Document ID: EPA-HQ-OAR-2007-0225-0013
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2007-08-02T04:00Z

Chapter 1: Introduction and Background							

Synopsis

This document estimates the incremental costs and monetized human health
and welfare benefits of attaining possible revised primary ozone
National Ambient Air Quality Standards (NAAQS) nationwide.  This
document contains illustrative analyses that consider limited emission
control scenarios that states, tribes and regional planning
organizations might implement to achieve a revised ozone NAAQS.  In some
cases, EPA weighed the available empirical data to make judgments
regarding the proposed attainment status of certain urban areas in the
future.  According to the Clean Air Act, EPA must use health-based
criteria in setting the NAAQS and cannot consider estimates of
compliance cost.  This Regulatory Impact Analysis (RIA) is intended both
to provide the public a sense of the benefits and costs of meeting new
alternative ozone NAAQS, and to meet the requirements of Executive Order
12866.  

	Background

Two sections of the Clean Air Act (“Act”) govern the establishment
and revision of NAAQS.  Section 108 (42 U.S.C. 7408) directs the
Administrator to identify pollutants which “may reasonably be
anticipated to endanger public health or welfare,” and to issue air
quality criteria for them.  These air quality criteria are intended to
“accurately reflect the latest scientific knowledge useful in
indicating the kind and extent of all identifiable effects on public
health or welfare which maybe expected from the presence of [a]
pollutant in the ambient air.”  Ozone is one of six pollutants for
which EPA has developed air quality criteria.  

Section 109 (42 U.S.C. 7409) directs the Administrator to propose and
promulgate “primary” and “secondary” NAAQS for pollutants
identified under section 108.  Section 109(b)(1) defines a primary
standard as “the attainment and maintenance of which in the judgment
of the Administrator, based on [the] criteria and allowing an adequate
margin of safety, [are] requisite to protect the public health.”  A
secondary standard, as defined in section 109(b)(2), must “specify a
level of air quality the attainment and maintenance of which in the
judgment of the Administrator, based on [the] criteria, [are] requisite
to protect the public welfare from any known or anticipated adverse
effects associated with the presence of [the] pollutant in the ambient
air.”  Welfare effects as defined in section 302(h) [42 U.S.C 7602(h)]
include but are not limited to “effects on soils, water, crops,
vegetation, manmade materials, animals, wildlife, weather, visibility
and climate, damage to and deterioration of property, and hazards to
transportation, as well as effects on economic values and on personal
comfort and well-being.” 

Section 109(d) of the Act directs the Administrator to review existing
criteria and standards at 5-year intervals.  When warranted by such
review, the Administrator is to retain or revise NAAQS.  After
promulgation or revision of the NAAQS, the standards are implemented by
the States.  

 

1.2  	Role of the Regulatory Impact Analysis in the NAAQS Setting
Process

1.2.1 Legislative roles

In setting primary ambient air quality standards, EPA’s responsibility
under the law is to establish standards that protect public health.  The
Clean Air Act requires EPA, for each criteria pollutant, to set a
standard that protects public health with “an adequate margin of
safety.”  As interpreted by the Agency and the courts, the Act
requires EPA to create standards based on health considerations only. 
Economic factors cannot be considered.  

The prohibition against the consideration of cost in the setting of the
primary air quality standard, however, does not mean that costs or other
economic considerations are unimportant or should be ignored.  The
Agency believes that consideration of costs and benefits are essential
to making efficient, cost effective decisions for implementation of
these standards.  The impact of cost and efficiency are considered by
states during this process, as they decide what timelines, strategies,
and policies make the most sense.  Thus, this RIA is intended to inform
the public about the potential costs and benefits that may result when a
new ozone standard is implemented, but it is not relevant to
establishing the standards themselves.  

1.2.2 Role of Statutory and Executive Orders

There are several statutory and executive orders that dictate the manner
in which EPA considers rulemaking and public documents.  This document
is separate from the NAAQS decision making process, but there are
several statutes and executive orders that still apply to any public
documentation.  A summary of the pertinent orders is included in
Appendix 1.  The analysis required by these statutes and executive
orders is presented in Chapter 9.

EPA presents this analysis pursuant to Executive Order 12866 and the
guidelines of OMB Circular A-4.   These documents present guidelines for
EPA to assess the benefits and costs of the selected regulatory option,
as well as one less stringent and one more stringent option. OMB
circular A-4 also requires both a cost-benefit, and a cost-effectiveness
analysis for rules where health is the primary effect.

