Environmental Regulation: EPA Should Improve Adherence to Guidance for Selected Elements of Regulatory Impact Analyses
Released: 2014-08-11T00:00:00

Letter

Background

Regulation is one of the principal tools the federal government uses to implement public policy. Agencies’ rulemaking processes generally share three basic phases: (1) initiation of rulemaking actions, (2) development of proposed rules, and (3) issuance of final rules. Agencies’ rulemaking processes include opportunities for internal and external deliberations and reviews, and, as appropriate, procedures for the development of an RIA. Figure 1 provides an overview of these rulemaking phases, including how agencies incorporate RIAs into the overall rulemaking process, when applicable.

During initiation, agency officials identify issues that may result in a rulemaking, including those resulting from statutory requirements or management agendas, for example. During this phase, agencies gather information that allows them to determine the need for a rulemaking. The second phase of the rulemaking process starts when an agency begins developing the proposed rule. During this phase, an agency will draft the rule and begin to address the analytical and procedural requirements, including commencing work on the RIA, when applicable. Rule development generally includes input from a wide range of disciplines, including engineers, scientists, economists, lawyers, and policy and subject matter experts, among others. For each rule the agency or the Administrator of the Office of Information and Regulatory Affairs (OIRA) within OMB identifies as an economically significant regulatory action, the agency develops the proposed rule and associated RIA and submits them to OIRA for formal review. After OIRA completes its review, and the agency incorporates resulting changes, the agency publishes the proposed rule in the Federal Register for public comment. In the third phase, development of the final rule, the agency responds to public comments, in some cases modifying the proposed rule in response to the comments. This phase also includes further internal and external review. The agency submits the final RIA and rule to OIRA for review before it publishes the final rule.

While agencies’ rulemaking processes generally share these basic process steps, the agencies may vary in managing them. EPA uses the Action Development Process (ADP)—a series of steps the agency follows when it develops actions such as regulations and policy statements—to ensure that the agency adequately addresses scientific, economic, and policy issues at appropriate stages. In addition, the ADP provides opportunities for senior management to provide guidance and direction to staff and helps ensure input from across EPA offices. For economically significant rules, ADP steps generally include forming a workgroup of representatives from various EPA offices who will develop the action; preparing and executing an analytic blueprint for analyses needed to support the action; receiving early guidance from management; developing and selecting options that best achieve the goal of the action; drafting the proposed rule; and conducting final agency review. The lead program office uses the ADP to direct the workgroup and their managers who provided policy direction and to help ensure the integrity of the process. In addition, EPA’s National Center for Environmental Economics provides guidance for performing economic analysis and performs a regulatory review function for the agency by reviewing economic analysis underlying significant regulatory actions. It also conducts research and development on methods for analyzing economic effects.

Overall, OMB guidance states RIAs should measure the benefits and costs of a proposed action and the alternatives in comparable terms to ensure a reasonable determination of net benefits. When estimating net benefits, the guidance states that agencies should generally estimate benefits and costs that accrue to society, including those that accrue only to private entities. In addition, agencies should measure benefits and costs against a baseline that generally describes the expected state of the world without the regulation. The guidance also states that agencies should monetize benefits and costs whenever possible. Where agencies cannot monetize or quantify benefits and costs, guidance directs agencies to present the relevant qualitative information along with a description of the unquantified effects, and a discussion of the strengths and limitations of the qualitative information.

According to OMB guidance, the 7 percent rate approximates the average before-tax rate of return on capital investments in the private sector, whereas the 3 percent rate approximates the rate at which consumers discount future consumption flows to their present value. Generally, using a higher discount rate gives less weight to future year benefits and gives more weight to near-term benefits. reasonably obtainable scientific, technical, and economic information. OMB guidance allows agencies to use professional judgment regarding the thoroughness of the analysis, while stressing the importance of full disclosure, including whether and how clearly the agencies explained their methods.

OMB last revised its guidance for regulatory analysis in 2003. Since that time, greater emphasis has been placed on agencies’ ability to analyze certain effects—including the effects of regulations on employment and reductions in greenhouse gas emissions, such as carbon dioxide—that OMB’s Circular A-4 does not specifically address. To ensure consistency across agencies in estimating benefits and costs related to reducing greenhouse gas emissions, in 2009, OMB co-convened an interagency working group to assess the best methods for valuing the benefits of reducing carbon dioxide emissions, known as the social cost of carbon. The interagency working group produced a technical support document that summarized its work, including the assumptions and uncertainties that underlie the range of estimates it developed for quantifying the social cost of carbon.

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

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

EPA Used RIAs to Inform Decision Making

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

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

All seven of the RIAs we reviewed generally adhered to OMB guidance calling for statements of need for the proposed regulatory actions, but these statements were not always clear. OMB guidance states that an agency must demonstrate the need for the proposed action before recommending regulatory action and only promulgate those required by law, necessary to interpret the law, or made necessary by a compelling need, such as material failures of private markets to protect or improve the health and safety of the public or the environment. Accordingly, the guidance states that the RIA should include a statement of need that identifies and explains the problem that the proposed regulation seeks to address—for example, a market failure, or some other compelling public need.

In several of the RIAs we reviewed, EPA clearly explained the problem the regulation intended to address and did so early in the analysis. For example, in the ELG RIA, EPA clearly identified and explained the market failure the regulation was intended to address and the authority under which it was promulgated. However, in other RIAs, EPA provided a less explicit explanation. For example, the CISWI RIA included information about the need for the rule, but it did not explicitly describe the problem the rule sought to address. Similarly, in the RFS2 RIA, EPA explained the need for the proposed rule—to assess the projected impacts of the renewable fuel volumes established through the Energy Independence and Security Act of 2007—but did not describe the problem the rule intended to address. According to EPA officials, in both of these cases, the preamble of the final rule published in the Federal Register included this information. Nonetheless, without a clear description of the problem the regulation is intended to address in the RIA, the context and rationale for the analysis is unclear. When the agency does not clearly describe the necessity of the action in the RIA, a third-party reader can not readily evaluate whether or not the proposed alternative addresses the intended need.

Each RIA we reviewed provided an executive summary, including a standardized accounting statement with information on expected benefits and costs in accordance with OMB guidance. Recognizing that executive summaries need to reflect the unique circumstances of each rule, we found that the quality and type of information included in the executive summary was inconsistent across the RIAs. For example, two of the standardized accounting statements—those for CISWI and Boiler MACT—clearly summarized the overall benefits and costs for the selected option and regulatory alternative in the executive summary and compared costs, benefits, and net benefits in a table. Other RIAs, however, did not clearly present this information. For example, EPA listed, but it did not explain the benefits, costs, and other economic effects included in the RFS2 accounting statement. In addition, EPA did not clearly present a net benefits calculation or identify the discount rates used for the estimates. Also, while EPA provided the chapter and section directing readers to more detailed support for the information found in the executive summary, the supporting information was challenging to identify and locate in lengthy chapters, particularly where numbers differed between the executive summaries and the support. In its review of the draft RIA, OMB also raised concerns about the clarity of EPA’s presentation of information in the accounting table and provided suggestions for improving its clarity by, for example, adding details in the executive summary explaining each row in the accounting summary statement. When EPA does not present summary-level information in RIAs clearly, accurately, or completely, as called for in OMB guidance, the executive summaries do not provide decision makers and the public with a simple and understandable summary of otherwise lengthy and complex information underlying the rulemaking.

