical task should check with OMB before procee ding. As a default position, OMB Circular A-94 states tha t a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent ra te is an estimate of the average before-tax rate of return to private capital in the U.S. economy. It is a broad measure that reflects the returns to real estate an d small business capital as well as corporate capital. It a pproximates the opportunity cost of capital, and itis the appropriate discount rate whenever the main effect of a regulation is to displace or alter the use of capital in the private sector. OMB revised Circular A-94 in 19 92 after extensive internal review and public comme nt. In a recent analysis, OMB found that the average rate of return to capital remains near the 7 percent rat e estimated in 1992. Circular A-94 also recommends us ing other discount rates to show the sensitivity of the estimates to the discount rate assumption. 

# Page **20 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Economic distortions, including taxes on capital, c reate a divergence between the rate of return that savers earn and the private rate of return to capital. Thi s divergence persists despite the tendency for capi tal to flow to where it can earn the highest rate of return. Al though market forces will push after-tax rates of r eturn in different sectors of the economy toward equality, t hat process will not equate pre-tax rates of return when there are differences in the tax treatment of inves tment. Corporate capital, in particular, pays an ad ditional layer of taxation, the corporate income tax, which requires it to earn a higher pre-tax rate of return in order to provide investors with similar after-tax rates of r eturn compared with non-corporate investments. The pre-tax rates of return better measure society's gains from investment. Since the rates of return on capital a re higher in some sectors of the economy than others, the gov ernment needs to be sensitive to possible impacts o f regulatory policy on capital allocation. The effects of regulation do not always fall exclus ively or primarily on the allocation of capital. Wh en regulation primarily and directly affects private c onsumption (e.g., through higher consumer prices fo r goods and services), a lower discount rate is appropriate . The alternative most often used is sometimes call ed the "social rate of time preference." This simply means the rate at which "society" discounts future consu mption flows to their present value. If we take the rate t hat the average saver uses to discount future consu mption as our measure of the social rate of time preference, then the real rate of return on long-term governmen t debt may provide a fair approximation. Over the last thi rty years, this rate has averaged around 3 percent in real terms on a pre-tax basis. For example, the yield on 10-year Treasury notes has averaged 8.1 percent si nce 1973 while the average annual rate of change in the CPI over this period has been 5.0 percent, implyin g a real 10-year rate of 3.1 percent. For regulatory analysis, you should provide estimat es of net benefits using both 3 percent and 7 perce nt. An example of this approach is EPA's analysis of its 1 998 rule setting both effluent limits for wastewate r discharges and air toxic emission limits for pulp a nd paper mills. In this analysis, EPA developed its presentvalue estimates using real discount rates of 3 and 7 percent applied to benefit and cost streams that extended forward for 30 years. You should present a similar analysis in your own work. In some instances, if there is reason to expect tha t the regulation will cause resources to be realloc ated away from private investment in the corporate sector, th en the opportunity cost may lie outside the range o f 3 to 7 percent. For example, the average real rate of retu rn on corporate capital in the United States was approximately 10 percent in the 1990s, returning to the same level observed in the 1950s and 1960s. If you are uncertain about the nature of the opportunity c ost, then you should present benefit and cost estim ates using a higher discount rate as a further sensitivi ty analysis as well as using the 3 and 7 percent ra tes.
3. Time Preference for Health-Related Benefits and Costs
When future benefits or costs are health-related, s ome have questioned whether discounting is appropri ate, since the rationale for discounting money may not a ppear to apply to health. It is true that lives sav ed today cannot be invested in a bank to save more lives in the future. But the resources that would have been used to save those lives can be invested to earn a higher p ayoff in future lives saved. People have been obser ved to prefer health gains that occur immediately to ident ical health gains that occur in the future. Also, i f future health gains are not discounted while future costs are, then the following perverse result occurs: an attractive investment today in future health improvement can a lways be made more attractive by delaying the investment. For such reasons, there is a profession al consensus that future health effects, including both benefits and costs, should be discounted at the sam e rate. This consensus applies to both BCA and CEA. A common challenge in health-related analysis is to quantify the time lag between when a rule takes ef fect and when the resulting physical improvements in hea lth status will be observed in the target populatio n. In such situations, you must carefully consider the ti ming of health benefits before performing present-v alue calculations. It is not reasonable to assume that a ll of the benefits of reducing chronic diseases suc h as cancer and cardiovascular disease will occur immedi ately when the rule takes effect. For rules address ing traumatic injury, this lag period may be short. For chronic diseases it may take years or even decadesfor a rule to induce its full beneficial effects in the t arget population. When a delay period between exposure to a toxin and increased probability of disease is likely (a so-c alled latency period), a lag between exposure reduction a nd reduced probability of disease is also likely. T his latter period has sometimes been referred to as a "cessati on lag," and it may or may not be of the same durat ion as the latency period. As a general matter, cessation lags will only apply to populations with at least s ome highlevel exposure (e.g., before the rule takes effect) . For populations with no such prior exposure, such as those born after the rule takes effect, only the latency period will be relevant. Ideally, your exposure-risk model would allow calcu lation of reduced risk for each year following expo sure cessation, accounting for total cumulative exposure and age at the time of exposure reduction. The pre sentvalue benefits estimate could then reflect an appro priate discount factor for each year's risk reducti on. Recent analyses of the cancer benefits stemming from reduc tion in public exposure to radon in drinking water have adopted this approach. They were supported by forma l risk-assessment models that allowed estimates of the timing of lung cancer incidence and mortality to va ry in response to different radon exposure levels. 22 