1.2.3 Market Failure or Other Social Purpose

OMB Circular A-4 indicates that one of the reasons a regulation such as
this one may be issued is to address market failure. The major types of
market failure include: externality, market power, and inadequate or
asymmetric information.  Correcting market failures is a reason for
regulation, but it is not the only reason.  Other possible
justifications include improving the functioning of government, removing
distributional unfairness, or promoting privacy and personal freedom.

An externality occurs when one party’s actions impose uncompensated
benefits or costs on another party.  Environmental problems are a
classic case of externality.  For example, the smoke from a factory may
adversely affect the health of local residents while soiling the
property in nearby neighborhoods.  If bargaining was costless and all
property rights were well defined, people would eliminate externalities
through bargaining without the need for government regulation.  From
this perspective, externalities arise from high transaction costs and/or
poorly defined property rights that prevent people from reaching
efficient outcomes through market transactions.

Firms exercise market power when they reduce output below what would be
offered in a competitive industry in order to obtain higher prices. 
They may exercise market power collectively or unilaterally.  Government
action can be a source of market power, such as when regulatory actions
exclude low-cost imports.  Generally, regulations that increase market
power for selected entities should be avoided.  However, there are some
circumstances in which government may choose to validate a monopoly.  If
a market can be served at lowest cost only when production is limited to
a single producer of local gas and electricity distribution services, 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, it should be noted that
technological advances often affect economies of scale.  This can, in
turn, transform what was once considered a natural monopoly into a
market where competition can flourish.

Market failures may also result from inadequate or asymmetric
information.  Because information, like other goods, is costly to
produce and disseminate, an evaluation will need to do more than
demonstrate the possible existence of incomplete or asymmetric
information.  Even though the market may supply less than the full
amount of information, the amount it does supply may be reasonably
adequate and therefore not require government regulation.  Sellers have
an incentive to provide information through advertising that can
increase sales by highlighting distinctive characteristics 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.

There are justifications for regulations in addition to correcting
market failures.  A regulation may be appropriate when there are clearly
identified measures that can make government operate more efficiently. 
In addition, Congress establishes some regulatory programs to
redistribute resources to select groups.  Such regulations should be
examined to ensure that they are both effective and cost-effective. 
Congress also authorizes some regulations to prohibit discrimination
that conflicts with generally accepted norms within our society. 
Rulemaking may also be appropriate to protect privacy, permit more
personal freedom or promote other democratic aspirations.

From an economics perspective, setting an air quality standard is a
straightforward case of addressing an externality, in this case where
firms are emitting pollutants which cause health and environmental
problems without compensation for those suffering the problems. 
Although this economics perspective is reflected in Clean Air Act
legislative history, there is also legislative history in which members
of Congress stated that the purpose of setting national air quality
standards solely based on health considerations (without considering
costs) is to protect a fundamental right of Americans to be protected
from air pollution levels that adversely affect their health. Setting a
standard with a reasonable margin of safety attempts to place the cost
of control on those who emit the pollutants and lessens the impact on
those who suffer the health and environmental problems from higher
levels of pollution.

1.2.4 Illustrative Nature of the Analysis

This ozone NAAQS RIA is an illustrative analysis that provides useful
insights into a limited number of emissions control scenarios that
states might implement to achieve a revised ozone NAAQS.  Because states
are ultimately responsible for implementing strategies to meet any
revised standard, the control scenarios in this RIA are necessarily
hypothetical in nature.  They are not forecasts of expected future
outcomes.  Important uncertainties and limitations, are documented in
the relevant portions of the analysis.

The illustrative goals of this RIA are somewhat different from other EPA
analyses of national rules, or the implementation plans states develop,
and the distinctions are worth brief mention.  This RIA does not assess
the regulatory impact of an EPA-prescribed national or regional rule
such as the Clean Air Interstate Rule, nor does it attempt to model the
specific actions that any state would take to implement a revised ozone
standard.  This analysis attempts to estimate the costs and human and
welfare benefits of cost-effective implementation strategies which might
be undertaken to achieve national attainment of new standards.  These
hypothetical strategies represent a scenario where states use one set of
cost-effective controls to attain a revised ozone NAAQS.  Because
states—not EPA—will implement any revised NAAQS, they will
ultimately determine appropriate emissions control scenarios.  State
implementation plans would likely vary from EPA’s estimates due to
differences in the data and assumptions that states use to develop these
plans.