Moreover, for the RIAs we reviewed, EPA did not always provide or clearly present all of the information a reader might need to understand the analysis. OMB guidance states that RIAs should communicate the complex and technical information that supports EPA’s regulatory decisions to Congress and the public. Specifically, OMB guidance states that RIAs should enable a third party to understand how the agency arrived at its estimates and conclusions (i.e., clarity and transparency), and Executive Order 12866 states that agencies should provide information to the public in plain, understandable language. However, in the Lead Opt-Out RIA, EPA neither included nor made readily apparent the support for certain benefit estimates in the RIA document, nor did it clearly explain in the RIA the rationale for the regulatory option it chose. Further, in the CISWI RIA, EPA clearly presented benefits and costs, but it did not explain the rationale for selecting an alternative that did not yield the greatest net benefits. EPA officials told us they included this information in the preamble of the rule and technical memoranda that were not referenced in the RIA. EPA officials said it was not necessary to include such information in the RIAs because it appeared in these other documents, which are also part of the rulemaking record. However, OMB staff told us they view the RIAs as stand-alone documents that should include relevant information or incorporate references to other documents, so that the support for agency decisions is understandable. Because the RIAs we reviewed did not always provide or clearly present key information, the RIAs’ usefulness for providing readers with a clear understanding of the analyses EPA conducted varied.

Senior EPA officials said the RIAs go through several reviews within the agency’s ADP, and EPA’s National Center for Environmental Economics sometimes participates in reviewing RIAs during their development. Under the federal standards for internal control, federal agencies are to employ control activities, such as management review, to help ensure that management’s directives are carried out to achieve effective results. However, the agency’s regulatory reviews did not fully ensure the accuracy, transparency, and clarity of information presented in, or among, the RIAs we reviewed. As a result, EPA has not fulfilled its responsibility to provide the public with a clear explanation of the economic information supporting its decision-making process consistent with OMB guidance. We identified additional examples of limited transparency and clarity that specifically relate to other selected elements of the RIAs we reviewed that we describe below.

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

For each of the seven RIAs we reviewed, EPA generally adhered to OMB guidance for analyzing regulatory alternatives, but its consideration of alternatives and presentation of the underlying analysis varied. For five of the seven RIAs, EPA analyzed more than one alternative, but, in two of those cases, EPA analyzed only the selected option and one other alternative, while, in the other three cases, it analyzed a broader range of alternatives. OMB guidance recommends that agencies consider and present a range of alternatives in an economic analysis, which could involve varying the level of stringency, compliance dates, or requirements for different-sized firms, for example. According to the guidance, considering a range of alternatives can enhance an agency’s ability to identify the alternative that yields the greatest net benefits. However, the guidance also states that the number and choice of alternatives selected for detailed analysis is a matter of judgment and, that in making this decision, analysts should consider a balance between thoroughness and practical limits on analytical capacity.

For the two RIAs in which EPA considered the selected option and one other alternative, CISWI and Boiler MACT, EPA considered the two options to which the law specifically refers. Specifically, under the Clean Air Act, EPA sets emission standards based on the maximum achievable control technology or “MACT” in a two-step process. First, EPA identifies the “MACT floor,” which is the maximum achievable reduction in emissions of certain air pollutants. Second, EPA selects as its standard either the applicable MACT floor identified in the first stage or a “beyond the floor” limitation more stringent than the MACT if such a standard is achievable in light of costs and other considerations.

In three other RIAs—ELG, Medium- and Heavy-Duty GHG, and Lead Opt-Out—EPA considered a broader range of alternatives. For example, in the Medium- and Heavy-Duty GHG analysis, EPA considered five alternatives along a continuum of stringency, with two alternatives that were less stringent than the selected regulatory alternative and two that were more stringent. EPA concluded in the RIA that the most stringent alternative—the one that would reduce the most emissions—would require advanced technologies that were likely not feasible. Nonetheless, EPA officials said information on this alternative was useful for comparing options in the rulemaking and for informing future decisions.

For the remaining two RIAs—RFS2 and SPCC—EPA presented information for only the selected option. For RFS2, EPA officials said they did not consider analyzing other alternatives because the key purpose of the RIA was to summarize the impacts of a congressional mandate. Specifically, the Energy Independence and Security Act of 2007 specified the volumes of renewable fuels that must be used in transportation fuel. According to EPA officials, committing agency resources to analyzing additional scenarios was not justifiable given their limited discretion for selecting other regulatory options under the mandate. For SPCC, EPA considered alternatives for several of the amendments in the rulemaking; however, it did not present them in the RIA. EPA officials said the agency presented the alternatives in an RIA that supported an earlier rulemaking, subsequently amended by the SPCC rule we reviewed and, therefore, did not need to include them in the current version. By not including this information, or at least a clear reference to it in the more recent RIA, it was difficult to discern that EPA considered regulatory alternatives and whether the selected approach provided the greatest net benefit.

As discussed above, for certain rules, EPA officials said they had limited discretion in the type of regulatory alternative the agency could implement. Where applicable, OMB guidance directs agencies to consider alternative regulatory approaches that rely on economic incentives (market-based approaches) such as fees, or informational remedies such as product labeling requirements, and offers increased flexibility because these approaches are generally more cost effective than prescriptive approaches. Of the seven RIAs we reviewed, however, only the Medium- and Heavy-Duty GHG RIA considered market-based techniques. For example, under the alternatives analyzed in this RIA, truck manufacturers could earn credits if they adopted certain emission control technologies, providing some incentive to use more advanced technologies.

In addition, several RIAs presented limited information about the regulatory alternatives EPA analyzed. OMB guidance states that agencies should clearly identify alternatives and explain reasons for selecting one alternative over another. Some RIAs did not clearly present this information or presented only limited information. For example, EPA did not describe the alternatives it analyzed in the Boiler MACT RIA or identify the associated net benefits for each of the alternatives in the Lead Opt-Out RIA. As a result, it was difficult to determine what alternatives the agency considered and whether it selected the alternative that would provide the greatest net benefit. For CISWI, EPA selected an alternative that did not maximize net benefits and did not explain its rationale in the RIA. Instead, EPA officials directed us to a separate technical document that clearly explained the rationale. By not including such an explanation in the RIA, or providing a reference to the technical document containing the rationale, EPA did not fulfill the direction in OMB guidance to provide a transparent pathway for understanding the rationale for its selected regulatory approach.

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

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

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

For four of the seven RIAs we reviewed, EPA clearly described economic baselines from which it measured benefits and costs, but it did not do so for the other three. OMB guidance identifies the need for a clearly stated baseline to properly evaluate the benefits and costs of regulatory alternatives. EPA clearly described and explicitly identified the baselines used for the RFS2, SPCC, Medium- and Heavy-Duty GHG, and ELG RIAs, but it did not do so for the CISWI, Boiler MACT, and Lead Opt-Out RIAs. As a result, we had to speak with EPA officials to understand the baseline the agency used in these analyses. Without clearly presenting baselines in these three RIAs, EPA did not fulfill its obligation to transparently provide information necessary for a third party to evaluate the agency’s estimates and conclusions.