# Page **21 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** In many cases, you will not have the benefit of suc h detailed risk assessment modeling. You will need to use your professional judgment as to the average cessat ion lag for the chronic diseases affected by your r ule. In situations where information exists on latency but not on cessation lags, it may be reasonable to use latency as a proxy for the cessation lag, unless there is reason to believe that the two are different. When t he average lag time between exposures and disease is u nknown, a range of plausible alternative values for the time lag should be used in your analysis. 4. Intergenerational Discounting Special ethical considerations arise when comparing benefits and costs across generations. Although mo st people demonstrate time preference in their own con sumption behavior, it may not be appropriate for so ciety to demonstrate a similar preference when deciding b etween the well-being of current and future generat ions. Future citizens who are affected by such choices ca nnot take part in making them, and today's society must act with some consideration of their interest. One way to do this would be to follow the same disc ounting techniques described above and supplement t he analysis with an explicit discussion of the interge nerational concerns (how future generations will be affected by the regulatory decision). Policymakers would be provided with this additional information without c hanging the general approach to discounting. Using the same discount rate across generations has the advantage of preventing time-inconsistency problems. For example, if one uses a lower discountrate for future generations, then the evaluation o f a rule that has short-term costs and long-term benefits wo uld become more favorable merely by waiting a year to do the analysis. Further, using the same discount r ate across generations is attractive from an ethica l standpoint. If one expects future generations to be better off, then giving them the advantage of a lower discount rate would in effect transfer resources fr om poorer people today to richer people tomorrow. Some believe, however, that it is ethically impermi ssible to discount the utility of future generation s. That is, government should treat all generations equally. Ev en under this approach, it would still be correct t o discount future costs and consumption benefits gene rally (perhaps at a lower rate than for intragenera tional analysis), due to the expectation that future generations will be wealthier and thus will value a marg inal dollar of benefits or costs by less than those alive today . Therefore, it is appropriate to discount future b enefits and costs relative to current benefits and costs, even if the welfare of future generations is not being d iscounted. Estimates of the appropriate discount rate appropri ate in this case, from the 1990s, ranged from 1 to 3 percent per annum. 23
A second reason for discounting the benefits and co sts accruing to future generations at a lower rate is increased uncertainty about the appropriate value o f the discount rate, the longer the horizon for the analysis. Private market rates provide a reliable reference f or determining how society values time within a gen eration, but for extremely long time periods no comparable p rivate rates exist. As explained by Martin Weitzman 24 , in the limit for the deep future, the properly average d certainty-equivalent discount factor (i.e., 1/[1+ r] t ) corresponds to the minimum discount rate having anysubstantial positive probability. From today's perspective, the only relevant limiting scenario is the one with the lowest discount rate B all of the other states at the far-distant time are relatively much less im portant because their expected present value is so severely reduced by the power of compounding at a higher rat e. If your rule will have important intergenerational benefits or costs you might consider a further sens itivity analysis using a lower but positive discount rate i n addition to calculating net benefits using discou nt rates of 3 and 7 percent.

5. Time Preference for Non-Monetized Benefits and C osts Differences in timing should be considered even for benefits and costs that are not expressed in monet ary units, including health benefits. The timing differences can be handled through discounting. EPA estim ated cost-effectiveness in its 1998 rule, "Control of Em issions from Nonroad Diesel Engines," by discountin g both the monetary costs and the non-monetized emission reduction benefits over the expected useful life of the engines at the 7 percent real rate recommended in O MB Circular A-94. Alternatively, it may be possible in some cases to avoid discounting non-monetized benefits. If the ex pected flow of benefits begins as soon as the cost is incu rred and is expected to be constant over time, then annualizing the cost stream is sufficient, and furt her discounting of benefits is unnecessary. Such an analysis might produce an estimate of the annualized cost pe r ton of reduced emissions of a pollutant.