The illustrative attainment scenarios presented in this RIA were
constructed with the understanding that there are inherent uncertainties
in projecting emissions and controls.  Furthermore, certain emissions
inventory, control, modeling and monitoring limitations and
uncertainties inhibit EPA’s ability to model full attainment in all
areas.  An additional limitation is that this analysis is carried out
for the year 2020, before some areas are required to reach the current
ozone standard.  Section 1.3.1 below explains why EPA selected the
analysis year of 2020.  Despite these limitations, EPA has used the best
available data and methods to produce this RIA.

	Overview and Design of the RIA

This Regulatory Impact Analysis evaluates the costs and benefits of
hypothetical national strategies to attain several potential revised
primary ozone standards.  The document is intended to be straightforward
and written for the lay person with a minimal background in chemistry,
economics, and/or epidemiology.  Figure 1.1 provides an illustration of
the framework of this RIA. 

 

Figure 1.1: the process used to create this RIA

Baseline and years of analysis

The analysis year for this regulatory impact analysis is 2020, which
allows EPA to build the ozone RIA analysis on the previously completed
PM NAAQS RIA analysis.  Many areas will attain the current ozone
standard or any alternative standard by 2020.  For purposes of this
analysis, we assume attainment by 2020 for all areas except for two
areas in California with unique circumstances described in chapter 4.  
Some areas for which we assume 2020 attainment may in fact need more
time to meet one or more of the analyzed standards, while others will
need less time.  This analysis does not prejudge the attainment dates
that will  ultimately be assigned to individual areas under the Clean
Air Act, which contains a variety of potential dates and flexibility to
move to later dates (up to 20 years), provided that the date is as
expeditious as practicable.  

The methodology first estimates what baseline ozone levels might look
like in 2020 with existing Clean Air Act programs, including application
of controls to meet the current ozone standard and the newly revised PM
NAAQS standard. and then models how ozone levels would be predicted to
change following the application of additional controls to reach a
tighter standard.  This allows for an analysis of the incremental change
between the current standard and an alternative standard.  This timeline
is also consistent with expected attainment in 2020 of the revised
Particulate Matter (PM) NAAQS covered in the PM NAAQS RIA issued in
September 2006.  As explained in Chapter 2, since one of  the principal
precursors for ozone, NOx, is also a precursor for PM, it is important
that we account for the impact on ozone concentrations of  NOx controls
used in the hypothetical control scenario used in the PM NAAQS RIA, so
as to avoid double counting the benefits and costs of these controls.

1.3.2 Control Scenarios considered in this RIA 

A hypothetical control strategy was developed for an alternative 8-hr
ozone standard of 0.070 ppm, in order to illustrate one national
scenario for how such a tighter standard might be met.   First, EPA
modeled the predicted air quality changes that would result from the
application of emissions control options that are known to be available
to different types of sources in portions of the country that were
predicted to be in non-attainment with 0.070 ppm in 2020.  However,
given the limitations of current technology and the amount of
improvement in air quality needed to reach a standard of 0.070 ppm in
some areas, it was also expected that modeling these known controls
would not reduce ozone concentrations sufficiently to allow all areas to
reach the more stringent standard.  This required a second step to
calculate the number of tons of emission reductions that would be needed
to reach full attainment.  This required calculating a conversion factor
to quantify the estimated tons of emissions that needed to be reduced to
generate a particular change in air quality concentrations of ozone (in
ppm).  This factor, coupled with the estimated remaining increment (in
ppm) of ozone necessary to reach the alternative standard in each area,
allowed for an extrapolation of how many tons of additional emissions
reductions were estimated to be needed to reach the alternate standard.

1.3.3 Evaluating Costs and Benefits

Applying a two step methodology for estimating emission reductions
needed to reach full attainment enabled EPA to evaluate nationwide costs
and benefits of attaining a tighter ozone standard, albeit with
substantial additional uncertainty regarding the second step estimates.
Costs and benefits are presented in this RIA in the same two steps that
emissions reductions were estimated.  First, the costs associated with
applying known controls were quantified, and presented along with an
estimate of their economic impact.  Second, EPA estimated costs of the
additional tons of extrapolated emission reductions estimated needed to
reach full attainment.  The analysis of the benefits of setting an
alternative standard included both mortality and morbidity calculations
matching the costs of applying known controls and then the benefits of
reaching full attainment.  The costs and monetized benefits were then
compared to provide an estimate of net benefits nationwide.

The RIA presents two sets of results for estimated costs and benefits. 
The first reflects full attainment in 2020 in all locations except two
areas of California which are not required to attain the current
standard by 2020.  For the national attainment estimate in 2020 these
two California areas have costs and benefits estimated for where they
should be in 2020 (their “glidepath” target).  The second estimate,
for California only, presents the additional costs and benefits that
might result from California fully attaining the standards in a year
beyond 2020 (glidepath estimate for 2020, plus further increment to full
attainment after 2020, added together for California total).