According to OMB guidance, baselines should reflect the expected state of the world without the regulation. In developing baselines, OMB guidance directs agencies to consider factors such as the evolution of the market, changes in regulations, and the degree of compliance by regulated entities with other regulations. Each of the RIAs we reviewed developed and used baselines that took one or more of those factors into account; however, one of the RIAs relied on outdated baseline information. Specifically, the RIA for the 2009 SPCC rule used the baseline from a 2002 SPCC rule, despite EPA having revised certain aspects of that rule in 2006. EPA officials said their use of the older baseline was still relevant because the revisions made in 2006 had not yet been fully implemented. By not using a more current baseline, EPA may not have presented the most up-to-date depiction of the expected state of the world from which to compare regulatory alternatives.

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

In the seven RIAs we reviewed, EPA provided information on the benefits and costs—monetized, quantitative, and qualitative—for all the alternatives considered. According to OMB guidance, agencies should monetize quantitative estimates wherever possible. All seven of the RIAs we reviewed monetized some benefits for the regulatory alternatives considered, including, for example, expected improvements in human health as a result of air pollution reductions. All but one of the RIAs monetized some costs. Specifically, the SPCC RIA did not quantify or monetize the potential costs to the environment associated with reducing the regulatory burden on farms and other entities. The remaining six RIAs estimated both monetized benefits and costs but, for one of these, EPA did not present net benefits—a key outcome of conducting these analyses, according to OMB’s guidance. For the Lead Opt-Out RIA, EPA officials said they did not present the net benefits calculation because doing so would have implied more precision and certainty in the benefits estimates than the data warranted. Without a reliable estimate of net benefits for each alternative, however, a third-party reader cannot determine whether the agency selected the alternative that maximized net benefits.

When monetization or quantification is not possible, OMB guidance states that agencies should explain why and present a detailed description of the qualitative effects, as well as a discussion of the strengths and limitations of that information.qualitative discussion of some potential benefits and costs, and most explained why EPA could not quantify them. However, some RIAs did not present a complete discussion of the strengths and limitations of the qualitative information. For example, the Lead-Opt Out RIA contains more than 10 pages of qualitative information about the health and environmental effects associated with lead exposure, but it does not discuss the strengths and limitations of the information as it pertains to the regulatory action. Without such information, the potential significance of these effects on the overall analysis is unclear.

Each of the RIAs we reviewed included a To determine the present value of monetized benefits and costs agencies expect to occur in future years, OMB guidance states that agencies should apply discount rates of 3 and 7 percent, unless a different rate is EPA generally used OMB’s recommended discount rates to justified. estimate benefits and costs in all of the RIAs we reviewed; however, in the RFS2 RIA, EPA did not clearly present its discounted estimates of benefits and costs using both rates, making it difficult to discern whether the agency used a consistent rate in the calculation.clearly presented such information. For example, in the CISWI RIA, EPA clearly delineated the estimated benefits, costs, and net benefits at the 3 and 7 percent discount rates for both alternatives in two separate tables that were concise and easy to follow.

In other RIAs, EPA OMB guidance also states that, when monetizing benefit and cost estimates in RIAs, agencies should generally estimate benefits and costs to society and should include any significant effects of regulations on private entities. In its analysis of the Medium- and Heavy-Duty GHG regulation, EPA estimated that more than 80 percent of the benefits would accrue to private entities—individual truck owners and operators— in the form of fuel cost savings. According to the final RIA, including this private benefit in the overall benefit estimate resulted in total benefits that exceeded overall compliance costs, yielding a positive net benefit.

According to OMB guidance, when estimated cost savings exceed estimated compliance costs, the agency should examine and discuss why market forces would not accomplish these gains in the absence of regulation. The RIA discussed conceptually several reasons why truck buyers might not purchase more fuel-efficient vehicles in the absence of the regulation, identifying market failures such as incomplete information or industry-wide barriers that prevent truck buyers from minimizing costs. EPA officials told us that to estimate the value of greater fuel efficiency and all other truck product attributes, they held constant these other attributes, such as size and torque, before and after the regulation. By assuming that these attributes remained constant, EPA officials reasoned that the costs of these attributes would be higher and therefore result in a more conservative estimate of net benefits. However, EPA’s assumptions and associated cost adjustments were not readily transparent in the RIA. Moreover, because EPA did not integrate both costs and consumer behavior into one consistent model, EPA may have misstated the value or benefits resulting from increased fuel efficiency. OMB staff said the data needed to account for these offsetting factors often do not exist. Moreover, EPA did not explore nonregulatory alternatives that could correct a market failure, such as providing truck buyers with more information about fuel economy through product labeling or other means as OMB guidance recommends.

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

In assessing EPA’s adherence to OMB guidance, we identified two key areas in which EPA faced challenges that limited the usefulness of some of the estimates in its RIAs—nonmonetized benefits and costs related to the primary purpose or key impacts of the regulatory actions and EPA’s approach for estimating the effects of regulations on employment.

In several RIAs, EPA provided quantitative estimates for the benefits and costs related to the primary purpose or key impacts of the regulatory action; however, EPA did not monetize some of these key benefits and costs. OMB guidance acknowledges that monetization is not always possible, and EPA officials said that limited data, modeling capabilities, and time and resource constraints precluded them from monetizing these effects in some cases. For example, in the RIA for RFS2, a rule aimed at increasing the use of renewable fuels such as ethanol and other biofuels through the production of agricultural and other feedstocks, EPA quantified some adverse water quality effects of the renewable fuel standard but did not monetize these effects. EPA officials said they used models to quantify the amounts of nitrogen pollution in water expected from the rule but were not able to use the model to place an economic value on this pollution, citing that limited time and resource constraints precluded them from developing such an economic value. Several water quality experts we spoke with suggested that monetizing water quality effects for this rule may have been possible, but they acknowledged challenges to doing so. For example, experts explained that it is challenging to monetize water quality effects at the national level. In the SPCC RIA, EPA officials said that monetizing potential costs to the environment associated with reducing the regulatory burden on farms and other entities is challenging, in part, due to a lack of information about the likelihood of an oil spill and its effects on the environment.

Further, in the RIAs for two regulations—CISWI and Boiler MACT—aimed at reducing emissions of specific air pollutants, EPA quantified the amount of reductions expected for particular pollutant emissions, but it did not monetize the health benefit associated with those emissions reductions. In the RIAs, EPA explained that methodological and time limitations under court-ordered schedules for the CISWI and Boiler MACT regulations precluded them from monetizing these effects. Specifically, EPA stated in the RIAs that insufficient information existed for emissions from specific sources that prevented the agency from modeling changes in population exposures to ambient concentrations of hazardous air pollutants. Nonetheless, consistent with OMB guidance, EPA included in the RIAs monetized benefits related to reducing particulate matter—a complex mixture of several components, including acids, metals, and soil or dust particles—both as a surrogate for metal hazardous air pollutants and as a secondary benefit resulting from other hazardous air pollutant reductions. Without further research to eliminate data gaps and enhance modeling capabilities to support monetizing additional benefits and costs, however, EPA’s RIAs may continue to be limited in their usefulness for understanding economic trade-offs among regulatory alternatives.