6. The Internal Rate of Return
The internal rate of return is the discount rate th at sets the net present value of the discounted ben efits and costs equal to zero. The internal rate of return do es not generally provide an acceptable decision cri terion, and regulations with the highest internal rate of return are not necessarily the most beneficial. Neve rtheless, it 

# Page **22 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** does provide useful information and for many it wil l offer a meaningful indication of regulation's imp act. You should consider including the internal rate of retu rn implied by your regulatory analysis along with o ther information about discounted net present values. Other Key Considerations

1. Other Benefit and Cost Considerations You should include these effects in your analysis a nd provide estimates of their monetary values when they are significant: • Private-sector compliance costs and savings; • Government administrative costs and savings; • Gains or losses in consumers' or producers' surplu ses; • Discomfort or inconvenience costs and benefits; an d • Gains or losses of time in work, leisure and/or co mmuting/travel settings.
Estimates of benefits and costs should be based on credible changes in technology over time. For examp le, retrospective studies may provide evidence that "le arning" will likely reduce the cost of regulation i n future years. The weight you give to a study of past ratesof cost savings resulting from innovation (includi ng "learning curve" effects) should depend on both its timeliness and direct relevance to the processes a ffected by the regulatory alternative under consideration. In addition, you should take into account cost-savi ng innovations that result from a shift to regulatory performance standards and incentive-based policies. On the other hand, significant costs may result from a slo wing in the rate of innovation or of adoption of ne w technology due to delays in the regulatory approval process or the setting of more stringent standards for new facilities than existing ones. In some cases ag encies are limited under statute to consider only technologies that have been demonstrated to be feas ible. In these situations, it may be useful to esti mate costs and cost savings assuming a wider range of te chnical possibilities. When characterizing technology changes over time, y ou should assess the likely technology changes that would have occurred in the absence of the regulatory action (technology baseline). Technologies change over time in both reasonably functioning markets an d imperfect markets. If you assume that technology will remain unchanged in the absence of regulation when technology changes are likely, then your analysis w ill over-state both the benefits and costs attributable to the regulation. Occasionally, cost savings or other forms of benefi ts accrue to parties affected by a rule who also be ar its costs. For example, a requirement that engine manuf acturers reduce emissions from engines may lead to technologies that improve fuel economy. These fuel savings will normally accrue to the engine purchase rs, who also bear the costs of the technologies. There is no apparent market failure with regard to the ma rket value of fuel saved because one would expect that c onsumers would be willing to pay for increased fuel economy that exceeded the cost of providing it. Whe n these cost savings are substantial, and particula rly when you estimate them to be greater than the cost associated with achieving them, you should examine and discuss why market forces would not accomplish thes e gains in the absence of regulation. As a general matter, any direct costs that are averted as a resu lt of a regulatory action should be monetized where ver possible and either added to the benefits or subtra cted from the costs of that alternative. 2. The Difference between Costs (or Benefits) and T ransfer Payments Distinguishing between real costs and transfer paym ents is an important, but sometimes difficult, prob lem in cost estimation. Benefit and cost estimates should reflect real resource use. Transfer payments are mo netary payments from one group to another that do not affe ct total resources available to society. A regulati on that restricts the supply of a good, causing its price t o rise, produces a transfer from buyers to sellers. The net reduction in the total surplus (consumer plus produ cer) is a real cost to society, but the transfer from buyers to sellers resulting from a higher price is not a r eal cost since the net reduction automatically acco unts for the transfer from buyers to sellers. However, transfersfrom the United States to other nations should be included as costs, and transfers from other nations to the U nited States as benefits, as long as the analysis i s conducted from the United States perspective.

You should not include transfers in the estimates o f the benefits and costs of a regulation. Instead, address them in a separate discussion of the regulation's d istributional effects. Examples of transfer payment s include the following: • Scarcity rents and monopoly profits • Insurance payments • Indirect taxes and subsidies 