To streamline this RIA, it refers to several previously published
documents, including two technical documents EPA produced to prepare for
the ozone NAAQS proposal.  The first was a Criteria Document created by
EPA’s Office of Research and Development (published in 2006), which
presented the latest available pertinent information on atmospheric
science, air quality, exposure, dosimetry, health effects, and
environmental effects of ozone.  The second was a “Staff Paper”
(published in 2007) that evaluated the policy implications of the key
studies and scientific information contained in the Criteria Document,
as well as presented a risk assessment for various standard levels.  The
Staff Paper also includes staff conclusions and recommendations to the
Administrator regarding potential revisions to the standards.  In
addition to the Criteria Document and Staff Paper, this ozone RIA relies
heavily on the 2006 RIA for particulate matter (PM).  Many of the models
and methodology used here are the same as in the PM NAAQS RIA.  This RIA
identifies methodologies used to generate data, but refers readers to
the PM NAAQS RIA for many technical details.  The focus of this RIA is
to explain in detail how the approach or methodologies have changed from
the PM NAAQS RIA analysis, and to present the results of the
methodologies employed in this analysis, which compares attainment of
tighter levels of the ozone standard to the baseline of the current
standard.

	Ozone Standard Alternatives Considered

Per Executive Order 12866 and the guidelines of OMB Circular A-4, this
RIA presents analyses of the range of standards proposed by the
Administrator in the Notice of Proposed Rulemaking (0.070 – 0.075
ppm), as well as one more stringent option (0.065 ppm).  The less
stringent option is the baseline, or the current primary standard for
ozone (0.08 parts per million (ppm), calculated as the 3-year average of
the annual fourth-highest daily maximum 8-hour average ozone
concentration measured at each monitor within an area -- effectively
0.084 ppm using current data rounding conventions).  

The EPA Administrator received recommendations to revise the current
primary ozone standard from both the Clean Air Act Scientific Advisory
Council (CASAC) and EPA staff.  Both CASAC and staff expressed the view
that the current standard was not adequately protective of human health
and should be tightened to provide additional public health protection. 
Specifically, CASAC recommended that “…the current primary ozone
NAAQS [should] be revised and that the level that should be considered
for the revised standard be from 0.060 to 0.070 ppm.”   In the Staff
Paper, EPA staff suggested a slightly broader range, recommending
“that consideration be given to a standard level within the range of
somewhat below 0.080 ppm to 0.060 ppm.”   Both of these
recommendations encourage maintaining the same averaging time and form
as the current standard.  Additionally, both recommendations suggested
it was appropriate to specify the level of the standard out to three
significant digits.  

In the concurrent ozone NAAQS proposal, EPA proposes to revise the
8-hour standard to a level within the range of 0.070 to 0.075 ppm to
provide increased protection for children and other sensitive
populations against an array of ozone-related adverse health effects
that range from decreased lung function and increased respiratory
symptoms to serious indicators of respiratory morbidity including
emergency department visits and hospital admissions for respiratory
causes, and possibly cardiovascular-related morbidity as well as total
nonaccidental and cardiopulmonary mortality.  The EPA also proposes to
specify the level of the primary standard to the nearest thousandth ppm.
 

This RIA presents benefit and cost estimates for both ends of the
proposal range of 0.070 to 0.075 ppm.  It also assesses the costs and
benefits of attaining one more stringent standard option (0.065 ppm). 
Since EPA is not considering loosening the standard, the less stringent
option to the proposed range is the current standard itself.  Since this
RIA presents an analysis of the costs and benefits incremental to the
current standard, retaining the current standard would have no
additional incremental costs or benefits.  

For the secondary standard, EPA proposes to revise the current 8-hour
standard with one of two options to provide increased protection against
ozone-related adverse impacts on vegetation and forested ecosystems. 
One option is to replace the current standard with a cumulative,
seasonal standard expressed as an index (called the W126) of the annual
sum of weighted hourly concentrations, cumulated over 12 hours per day
(8:00 am to 8:00 pm) during the consecutive 3-month period within the
ozone season with the maximum index value, set at a level within the
range of 7 to 21 ppm-hours.  The other option is to make the secondary
standard identical to the proposed primary 8-hour standard in all
respects.  This RIA provides a limited discussion of an alternative
secondary standard showing the number of additional counties with
monitors which may violate the standards depending on the level of the
secondary standard.  Costs and benefits of attaining the different
levels of the secondary were not estimated in this RIA; this analysis
focused on the health benefits of the primary standard.  An analysis of
a separate secondary will be included in the final RIA as appropriate.
Hereafter, any reference to the ozone standard will be assumed to be the
primary standard, unless otherwise noted.