In addition, in the RIAs we reviewed, EPA estimated the effects of its regulations on employment in two ways. Executive Order 12866 directs agencies to assess any adverse effects on employment resulting from regulations, but neither it nor OMB’s associated guidance provides specific direction on estimating these effects when the outlook is for continued high unemployment. First, in most of the RIAs we reviewed, EPA incorporated certain labor cost estimates in its compliance cost estimates within the benefit cost analyses. To develop these estimates, consistent with Circular A-4, EPA generally assumed the economy was at full employment and, accordingly, that the regulations would displace few workers over the long term, and any individuals laid off as a result of the regulations would quickly find new jobs at comparable wages.

During the time EPA conducted these analyses, however, the United States experienced an economic recession followed by a sluggish recovery with an unemployment rate of 9 percent or higher until late 2011. Some researchers have raised questions about the reasonableness of the full employment assumption, suggesting that the cost of job losses may be substantial and generate other social costs or benefits when the outlook is for continued high unemployment.

Researchers and senior EPA and OMB officials said that empirically assessing these employment effects is challenging, however, due to data limitations and the inherent difficulty of separating the effects of regulations from other factors in the economy. In addition, some rules have compliance periods that begin and extend well into the future, and EPA officials said that the employment rate during the compliance period is more important than the employment rate when the rule is written. Nonetheless, in the RIA for the Medium- and Heavy-Duty GHG rule, finalized in 2011, EPA qualitatively discussed the possibility that the rule would have a net positive effect on employment by reducing involuntary unemployment.

Second, for three of the seven RIAs we reviewed, EPA conducted a separate analysis of the potential effect of its regulations on changes in the number of jobs. Specifically, in the Boiler MACT, CISWI, and ELG RIAs, EPA quantitatively assessed the potential effect of the regulation on employment in the directly affected industries, estimating the expected job losses and gains for each. With limited methods, studies, and models available for assessing the potential effects of regulation on employment, EPA relied primarily on an economic study that had several limitations. For example, the study was based on outdated information that considered the effect of regulations on employment for certain years from 1979 through 1991. In addition, the study was limited to four industrial sectors. By applying this study to its analyses, EPA effectively assumed that the conditions at the time of the study, as well as the sectors considered, were relevant to the conditions and industries affected by the regulations we reviewed. EPA acknowledged in the RIAs that the study has these limitations. In addition, senior agency officials acknowledged the limitations in our discussions and said the authors of the underlying study have since questioned its sufficiency for use in regulatory analyses. However, the officials also said that the study represented the best reasonably obtainable data when they conducted their analyses. EPA officials said they last used the study to support quantitative estimates of employment effects in June 2013, but that the study continues to provide a theoretical framework for EPA’s consideration of employment effects in RIAs. In addition, they said they have begun to explore new approaches for analyzing employment effects. However, EPA officials were uncertain about when such information would be available. Without additional information and improvements in its approach for estimating employment effects, EPA’s RIAs may be limited in their usefulness for helping decision makers and the public understand the potential effects of the agency’s regulations on employment.

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

In four of the RIAs we reviewed, EPA estimated the value of carbon dioxide emission reductions using a measure known as the social cost of carbon. A federal interagency working group, co-led by OMB and the Council of Economic Advisers, developed social cost of carbon estimates in a technical support document produced in 2010 and updated in 2013. According to OMB staff, the technical support document guidance— developed by experts from numerous agencies—is an extension of the guidance in Circular A-4, aimed specifically at estimating the value of future reductions of carbon emissions. The 2010 technical support document, which was applicable to most of the rules we reviewed, does not include a clear overall statement of its relationship to Circular A-4, but includes references to Circular A-4 in certain sections of the body that explain how the technical support document guidance relates to the general direction provided in Circular A-4. Similarly, the 2013 update of the technical support document references Circular A-4 in the body, but does not include a clear overall statement of its relationship to Circular A- 4.

The benefits and costs of reducing most greenhouse gas emissions, including carbon dioxide, differ from other benefits and costs in at least two respects: (1) greenhouse gas emissions contribute to global damages even when emitted in the United States because these emissions disperse widely throughout the atmosphere and (2) these emissions generally remain in the atmosphere for years, causing subsequent long- term damages. As a result, the technical support document represents an approach for estimating the value of reducing future carbon dioxide emissions that differs from the approach for estimating other benefits and costs described in Circular A-4 in two key ways.

First, while Circular A-4 states that agencies should generally estimate domestic benefits and costs of regulations, it also provides latitude to include global economic effects resulting from regulations when relevant and states that such effects should be reported separately and in addition to domestic effects. According to the more recent technical support document, a global measure of benefits and costs for greenhouse gas reductions is preferable in light of the global nature of climate change. Accordingly, in the four RIAs, EPA estimated the value of reducing future carbon dioxide emissions using a global value rather than focusing solely on benefits that would accrue to the United States. In addition, the technical support document notes that relatively few region- or country- specific models for estimating a domestic measure of the social cost of carbon exist, and the EPA officials responsible for these analyses reiterated this challenge. The technical support document includes a range of values for adjusting the global social cost of carbon to estimate domestic effects based on one model but states that the values are “approximate, provisional, and highly speculative.” OMB staff said the interagency working group will continue assessing whether it can generate a more reliable domestic measure.

Second, for valuing reductions of future carbon dioxide emissions using social cost of carbon estimates, the technical support document adapts and revises the guidance in Circular A-4 related to discount rates. Circular A-4 states that agencies should discount future benefits and costs using rates of 3 and 7 percent but notes that agencies may, in addition, consider a lower discount rate if a rule will have important intergenerational benefits or costs. OMB has stated, however, that a 7 percent discount rate is not appropriate for valuing carbon dioxide emissions because it does not adequately account for the impact of Accordingly, in the carbon dioxide emissions on future generations. RIAs we reviewed that included estimates related to reducing carbon dioxide emissions, EPA generally applied the technical support document’s social cost of carbon estimates based on discount rates of 2.5, 3, and 5 percent. According to OMB, these discount rates are consistent with the latitude provided in Circular A-4 and span a plausible range to account for disagreement in the literature on the appropriate rate to use in this context and various uncertainties. Circular A-4 preceded the technical support document and has not been amended and, accordingly, it does not reference the technical support document or explain the relationship between the two documents. Because Circular A-4 generally suggests that agencies use discount rates of 3 and 7 percent and the relationship to the technical support document is not clear, including estimates of benefits at different discount rates can lead to the appearance that EPA did not adhere to the general direction regarding discount rates in Circular A-4.

Moreover, applying Circular A-4 and the technical support document simultaneously can lead to an inconsistency in some of EPA’s net benefits analyses. For example, in the Medium- and Heavy-Duty GHG RIA, EPA estimated the value of reducing future carbon dioxide emissions using a 3 percent discount rate, as provided in the technical support document, and incorporated that estimate with the other non- greenhouse gas benefit and cost estimates it discounted using both the 3 percent and 7 percent discount rates suggested in Circular A-4. Incorporating the estimate for carbon dioxide emission reductions at 3 percent with other benefits and costs discounted at 7 percent produces an analytical inconsistency, whereas incorporating the estimate for carbon dioxide emission reductions at 3 percent with other benefits and costs discounted at the same rate does not. In effect, using a lower discount rate to estimate the value of reducing future carbon dioxide emissions than that used to estimate other benefits and costs places greater weight on carbon dioxide emission reductions when calculating the overall net benefits of a rule.