# Page **23 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Treatment of Uncertainty The precise consequences (benefits and costs) of re gulatory options are not always known for certain, but the probability of their occurrence can often be de veloped. The important uncertainties connected with your regulatory decisions need to be analyzed and presen ted as part of the overall regulatory analysis. You should begin your analysis of uncertainty at the earliest possible stage in developing your analysis. You sho uld consider both the statistical variability of key el ements underlying the estimates of benefits and cos ts (for example, the expected change in the distribution of automobile accidents that might result from a chan ge in automobile safety standards) and the incomplete kno wledge about the relevant relationships (for exampl e, the uncertain knowledge of how some economic activi ties might affect future climate change). 25By assessing the sources of uncertainty and the way in which ben efit and cost estimates may be affected under plaus ible assumptions, you can shape your analysis to inform decision makers and the public about the effects an d the uncertainties of alternative regulatory actions. The treatment of uncertainty must be guided by the same principles of full disclosure and transparencythat apply to other elements of your regulatory analysis . Your analysis should be credible, objective, real istic, and scientifically balanced. 26Any data and models that you use to analyze uncert ainty should be fully identified. You should also discuss the quality of the availabl e data used. Inferences and assumptions used in you r analysis should be identified, and your analytical choices should be explicitly evaluated and adequate ly justified. In your presentation, you should delinea te the strengths of your analysis along with any un certainties about its conclusions. Your presentation should als o explain how your analytical choices have affected your results. In some cases, the level of scientific uncertainty may be so large that you can only present discrete alternative scenarios without assessing the relativ e likelihood of each scenario quantitatively. For i nstance, in assessing the potential outcomes of an environmenta l effect, there may be a limited number of scientif ic studies with strongly divergent results. In such ca ses, you might present results from a range of plau sible scenarios, together with any available information that might help in qualitatively determining which scenario is most likely to occur. When uncertainty has significant effects on the fin al conclusion about net benefits, your agency shoul d consider additional research prior to rulemaking. T he costs of being wrong may outweigh the benefits o f a faster decision. This is true especially for cases with irreversible or large upfront investments. If your agency decides to proceed with rulemaking, you should expl ain why the costs of developing additional informat ion— including any harm from delay in public protection—e xceed the value of that information. For example, when the uncertainty is due to a lack of data, you might consider deferring the decision, as an explicit regulatory alternative, pending further st udy to obtain sufficient data. Delaying a decision will also have costs, as will further efforts at data gatheri ng and analysis. You will need to weigh the benefit s of delay against these costs in making your decision. Formal tools for assessing the value of additional inform ation are now well developed in the applied decision scie nces and can be used to help resolve this type of c omplex regulatory question. "Real options" methods have also formalized the val uation of the added flexibility inherent in delayin g a decision. As long as taking time will lower uncerta inty, either passively or actively through an inves tment in information gathering, and some costs are irreversi ble, such as the potential costs of a sunk investme nt, a benefit can be assigned to the option to delay a de cision. That benefit should be considered a cost of taking immediate action versus the alternative of delaying that action pending more information. However, the burdens of delay—including any harm to public health , safety, and the environment—need to be analyzed carefully. 1. Quantitative Analysis of Uncertainty Examples of quantitative analysis, broadly defined, would include formal estimates of the probabilitie s of environmental damage to soil or water, the possible loss of habitat, or risks to endangered species aswell as probabilities of harm to human health and safety. T here are also uncertainties associated with estimat es of economic benefits and costs, such as the cost savin gs associated with increased energy efficiency. Thu s, your analysis should include two fundamental compon ents: a quantitative analysis characterizing the probabilities of the relevant outcomes and an assig nment of economic value to the projected outcomes. It is essential that both parts be conceptually consisten t. In particular, the quantitative analysis should be conducted in a way that permits it to be applied wi thin a more general analytical framework, such as b enefitcost analysis. Similarly, the general framework nee ds to be flexible enough to incorporate the quantit ative analysis without oversimplifying the results. For e xample, you should address explicitly the implicati ons for benefits and costs of any probability distributions developed in your analysis. As with other elements of regulatory analysis, you will need to balance thoroughness with the practica l limits on your analytical capabilities. Your analysis does not have to be exhaustive, nor is it necessary to evaluate each alternative at every step. Attention should be devoted to first resolving or studying the uncerta inties that 