1.5 	References: 

Henderson, R. 2006. October 24, 2006.  Letter from CASAC Chairman Rogene
Henderson to EPA Administrator Stephen Johnson, , EPA-CASAC-07-001.

U.S. EPA. 1970. Clean Air Act. 40CFR50.

U.S. EPA. 2006 .Air Quality Criteria for Ozone and Related Photochemical
Oxidants (Final). U.S. Environmental Protection Agency, Washington, DC,
EPA/600/R-05/004aF-cF, 

U.S EPA. 2007. Review of the National Ambient Air Quality Standards for
Ozone: Policy Assessment of Scientific and Technical Information. OAQPS
Staff Paper. North Carolina. EPA-452/R-07-003

Pertinent Statutory and Executive Orders

1. Executive Order 12866: Regulatory Planning and Review 

  HYPERLINK
"http://www.archives.gov/federal-register/executive-orders/pdf/12866.pdf
" 
http://www.archives.gov/federal-register/executive-orders/pdf/12866.pdf 

2. Paperwork Reduction Act, 44 U.S.C. 3501 et seq

  HYPERLINK
"http://www.archives.gov/federal-register/laws/paperwork-reduction/" 
http://www.archives.gov/federal-register/laws/paperwork-reduction/ 

3. Regulatory Flexibility Act, 5 U.S.C. 601 et seq.

  HYPERLINK
"http://www.archives.gov/federal-register/laws/regulatory-flexibility/" 
http://www.archives.gov/federal-register/laws/regulatory-flexibility/ 

4. Unfunded Mandates Reform Act, Public Law 104-4

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publ
ic_laws&docid=f:publ4.104.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publi
c_laws&docid=f:publ4.104.pdf  

5. Executive Order 13132: Federalism, Executive Order 13132

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1999_register
&docid=fr10au99-133.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1999_register&
docid=fr10au99-133.pdf  

6. Executive Order 13175: Consultation and Coordination with Indian
Tribal Governments 

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2000_register
&docid=fr09no00-167.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2000_register&
docid=fr09no00-167.pdf  

7.  Executive Order 13045: Protection of Children from Environmental
Health & Safety Risks 

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1997_register
&docid=fr23ap97-130.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1997_register&
docid=fr23ap97-130.pdf  

8.  Executive Order 13211: Actions that Significantly Affect Energy
Supply, Distribution or Use 

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register
&docid=fr22my01-133.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register&
docid=fr22my01-133.pdf  

9. National Technology Transfer Advancement Act, Public Law No. 104-113,
§12(d)

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publ
ic_laws&docid=f:publ113.104.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publi
c_laws&docid=f:publ113.104.pdf  

10. Executive Order 12898: Federal Actions to Address Environmental
Justice in Minority Populations and Low-Income Populations 

  HYPERLINK
"http://www.archives.gov/federal-register/executive-orders/pdf/12898.pdf
" 
http://www.archives.gov/federal-register/executive-orders/pdf/12898.pdf 

 U.S. Office of Management and Budget. Circular A-4, September 17, 2003.
Found on the Internet at <  HYPERLINK
"http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf" 
http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf >. 

 (Henderson, 2006c, p. 5).  Henderson, R. (2006c) Letter from CASAC
Chairman Rogene Henderson to EPA Administrator Stephen Johnson, October
24, 2006, EPA-CASAC-07-001.

 U.S EPA. 2007. Review of the National Ambient Air Quality Standards for
Ozone: Policy Assessment of Scientific and Technical Information. OAQPS
Staff Paper. North Carolina. EPA-452/R-07-003

 PAGE   

 PAGE   7 

 PAGE   

 PAGE   10 

 PAGE   

Estimate 2020 Emissions

Model 2020 Baseline Air Quality

Identify Areas Projected to Exceed Alternate Standard and  Calculate
Needed Reduction Targets

Select Control Strategies

Estimate Modeled                    Control Costs

Estimate Economic Impacts

Estimate Modeled Human Health Effects and Dollar Benefits

Determine Post-Control Air Quality and Compare pre- and post-control
strategy air quality 

(partial attainment in most areas)

Extrapolate Tons to Reach Full Attainment and Compare pre-and post-
extrapolation air quality

Estimate Extrapolated                  Control Costs

Estimate Extrapolated Human Health Effects and Dollar Benefits