OMB staff said they understand the issues associated with incorporating carbon dioxide reduction estimates discounted at a lower rate with net benefits discounted at the 7 percent rate. However, they said this difference in discount rates is unavoidable due to the intergenerational nature of the benefits associated with reducing carbon dioxide emissions and noted that the technical support document envisions this possibility— that other benefits and costs unrelated to carbon dioxide emissions will be discounted at rates that differ from those used to develop the social cost of carbon estimates.integrating intergenerational benefits in benefit-cost analyses is an active area in the literature, and the interagency working group has committed to periodically updating the technical support document. However, they told us they have not yet determined a better approach for addressing this analytical issue. Without increased clarity regarding the relationship between Circular A-4 and the technical support document and additional guidance on presenting the analytical inconsistencies, questions about the adherence of the agency’s analyses to Circular A-4 and challenges related to the public’s understanding of the agency’s estimates will likely persist.

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

EPA generally adhered to OMB guidance on analyzing uncertainties with key assumptions underlying its RIAs although, in some cases, its assessment of uncertainty was limited. OMB guidance states that analyzing and presenting important uncertainties as part of the overall regulatory analysis can inform the public and decision makers about the effects of these uncertainties on the benefits and costs of alternative regulatory actions. For example, a sensitivity analysis can show how benefit and cost estimates may change under different assumptions. OMB guidance also states that agencies should conduct a formal quantitative analysis of the relevant uncertainties about benefits and costs for rules with estimated annual effects of $1 billion or more.

For all of the RIAs we reviewed, EPA assessed the uncertainty of some key assumptions. For three of the four RIAs with estimated annual effects of $1 billion or more, EPA conducted a formal quantitative analysis. However, for these three RIAs, EPA did not conduct such an analysis of all of the relevant uncertainties, as OMB guidance directs. OMB staff acknowledged that time and resources limitations can hinder agencies’ ability to conduct such analyses. In some cases, EPA cited data limitations as the reason for not doing so. In the Boiler MACT RIA, for example, EPA used experts’ judgments, among other methods, to assess the variability in one important component of its benefit estimates—the extent to which emissions of certain air pollutants lead to premature mortality. EPA officials said, however, they did not analyze other relevant uncertainties related to other aspects of these pollutants because of data limitations. Also, in this RIA, EPA did not analyze the uncertainties associated with its cost estimates. EPA officials said that, in weighing time and resource constraints against additional uncertainty analyses for cost estimates, they determined additional analysis was not worthwhile because the benefits of the rule far outweighed the costs, and additional analysis under alternative assumptions would not likely change that conclusion. However, by not assessing uncertainty associated with the cost estimates, the RIA implied greater precision than was warranted.

For the other three RIAs we reviewed, EPA had greater flexibility under OMB guidance because the annual effects of the rule totaled less than $1 billion. Specifically, for rules expected to range in annual effects from $100 million to $1 billion, the guidance suggests that agencies consider using techniques ranging in complexity from a sensitivity analysis to more formal uncertainty analysis. While each of these RIAs analyzed some uncertainties, only one of the three RIAs analyzed most of the relevant uncertainties. For example, in one RIA, EPA did not analyze the uncertainties associated with the cost estimates.

In addition, EPA generally described the quality of data, models, and assumptions underlying its analysis or whether the information had undergone peer review. According to OMB guidance, agencies should rely on peer-reviewed literature, where available, to document their use of the best reasonably obtainable scientific, technical, and economic information in RIAs. In many instances, EPA described the quality of the underlying data and models and the use of peer-reviewed data. For example, in the RFS2 RIA, EPA used a new peer-reviewed model to calculate an important piece of the final analysis, which improved the estimates between the proposed and final rules, according to EPA officials. In other instances, however, EPA did not describe the quality of the underlying data and models. Although EPA explained to us that they aim to have their models peer-reviewed, for CISWI and Boiler MACT, EPA used a non-peer reviewed multimarket model to estimate social costs and benefits because, according to EPA officials, no peer-reviewed model was available. EPA officials said they used this model, nonetheless, because at the time of the analysis it was considered an appropriate approach. Disclosing such information about the underlying model in the RIA would provide readers with its potential limitations and areas for future improvement. Ultimately, the peer review—completed after EPA used the estimates in the analysis—criticized a number of the assumptions and data used in the model, raising questions about the reliability of these estimates. EPA officials said they no longer use the model and that they plan to revise it in response to the peer review.

Conclusions

RIAs are valuable tools for helping agencies assess whether the benefits of an action justify the costs and identify the regulatory alternative that yields the greatest net benefits. In addition, RIAs provide affected entities, government agencies, Congress, and the public with important information about the potential effects of new regulations, which can result in significant benefits and costs. Because the information in RIAs can be complex and technical, it is important that agencies clearly present how they arrived at their estimates and conclusions. OMB guidance provides best practices for conducting regulatory analysis and communicating this information; however, EPA did not always adhere to this guidance. In particular, EPA’s regulatory review process does not ensure that the information about selected elements that should appear in the analyses—such as clear descriptions of baselines and alternatives considered—is transparent or clear, within and across its RIAs. Without enhancements to its review process targeted at improving adherence to OMB guidance, EPA cannot ensure that its RIAs provide the public with a clear understanding of its decision making. In addition, executive summaries are a key focal point of these lengthy, complex RIAs. When the executive summaries are not clearly or accurately linked to the detailed analyses, they do not provide decision makers and the public with simple, understandable explanations of the expected economic effects of the regulations.

In addition, EPA faced challenges in two key areas that limited the usefulness of some of the estimates in its RIAs. First, resource and data limitations constrained EPA’s ability to monetize certain benefits and costs related to the primary purposes or key impacts of the rules we reviewed, such as the health benefits of reducing hazardous air pollutants and water quality effects. A key aspect of regulatory analysis is monetizing the benefits and costs, but OMB guidance acknowledges this is not always possible. However, when EPA does not monetize key benefits and costs, the RIAs may be limited in their usefulness for helping decision makers and the public understand economic trade-offs among different regulatory alternatives. Second, because EPA relied on an outdated and limited study to estimate the effects of regulations on employment, it may have inaccurately characterized the relationship between those regulations and employment. EPA officials said they have begun to explore new approaches for analyzing employment effects. However, EPA officials were uncertain about when such information would be available. Without additional information and improvements in its approach for estimating employment effects, EPA’s RIAs may be limited in their usefulness for helping decision makers and the public understand the potential effects of the agency’s regulations on employment.

Finally, in response to increased emphasis on agencies’ ability to monetize the effects of regulations on reductions of carbon dioxide emissions—the effects of which are long lasting and global in nature—a federal interagency working group, co-led by OMB and the Council of Economic Advisers, developed a technical support document for estimating these effects to supplement the guidance in OMB’s Circular A- 4. EPA’s use of the technical support document for estimating the value of reducing future carbon dioxide emissions and Circular A-4 for estimating other benefits and costs in its RIAs has raised questions about the agency’s adherence to Circular A-4 and has introduced an inconsistency in EPA’s analyses. Without increased clarity regarding the relationship between Circular A-4 and the technical support document, and additional guidance on presenting the analytical inconsistencies, questions about the adherence of agencies’ analyses to Circular A-4 and challenges related to the public’s understanding of their estimates will likely persist.