# Page **24 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** have the largest potential effect on decision makin g. Many times these will be the largest sources of uncertainties. In the absence of adequate data, you will need to make assumptions. These should be cle arly identified and consistent with the relevant science . Your analysis should provide sufficient informati on for decision makers to grasp the degree of scientific u ncertainty and the robustness of estimated probabil ities, benefits, and costs to changes in key assumptions. For major rules involving annual economic effects o f $1 billion or more, you should present a formal quantitative analysis of the relevant uncertainties about benefits and costs. In other words, you shou ld try to provide some estimate of the probability distributi on of regulatory benefits and costs. In summarizing the probability distributions, you should provide some estimates of the central tendency (e.g., mean and m edian) along with any other information you think will be useful such as ranges, variances, specified low-end and high-end percentile estimates, and other characteri stics of the distribution.
Your estimates cannot be more precise than their mo st uncertain component. Thus, your analysis should report estimates in a way that reflects the degree of uncertainty and not create a false sense of prec ision. Worst-case or conservative analyses are not usuallyadequate because they do not convey the complete probability distribution of outcomes, and they do n ot permit calculation of an expected value of net b enefits. In many health and safety rules, economists conducting benefit-cost analyses must rely on formal risk assessments that address a variety of risk manageme nt questions such as the baseline risk for the affe cted population, the safe level of exposure or, the amou nt of risk to be reduced by various interventions. Because the answers to some of these questions are directlyused in benefits analyses, the risk assessment methodology must allow for the determination of exp ected benefits in order to be comparable to expecte d costs. This means that conservative assumptions and defaults (whether motivated by science policy or b y precautionary instincts), will be incompatible with benefit analyses as they will result in benefit es timates that exceed the expected value. Whenever it is possible to characterize quantitatively the probability dist ributions, some estimates of expected value (e.g., mean and me dian) must be provided in addition to ranges, variances, specified low-end and high-end percentil e estimates, and other characteristics of the distr ibution. Whenever possible, you should use appropriate stati stical techniques to determine a probability distri bution of the relevant outcomes. For rules that exceed the $1 billion annual threshold, a formal quantitative an alysis of uncertainty is required. For rules with annual bene fits and/or costs in the range from 100 million to $1 billion, you should seek to use more rigorous approaches wit h higher consequence rules. This is especially the case where net benefits are close to zero. More rigorous uncertainty analysis may not be necessary for rule s in this category if simpler techniques are sufficient to show robustness. You may consider the following analytical approaches that entail increasing levels of complexity: • Disclose qualitatively the main uncertainties in e ach important input to the calculation of benefits and costs. These disclosures should address the uncerta inties in the data as well as in the analytical results. However, major rules above the $1 billion annual threshold require a formal treatment. • Use a numerical sensitivity analysis to examine ho w the results of your analysis vary with plausible changes in assumptions, choices of input data, and alternative analytical approaches. Sensitivity analysis is especially valuable when the informatio n is lacking to carry out a formal probabilistic simulation. Sensitivity analysis can be used to fin d "switch points" -- critical parameter values at w hich estimated net benefits change sign or the low cost alternative switches. Sensitivity analysis usually proceeds by changing one variable or assumption at a time, but it can also be done by varying a combination of variables simultaneously to learn mo re about the robustness of your results to widespread changes. Again, however, major rules abo ve the $1 billion annual threshold require a formal treatment. • Apply a formal probabilistic analysis of the relev ant uncertainties B possibly using simulation model s and/or expert judgment as revealed, for example, th rough Delphi methods. 28Such a formal analytical approach is appropriate for complex rules where the re are large, multiple uncertainties whose analysis raises technical challenges, or where the effects c ascade; it is required for rules that exceed the $1 billion annual threshold. For example, in the analy sis of regulations addressing air pollution, there is uncertainty about the effects of the rule on future emissions, uncertainty about how the change in emissions will affect air quality, uncertainty abou t how changes in air quality will affect health, an d finally uncertainty about the economic and social v alue of the change in health outcomes. In formal probabilistic assessments, expert solicitation is a useful way to fill key gaps in your ability to ass ess uncertainty. 29In general, experts can be used to quantify the probability distributions of key parameters and relationships. These solicitations, combined wi th other sources of data, can be combined in Monte Carlo simulations to derive a probability distribut ion of benefits and costs. You should pay attention to correlated inputs. Often times, the standard defaul ts in Monte Carlo and other similar simulation packages assume independence across distributions. Failing to correctly account for correlated distributions of inputs can cause the resultant out put uncertainty intervals to be too large, although in many cases the overall effect is ambiguous. You sho uld make a special effort to portray the probabilistic results—in graphs and/or tables—clearl y and meaningfully. 

# Page **25 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** New methods may become available in the future. Thi s document is not intended to discourage or inhibittheir use, but rather to encourage and stimulate their de velopment.
2. Economic Values of Uncertain Outcomes In developing benefit and cost estimates, you may find that there are probability distributions of val ues as well for each of the outcomes. Where this is the case, y ou will need to combine these probability distribut ions to provide estimated benefits and costs. Where there is a distribution of outcomes, you will often find it useful to emphasize summary statisti cs or figures that can be readily understood and compared to achieve the broadest public understanding of yo ur findings. It is a common practice to compare the "b est estimates" of both benefits and costs with thos e of competing alternatives. These "best estimates" are usually the average or the expected value of benefi ts and costs. Emphasis on these expected values is appropr iate as long as society is "risk neutral" with resp ect to the regulatory alternatives. While this may not alw ays be the case, you should in general assume "risk neutrality" in your analysis. If you adopt a differ ent assumption on risk preference, you should expla in your reasons for doing so. 3. Alternative Assumptions If benefit or cost estimates depend heavily on cert ain assumptions, you should make those assumptions explicit and carry out sensitivity analyses using p lausible alternative assumptions. If the value of n et benefits changes from positive to negative (or vice versa) o r if the relative ranking of regulatory options cha nges with alternative plausible assumptions, you should condu ct further analysis to determine which of the alter native assumptions is more appropriate. Because different estimation methods may have hidden assumptions, you should analyze estimation methods carefully to make any hidden assumptions explicit.
F. Specialized Analytical Requirements In preparing analytical support for your rulemaking , you should be aware that there are a number of an alytic requirements imposed by law and Executive Order. In addition to the regulatory analysis requirements o f Executive Order 12866, you should also consider whe ther your rule will need specialized analysis of an y of the following issues. Impact on Small Businesses and Other Small Entities Under the Regulatory Flexibility Act (5 U.S.C. chap ter 6), agencies must prepare a proposed and final "regulatory flexibility analysis" (RFA) if the rule making could "have a significant impact on a substa ntial number of small entities." You should consider post ing your RFA on the internet so the public can revi ew your findings. Your agency should have guidelines on how to prepar e an RFA and you are encouraged to consult with the Chief Counsel for Advocacy of the Small Business Ad ministration on expectations concerning what is an adequate RFA. Executive Order 13272 (67 FR 53461, A ugust 16, 2002) requires you to notify the Chief Counsel for Advocacy of any draft rules that might have a significant economic impact on a substantial number of small entities. Executive Order 13272 als o directs agencies to give every appropriate consideration to any comments provided by the Advoc acy Office. Under SBREFA, EPA and OSHA are required to consult with small business prior to de veloping a proposed rule that would have a signific ant effect on small businesses. OMB encourages other agencies to do so as well. Analysis of Unfunded Mandates Under the Unfunded Mandates Act (2 U.S.C. 1532), yo u must prepare a written statement about benefits a nd costs prior to issuing a proposed or final rule (fo r which your agency published a proposed rule) thatmay result in aggregate expenditure by State, local, an d tribal governments, or by the private sector, of $100,000,000 or more in any one year (adjusted annu ally for inflation). Your analytical requirements u nder Executive Order 12866 are similar to the analytical requirements under this Act, and thus the same ana lysis may permit you to comply with both analytical requi rements. Information Collection, Paperwork, and Recordkeepin g Burdens Under the Paperwork Reduction Act (44 U.S.C. chapte r 35), you will need to consider whether your rulemaking (or other actions) will create any addit ional information collection, paperwork or recordke eping burdens. These burdens are permissible only if you can justify the practical utility of the informatio n for the implementation of your rule. OMB approval will be required of any new requirements for a collection of information imposed on 10 or more persons and a val id OMB control number must be obtained for any covered paperwork. Your agency's CIO should be able to assist you in complying with the Paperwork Reduction Act. 

# Page **26 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** Information Quality Guidelines Under the Information Quality Law, agency guideline s, in conformance with the OMB government-wide guidelines (67 FR 8452, February 22, 2002), have es tablished basic quality performance goals for all information disseminated by agencies, including inf ormation disseminated in support of proposed and fi nal rules. The data and analysis that you use to suppor t your rule must meet these agency and OMB quality standards. Your agency's CIO should be able to assi st you in assessing information quality. The Statis tical and Science Policy Branch of OMB's Office of Inform ation and Regulatory Affairs can provide you assist ance. This circular defines OMB's minimum quality standar ds for regulatory analysis. Environmental Impact Statements The National Environmental Policy Act (42 U.S.C. 43 21-4347) and related statutes and executive orders require agencies to consider the environmental impa cts of agency decisions, including rulemakings. An environmental impact statement must be prepared for "major Federal actions significantly affecting the quality of the human environment." You must complete NEPA d ocumentation before issuing a final rule. The White House Council on Environmental Quality has issued regulations (40 C.F.R. 1500-1508) and associated guidance for implementation of NEPA, available thro ugh CEQ's website ( http://www.whitehouse.gov/ceq/ ). Impacts on Children
Under Executive Order 13045, "Protection of Childre n from Environmental Health Risks and Safety Risks, " each agency must, with respect to its rules, "to th e extent permitted by law and appropriate, and cons istent with the agency's mission," "address disproportiona te risks to children that result from environmental health risks or safety risks." For any substantive rulemak ing action that "is likely to result in" an economi cally significant rule that concerns "an environmental he alth risk or safety risk that an agency has reason to believe may disproportionately affect children," the agencymust provide OMB/OIRA "an evaluation of the environmental health or safety effects of the plann ed regulation on children," as well as "an explanat ion of why the planned regulation is preferable to other p otentially and reasonably feasible alternatives con sidered by the agency." Energy Impacts Under Executive Order 13211 (66 FR 28355, May 22, 2 001), agencies are required to prepare and submit t o OMB a Statement of Energy Effects for significant e nergy actions, to the extent permitted by law. This Statement is to include a detailed statement of "an y adverse effects on energy supply, distribution, o r use (including a shortfall in supply, price increases, and increased use of foreign supplies)" for the act ion and reasonable alternatives and their effects. You need to publish the Statement or a summary in the relat ed NPRM and final rule. For further guidance, see OMB Memorandum 01-27 ("Guidance on Implementing Executive Order 13211", July 13, 2001), available o n OMB's website.
G. Accounting Statement You need to provide an accounting statement with ta bles reporting benefit and cost estimates for each major final rule for your agency. You should use the guid ance outlined above to report these estimates. We h ave included a suggested format for your consideration. Categories of Benefits and Costs To the extent feasible, you should quantify all pot ential incremental benefits and costs. You should report benefit and cost estimates within the following thr ee categories: monetized quantified, but not moneti zed; and qualitative, but not quantified or monetized. These categories are mutually exclusive and exhaust ive. Throughout the process of listing preliminary estimates of benefits and costs, agencies should av oid double-counting. This problem may arise if more than one way exists to express the same change in social welfare. Quantifying and Monetizing Benefits and Costs
You should develop quantitative estimates and conve rt them to dollar amounts if possible. In many case s, quantified estimates are readily convertible, with a little effort, into dollar equivalents.
Qualitative Benefits and Costs You should categorize or rank the qualitative effec ts in terms of their importance (e.g., certainty, l ikely magnitude, and reversibility). You should distingui sh the effects that are likely to be significant en ough to warrant serious consideration by decision makers from those that are likely to be minor.
Treatment of Benefits and Costs over Time 