Recommendations for Executive Action

We are making six recommendations in this report.

To improve future adherence to OMB guidance for conducting RIAs, we recommend that the EPA Administrator take the following two actions: enhance the agency’s review process for RIAs to ensure the transparency and clarity of information presented for selected elements in and across RIAs; and improve the accuracy, transparency, and clarity of the information included in the executive summaries of each RIA.

In addition, to enhance the usefulness of EPA’s RIAs, we recommend that the EPA Administrator take the following two actions: identify and prioritize for research key categories of benefits and costs that the agency cannot currently monetize that, once monetized, would most enhance the agency’s ability to consider economic trade- offs associated with different regulatory alternatives; and continue efforts to update and improve the agency’s approach to estimating employment effects.

To clarify the relationship between OMB Circular A-4 and an Interagency Working Group’s Technical Support document for estimating the effects of changes in carbon dioxide emissions, and the approach agencies should use when informing decision makers and the public of their findings, we recommend that the Director of OMB consider taking the following two actions: clarify the relationship between OMB Circular A-4 and the Technical Support Document by increasing the visibility of relevant language in the Technical Support Document; and continue monitoring the economic literature and working with agencies to identify approaches for presenting social cost of carbon estimates with other analytical results that have been discounted at different rates to help agencies more transparently communicate about the circumstances unique to assessing the long-term effects of changes in carbon dioxide emissions.

Agency Comments and Our Evaluation

We provided a draft of this report to EPA and OMB for review and comment. In written comments, which are reproduced in appendix III, EPA generally agreed with our recommendations and described actions it intends to take to address them. Additionally, EPA provided comments on areas in the report where it believes that our findings and conclusions are incomplete or would benefit from a clearer and more robust consideration of context as well as technical comments, which we incorporated as appropriate. In oral comments on behalf of OMB, OMB staff commented on both recommendations and suggested several changes and clarifications, which we used to modify the recommendations. We discussed these changes and clarifications with OMB staff, who said they neither agreed nor disagreed with the revised recommendations but saw some merit in them. OMB staff also commented on technical issues, which we addressed as appropriate.

Regarding the first two recommendations to the EPA Administrator, in its comment letter, although the agency agrees with our recommendations, EPA stated that our findings do not point to systemic deficiencies with respect to the accuracy of the agency’s analytic work. EPA also stated that it supports our emphasis on the importance of transparency and clarity and will continue to strive to enhance these qualities in its RIAs. EPA then described actions it plans to take to address these recommendations. In its comments on our findings concerning RIAs, EPA characterized the seven rules we reviewed as a very small subset of RIAs for the rules that EPA has issued in recent years. We disagree with this characterization. The seven rules we reviewed represent more than one- third of the 20 economically significant rules EPA finalized from 2009 through 2011, the period from which we sampled rules. In addition, four of the rules had economic effects of over $1 billion, a threshold beyond which OMB guidance directs agencies to conduct additional analysis because of the significance of these effects. EPA correctly stated that our findings cannot be generalized, which we acknowledged in our report.

Also in its comments on our findings concerning RIAs, EPA stated that the report suggests that the agency’s use of the discount rates in the interagency support document for the social cost of carbon raised questions about the agency’s adherence to OMB Circular A-4 and about the consistency of analysis in certain RIAs. We believe that our report includes a robust discussion of this issue and related context. Specifically, our report describes the fact that EPA relied on two different guidance documents—OMB Circular A-4 and a Technical Support Document that was developed by OMB and the White House Council of Economic Advisers—for estimating certain benefits and costs. In this context, we identified a challenge related to the clarity of the relationship between these two documents that can lead to confusion about whether EPA adhered to OMB Circular A-4—the primary guidance document that agencies should use when conducting economic analysis. We therefore recommended that OMB enhance the clarity of the relationship between the two documents.

Regarding the third recommendation to the EPA Administrator, in its comment letter, EPA stated that the agency agreed with the importance of making continual improvements in valuing the benefits and costs of its regulatory actions and is constantly working to improve in these areas. The agency also stated that it will continue to invest in areas that will support improvements in its ability to quantify important benefits and costs, including areas we identified such as water quality benefits and hazardous chemical impacts. In its comments on our related findings concerning the monetization of benefits and costs, EPA accurately characterized the flexibility agencies have to design analyses in ways that optimize the use of limited resources while providing appropriate information about policy options. Furthermore, our report acknowledges this flexibility and identifies challenges EPA faces in monetizing certain types of benefits. In some cases, however, EPA was not able to monetize benefits and costs related to the primary purpose or key impacts of the regulatory action. In these cases, our report points out that this can limit the usefulness of RIAs in helping decision makers and the public understand the potential effects of EPA rules.

Regarding the fourth recommendation to the EPA Administrator, in its comment letter, EPA stated that while the agency considers its current practices to be up-to-date and consistent with sound science and economics, it continues to explore the relevant theoretical and empirical literature and to seek public comments on analysis of economically significant regulations to ensure that the way it characterizes the employment effects of its regulations is valid and informative. In its comments on our findings concerning the agency’s analysis of employment impacts, EPA stated that it was important for us to recognize that the agency relied on the best available peer-reviewed research that existed at the time that EPA conducted its RIAs and that the agency’s treatment transparently recognized the limitations of the study where it was applied. Although EPA discussed the potential limitations associated with using the study in RIAs we reviewed, the RIAs did not analyze whether factors such as the time period and the industries reflected in the employment study were appropriate for use in these RIAs. In addition, the lead author of the employment study has since indicated that the study should not be used to estimate employment effects in regulatory analyses.

Regarding the first recommendation to the OMB Director, our draft report recommended that OMB draw an explicit link between Circular A-4—the primary guidance document for conducting economic analysis issued in 2003—and later guidance issued in 2010 and updated in 2013 on estimating the effects of changes in carbon dioxide emissions because it was difficult to determine whether EPA’s use of the later guidance adhered to Circular A-4. In their oral comments, OMB staff said that an explicit link already exists in the 2010 guidance. We agree that the 2010 guidance had some language explaining the relationship between it and Circular A-4 but that this language did not feature prominently in the 2010 guidance or appear in Circular A-4. As a result, the relationship between the two sets of guidance was still unclear. In response to the OMB comments, we modified the recommendation to say that the Director of OMB should consider clarifying the relationship between the two sets of guidance to assist the public and decision makers in understanding the results of analyses that follow both guidance documents.

Regarding the second recommendation to the OMB Director, our draft report recommended that OMB provide further guidance on how agencies should present estimates of the benefits of regulations when agencies discount different types of benefits (including changes in carbon dioxide emissions) at different rates because this can introduce inconsistencies in the analytical results that make it difficult for the public and decision makers to understand. OMB staff said that the existing economic literature was unresolved on addressing this issue and that issuing further guidance would thus be premature. In response to the OMB comments, we modified the recommendation to say that the Director of OMB should continue monitoring the economic literature and working with agencies on approaches for presenting estimates of changes in carbon dioxide emissions along with other types of economic effects that have been discounted at different rates.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Administrator of EPA, the Director of OMB, the appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or gomezj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report examines how the Environmental Protection Agency (EPA) has used economic analyses in its decision making during the rulemaking process and the extent to which EPA adhered to Office of Management and Budget (OMB) guidance in conducting selected elements of the economic analyses the agency used to support recent rulemakings.