# Page **27 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** You should present undiscounted streams of benefit and cost estimates (monetized and net) for each yea r of the analytic time horizon. You should present annua lized benefits and costs using real discount rates of 3 and 7 percent. The stream of annualized estimates shoul d begin in the year in which the final rule will be gin to have effects, even if the rule does not take effectimmediately. Please report all monetized effects i n 2001 dollars. You should convert dollars expressed in di fferent years to 2001 dollars using the GDP deflato r. Treatment of Risk and Uncertainty
You should provide expected-value estimates as well as distributions about the estimates, where such information exists. When you provide only upper and lower bounds (in addition to best estimates), you should, if possible, use the 95 and 5 percent confi dence bounds. Although we encourage you to develop estimates that capture the 5 of plausible outcomes for a particular alternative , detailed reporting of such distributions is not required, but should be availa ble upon request. The principles of full disclosure and transparency apply to the treatment of uncertainty. Where there is significant uncertainty and the resulting inference s and/or assumptions have a critical effect on the benefit and cost estimates, you should describe the benefit s and costs under plausible alternative assumptions . You may add footnotes to the table as needed to provide documentation and references, or to express import ant warnings. In a previous section, we identified some of the is sues associated with developing estimates of the va lue of reductions in premature mortality risk. Based on th is discussion, you should present alternative prima ry estimates where you use different estimates for val uing reductions in premature mortality risk.

Precision of Estimates Reported estimates should reflect, to the extent fe asible, the precision in the analysis. For example, an estimate of $220 million implies rounding to the ne arest $10 million and thus a precision of +/-$5 mil lion; similarly, an estimate of $222 million implies roun ding to the nearest $1 million and thus, a precisio n of +/- $0.5 million. Separate Reporting of Transfers You should report transfers separately and avoid th e misclassification of transfer payments as benefit s or costs. Transfers occur when wealth or income is red istributed without any direct change in aggregate s ocial welfare. To the extent that regulatory outputs refl ect transfers rather than net welfare gains to soci ety, you should identify them as transfers rather than benef its or costs. You should also distinguish transfers caused by Federal budget actions -- such as those stemming from a rule affecting Social Security payments -- from those that involve transfers between non-government al parties -- such as monopoly rents a rule may con fer on a private party. You should use as many categori es as necessary to describe the major redistributiv e effects of a regulatory action. If transfers have s ignificant efficiency effects in addition to distri butional effects, you should report them.
Effects on State, Local, and Tribal Governments, Sm all Business, Wages and Economic Growth You need to identity the portions of benefits, cost s, and transfers received by State, local, and trib al governments. To the extent feasible, you also shoul d identify the effects of the rule or program on sm all businesses, wages, and economic growth. Note that r ules with annual costs that are less than one billi on dollars are likely to have a minimal effect on econ omic growth.

Click here to access the form (93 kb)

**H. Effective Date** The effective date of this Circular is January 1, 2 004 for regulatory analyses received by OMB in supp ort of proposed rules, and January 1, 2005 for regulatory analyses received by OMB in support of final rules. In other words, this Circular applies to the regulatory analyses for draft proposed rules that are formal ly submitted to OIRA after December 31, 2003, and for draft final rules that are formally submitted to OI RA after December 31, 2004. (However, if the draft proposed rule is subject to the Circular, then the draft fin al rule will also be subject to the Circular, even if it is subm itted prior to January 1, 2005.) To the extent prac ticable, agencies should comply earlier than these effective dates. Agencies may, on a case-by-case basis, seeka waiver from OMB if these effective dates are impractical.

1 We use the term "proposed" to refer to any regulat ory actions under consideration regardless of the s tage of the regulatory process.

2 See Mishan EJ (1994), Cost-Benefit Analysis , fourth edition, Routledge, New York. 

# Page **28 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** 3See Coase RH (1960), Journal of Law and Economics , 3, 1-44.

4Mishan EJ (1994), Cost-Benefit Analysis , fourth edition, Routledge, New York.

5For a full discussion of CEA, see Gold, ML, Siegel , JE, Russell, LB, and Weinstein, MC (1996), Cost Effectiveness in Health and Medicine: The Report of the Panel on Cost-Effectiveness in Health and Medicine , Oxford University Press, New York.