To identify the economic analyses for our review, we used OMB’s historical lists of rules it has reviewed to compile a list of the economically significant rules—those with an annual effect on the economy of $100 million or more or that have a material adverse effect on a sector of the economy; productivity; competition; jobs; the environment; public health or safety; or state, local, or tribal governments or communities— EPA finalized in 2009 through 2011. This yielded a total of 20 rules from which we eliminated from consideration four rules: (1) a rule related to National Ambient Air Quality Standards because EPA is statutorily prohibited from considering costs in setting these standards; (2) a rule that EPA identified as erroneously appearing on OMB’s list of economically significant rules; and (3) two rules because they applied to specific states, rather than the nation. This reduced our universe of possible rules for consideration to 16 rules. From these, we selected a nonprobability sample of seven EPA rules that met the following criteria: (1) they were considered economically significant under Executive Order 12866; (2) they were finalized from 2009 through 2011; (3) they were conducted by four different EPA program offices (Air and Radiation, Chemical Safety and Pollution Prevention, Solid Waste and Emergency Response, and Water); and (4) they were expected to have a varying range of effects on the economy. Because this was a nonprobability sample, findings from our review of the seven rules cannot be generalized to those we did not review.

To examine how EPA used economic analyses in its decision making, we interviewed EPA officials that prepared the Regulatory Impact Analyses (RIA) and other documentation for each rule, as well as officials from EPA’s Office of Policy. They provided detailed explanations about the regulatory decision-making process for each rule and how RIAs were used in that process. In addition, we reviewed the final RIAs for the seven selected rules. To assess the extent to which EPA adhered to OMB’s guidance in Circular A-4 for selected elements of the RIAs, we developed a checklist that included questions related to each element and applied the checklist to all seven rules. For each RIA, two analysts (including one economist) independently reviewed the analyses and subsequently came to consensus about each element’s adherence to OMB guidance. For each rule, we also reviewed the relevant Federal Register notices prepared during the course of the rulemaking, draft RIAs, and other relevant technical documents. We compiled the individual checklists into a summary checklist to assess the extent to which the rules as a group adhered with specific elements of OMB Circular A-4 principles. The selected elements we examined included: the analyses’ overall transparency and use of executive summaries and statements of need; treatment of regulatory alternatives; estimation of benefits and costs; and treatment of uncertainty, assumptions, and descriptions of data quality.

To enhance our understanding of the analyses, we interviewed the EPA officials that prepared the RIAs from the four EPA offices, including the Offices of Air and Radiation, Chemical Safety and Pollution Prevention, Solid Waste and Emergency Response, and Water. In addition, to increase our understanding about specific categories of estimates, we reviewed economic literature and interviewed a convenience sample of economists, selected because of their knowledge and expertise regarding specific technical issues that appeared in the seven RIAs. Finally, we interviewed OMB staff to discuss specific elements of OMB Circular A-4 and technical guidance related to estimating the economic effects of reducing greenhouse gases.

We conducted this performance audit from February 2012 to July 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Rule Descriptions

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

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

On September 15, 2011, the Environmental Protection Agency (EPA) and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) finalized regulations in a joint rulemaking to establish a comprehensive Heavy-Duty National Program. The respective rules responded to a May 21, 2010, presidential directive and constituted the first-ever program to reduce greenhouse gas emissions and fuel consumption in the heavy-duty highway vehicle sector. In this rulemaking, EPA finalized carbon dioxide emissions standards, and NHTSA concurrently finalized fuel consumption standards for three regulatory categories of heavy-duty vehicles: combination tractors; heavy-duty pickup trucks and vans; and vocational vehicles. EPA set additional standards in its rule, including final hydrofluorocarbon standards to control leakage from air-conditioning systems, and final nitrous oxide and methane emissions standards for combination tractors and heavy-duty pickup trucks and vans. In this rule, EPA also finalized provisions allowing light-duty vehicle manufacturers to use carbon dioxide credits to meet the light-duty vehicle nitrous oxide and methane standards, technical amendments to the fuel economy provisions for light-duty vehicles, and a technical amendment to the criteria pollutant emissions requirements for certain switch locomotives. EPA’s final greenhouse gas emission standards under the Clean Air Act begins with model year 2014 and will be fully phased in by 2018. This phase of the Heavy-Duty National Program did not regulate commercial trailers.

The agencies estimated that the combined standards will reduce carbon dioxide emissions by approximately 270 million metric tons and save 530 million barrels of oil over the life of vehicles sold during the 2014 through 2018 model years and yield $49 billion in net benefits at a 3 percent discount rate and $33 billion in net benefits at a 7 percent discount rate.

On March 21, 2011, EPA finalized this rule, which requires industrial, commercial, and institutional boilers and process heaters located at major sources to meet hazardous air pollutants standards reflecting the application of the maximum achievable control technology (MACT). Under section 112(d) of the Clean Air Act, EPA must set these emissions limits for both existing and new sources. For existing sources, the MACT standards must be at least as stringent as the average emissions limitation achieved by the best performing 12 percent of existing sources for which there is emissions information. For new sources, the MACT standards must be at least as stringent as the control level achieved in practice by the best controlled similar source. In both scenarios, these levels are referred to as the MACT floor. EPA also must consider more stringent “beyond-the-floor” control options and, in doing so, must take into account the maximum degree of reduction in emissions of hazardous air pollutants, costs, energy, and nonair environmental impacts. The final rule regulated the following hazardous air pollutants: hydrogen chloride (as a surrogate for acid gases); particulate matter (as a surrogate for nonmercury hazardous air pollutant metals); carbon monoxide (as a surrogate for nondioxin and furan organic hazardous air pollutants); mercury; and dioxin and furan emissions.

EPA estimated the net benefits of this rule to range from $20.5 to $52.5 billion at a 3 percent discount rate and from $18.5 to $47.5 billion at a 7 percent discount rate. The monetized benefits reflect the health benefits associated with reducing exposure to fine particulate matter through directly emitted particulate matter and precursors (such as sulfur dioxide), as well as reducing ozone exposure through reductions of volatile organic compounds. In addition to the monetized benefits, EPA estimated that the rule would reduce 112,000 tons of carbon monoxide; 30,000 tons of hydrogen chloride; 820 tons of hydrogen fluoride; 2,800 pounds of mercury; 2,700 tons of other metals; and 23 grams of dioxins and furans.

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

On March 26, 2010, EPA issued a final rule implementing changes to the National Renewable Fuel Standard program as required under the Clean Air Act Section 211(o), as amended by the Energy Independence and Security Act of 2007 (EISA). The 2007 act expanded the renewable fuel standard established by the Energy Policy Act (EPAct) of 2005. The renewable fuel standard is the mandated minimum volume of biofuels used in the national transportation fuel (gasoline and diesel) supply each year. EISA mandated the use of 36 billion gallons of renewable fuel by 2022, a significant increase over the requirement in EPAct 2005. EISA also required that an increased amount of the mandate be met with advanced biofuels—certain biofuels produced from feedstocks other than corn starch—compared with conventional corn-based ethanol. Specifically, 21 billion of the 36 billion gallon mandate of renewable fuel is expected to come from advanced biofuels by 2022. EPA expects the revised RFS2 to lay the foundation for achieving significant reductions of greenhouse gas emissions from the use of renewable fuels, reducing imported petroleum, and encouraging the development and expansion of our nation’s renewable fuels sector.