6Gold ML, Siegel JE, Russell LB, and Weinstein MC ( 1996), Cost Effectiveness in Health and Medicine: The Report of the Panel on Cost-Effectiveness in Health and Medicine , Oxford University Press, New York, pp. 284-285.

7Russell LB and Sisk JE (2000), "Modeling Age Diffe rences in Cost Effectiveness Analysis", International Journal of Technology Assessment in Health Care , 16(4), 1158-1167.

8Pliskin JS, Shepard DS, and Weinstein MC (1980), " Utility Functions for Life Years and Health Status, " Operations Research , 28(1), 206-224.

9Hammitt JK (2002), "QALYs Versus WTP," Risk Analysis , 22(5), pp. 985-1002.

10 For the least stringent alternative, you should es timate the incremental benefits and costs relative to the baseline. Thus, for this alternative, the increment al effects would be the same as the corresponding t otals. For each alternative that is more stringent than th e least stringent alternative, you should estimate the incremental benefits and costs relative to the clos est less-stringent alternative.

11 See Hanemann WM (1991), American Economic Review , 81(3), 635-647.

12 See Kahneman D, Knetsch JL, and Thaler RH (1991), "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives 3(1), 192-206.

13 Consumer surplus is the difference between what a consumer pays for a unit of a good and the maximum amount the consumer would be willing to pay for tha t unit. It is measured by the area between the pric e and the demand curve for that unit. Producer surplus is the difference between the amount a producer is pa id for a unit of a good and the minimum amount the produce r would accept to supply that unit. It is measured by the area between the price and the supply curve for tha t unit.

14 See McConnell KE (1997), Journal of Environmental Economics and Management , 32, 22-37.

15 See Loomis JB (1992), Water Resources Research , 28(3), 701-705 and Kirchoff, S, Colby, BG, and LaFrance, JT (1997), Journal of Environmental Economics and Management , 33, 75-93.

16 Mishan EJ (1994), Cost-Benefit Analysis , fourth edition, Routledge, New York.

17 See Viscusi WK and Aldy JE, Journal of Risk and Uncertaint y (forthcoming) and Mrozek JR and Taylor LO (2002), Journal of Policy Analysis and Management , 21(2), 253-270.

18 Distinctions between "voluntary" and "involuntary" should be treated with care. Risks are best consid ered to fall within a continuum from "voluntary" to "inv oluntary" with very few risks at either end of thisrange. These terms are also related to differences in the cost of avoiding risks.

19 Graham JD (2003), Memorandum to the President’s Ma nagement Council, Benefit-Cost Methods and Lifesaving Rules. This memorandum can be found at http://www.whitehouse.gov/omb/inforeg/pmc_benefit_c ost_memo.pdf

20 Office of Information and Regulatory Affairs, OMB, Memorandum to the President’s Management Council, ibid.

21 For more information, see Dockins C., Jenkins RR, Owens N, Simon NB, and Wiggins LB (2002), Risk Analysis , 22(2), 335-346.

22 Committee on Risk Assessment of Exposure to Radon in Drinking Water, Board on Radiation Effects Research, Commission on Life Sciences (1996), Risk Assessment of Radon in Drinking Water, National Research Council, National Academy Press, Washingto n, DC. 

# Page **29 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/** 23 Portney PR and Weyant JP, eds. (1999), Discounting and Intergenerational Equity, Resources for the Future, Washington, DC.

24 Weitzman ML In Portney PR and Weyant JP, eds. (199 9), Discounting and Intergenerational Equity , Resources for the Future, Washington, DC.

25 In some contexts, the word "variability" is used a s a synonym for statistical variation that can be d escribed by a theoretically valid distribution function, whe reas "uncertainty" refers to a more fundamental lac k of knowledge. Throughout this discussion, we use the t erm "uncertainty" to refer to both concepts.

26 When disseminating information, agencies should fo llow their own information quality guidelines, issu ed in conformance with the OMB government-wide guidelines (67 FR 8452, February 22, 2002).

27 Clemen RT (1996), Making Hard Decisions: An Introduction to Decision Analysis , second edition, Duxbury Press, Pacific Grove.

28 The purpose of Delphi methods is to generate suita ble information for decision making by eliciting ex pect judgment. The elicitation is conducted through a su rvey process which eliminates the interactions betw een experts. See Morgan MG and Henrion M (1990), Uncertainty: A Guide to Dealing with Uncertainty in Quantitative Riskand Policy Analysis , Cambridge University Press.

29 Cooke RM (1991), Experts in Uncertainty: Opinion and Subjective Prob ability in Science , Oxford University Press.

30 The Regulatory Flexibility Act (5 U.S.C. 603(c), 6 04).

Top of Page 

# Page **30 of**  **30 Circular A** 

**- 4 | The White House** 

**6/ 25/** **2015 https://www.whitehouse.gov/omb/circulars_a004_a** 

**- 4/**