EPA estimated net benefits of the mandated volumes ranging from $13 to $26 billion. The measure does not include the costs of investments needed to increase renewable fuel production. The agency estimated those capital costs to total $90.5 billion through 2022.

On March 21, 2011, EPA finalized a rule to implement section 129 of the Clean Air Act, which required EPA to develop and adopt standards for new and existing commercial and industrial solid waste incineration units (CISWI), including emissions limitations for nine specific pollutants— particulate matter (total and fine), opacity (as appropriate), sulfur dioxide, hydrogen chloride, nitrogen oxides, carbon monoxide, lead, cadmium, mercury, and dioxins and dibenzofurans. Enacted in 1990, Section 129 required EPA to issue standards for solid waste incinerators that were more stringent than those EPA had proposed in 1989. Under section 129, EPA must set emissions limits based on MACT for both new and existing sources. The rule also requires CISWI units to demonstrate compliance through testing and monitoring.

Five of the nine pollutants subject to section 129 are also regulated as hazardous air pollutants under section 112(c)(6) of the act. During the development of the CISWI rule, EPA was under a court order to issue regulations under section 112(c)(6) by January 16, 2011. Because some CISWI units, including those burning solid waste for energy recovery, are also subject to section 112(c)(6), EPA determined that the CISWI rule was subject to this court-ordered deadline.

In the 2011 rule, EPA expected few new CISWI units to be constructed over the subsequent 5-year time frame, and that those few would be constructed to replace existing units. Standards for both new and existing units are generally more stringent than those previously in effect.

EPA estimated the net benefits of this rule to range from $60 to $550 million at a 3 percent discount rate, and from $30 to $470 million at a 7 percent discount rate.

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

In 2008, EPA issued a rule regulating renovation and remodeling activities that create health hazards arising from lead paint (RRP rule). Among the provisions in the rule was an “opt-out” provision, which exempted owner-occupied housing from the rule’s requirements if the homeowner certified that no pregnant women or young children lived there. In addition, the RRP rule established certain training, certification, accreditation, and recordkeeping requirements. EPA noted in the 2008 final rule that most commenters did not agree with the opt-out provision as EPA had proposed, but the agency retained the provision in the final rule, though in a somewhat narrower form than originally proposed. Shortly after the rule was published, several petitions challenged the rule, including several from environmental and children’s health advocacy groups. On August 24, 2009, EPA signed an agreement with these groups in settlement of their petitions. In this agreement, EPA committed to propose several changes to the RRP rule, including proposing to remove the opt-out provision.

In May 2010, EPA finalized an amendment to the RRP rule removing the opt-out provision, concluding that it is important to require RRP work practices and training and certification requirements in target housing even if there is no child under age 6 or pregnant woman residing there. EPA further supported the amendment stating that implementing the regulations without the opt-out provision promotes, to a greater extent, the Toxic Substances Control Act directive to promulgate regulations covering renovation activities in target housing.

Following the removal of the opt-out provision, trade associations petitioned a federal appellate court for review of the rule. One petitioner, the National Association of Home Builders, argued that EPA’s removal of the opt-out amendment was unauthorized because the “only event of note between the inclusion and removal of the opt-out provision was a settlement agreement which obligated the Agency to undertake certain actions.” In rejecting this argument and upholding the 2010 rule, the court held that there were two other events which preceded the settlement that explained why EPA reconsidered the opt-out provision: a new President and a new EPA Administrator. The court similarly rejected the contention that EPA’s change in position was invalid because EPA had merely revisited old evidence and arguments, rather than relying on new data or experience.

EPA estimated that the rule would cost between $246 and $295 million at a 3 percent discount rate and between $267 and $320 million 7 percent discount rate and yield benefits ranging from $866 million to $3.1 billion at a 3 percent discount rate and from $920 million to $3.3 billion at a 7 percent discount rate.

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

Under the Clean Water Act, EPA must issue requirements establishing procedures, methods, and equipment to prevent discharges of oil from facilities to navigable waters. The Spill Prevention, Control, and Countermeasure (SPCC) Rule, first promulgated in 1973, outlined actions regulated facilities must take to prevent, prepare for, and respond to oil spills before they reach navigable waters or adjoining shorelines. The rule required each owner or operator of a regulated facility to prepare or amend and implement a plan that describes how the facility is designed, operated, and maintained to prevent the discharge of oil into navigable waters or adjoining shorelines. The plan must include measures to control, contain, clean up, and alleviate the effects of an oil spill to prevent such spills from reaching any navigable waters or adjoining shorelines. Facilities may incur significant costs to develop, revise, and implement an SPCC plan. The costs depend on, among other things, the size and type of facility and whether the facility is new or existing.

In December 2008, EPA amended the SPCC rule to, among other things, exempt several types of facilities from some or all of the rule’s requirements. The effective rulemaking date, however was delayed and upon additional review was amended. On November 13, 2009, EPA promulgated a new rule that amended the December 2008 SPCC amendments to, among other things, make technical corrections and remove three provisions it had previously finalized as exemptions. Specifically, upon additional review, and after consideration of additional public comments, EPA removed the exclusion of farms and oil production facilities from the loading/unloading rack requirements because EPA did not believe there was a basis to treat these facilities differently from other facilities with loading/unloading racks. In addition, EPA removed two other exemptions—the exemption for produced water containers and the alternative qualified facility eligibility criteria, both applicable to oil production facilities—because EPA determined that these measures would not effectively protect the environment from oil discharges. EPA stated that removal of these provisions would increase compliance costs but reduce the risk of oil spills.

Overall, EPA estimated total cost savings for the final amendments of $95 million at a 7 percent discount rate. The agency did not present a net benefit calculation as it did not monetize the costs associated with the rule.

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

On December 1, 2009, EPA finalized regulations establishing Clean Water Act technology-based effluent limitations guidelines (ELG) and new source performance standards for storm water discharges from the construction and development industry. The regulations require that discharges from construction sites disturbing 10 or more acres of land at one time meet a numeric turbidity limit, among other things. In addition, all construction sites that are currently required to obtain a National Pollutant Discharge Elimination System permit must limit erosion and control sediment discharges from construction sites. The final rule became effective on February 1, 2010. In January 2011, EPA stayed implementation of the numeric limit. The other portions of the rule remain in effect.

EPA planned to phase in the numeric ELG over 4 years. Beginning 18 months after the effective date of the final rule, construction sites that disturb 20 or more acres at one time would have been required to monitor site discharges and comply with the numeric effluent limitation. Beginning 4 years after the effective date of the final rule, construction sites that disturb 10 or more acres at one time would have been required to monitor site discharges and comply with the numeric effluent limitation.

EPA estimated that compliance with the ELG and new source performance standards would reduce the amount of sediment and other pollutants discharged from construction and development sites by approximately 4 billion pounds per year. The agency also estimated that compliance with this regulation would provide approximately $369 million in annual monetized societal benefits and $959 million in annual societal costs, which would result in a negative net benefit (or net cost) of $590 million at a 3 percent discount rate.

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

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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