Economics at the Environmental Protection Agency by RG

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									Economics at the Environmental
     Protection Agency

             Al McGartland, Ph.D.
  National Center for Environmental Economics
           Presentation Overview
• Economics at EPA – institutional data
• The Regulatory Process
• What is Benefit-Cost Analysis
         Some Major Environmental Laws
•   Federal Water Pollution Control Act (CWA)
•   Clean Air Act (CAA)
•   Safe Drinking Water Act (SDWA)
•   Resource Conservation and Recover Act (RCRA)
•   Comprehensive Environmental Response, Compensation, and
    Liability Act (CERCLA)
•   Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)
•   National Environmental Policy Act (NEPA)
•   Pollution Prevention Act (PPA)
•   Toxic Substances Control Act (TSCA)
                           Analysis Allowable Under
                            Environmental Statutes
                                               Benefit-Related Factors         Cost Related Factors
                                             Pollution                 Technical                   Cost-     Benefit /
                                             Reduction Health Welfare Fesibility Affordability Effectiveness  Cost
Clean Air Act (CAA)
NAAQS/primary                                                Yes
NAAQS/secondary                                                     Yes                                                         ?
Hazardous air pollution                                   Marginal Marginal     Marginal       Marginal           Marginal   Marginal
Automobile engines                             Limited    Limited Limited       Limited        Limited            Limited    Limited
Fuel standards                                 Limited    Limited Limited                                         Limited    Limited
New source standards                             Yes                               Yes           Yes                Yes        Yes

Clean Water Act (CWA)
Effluent guidelines, industrial sources          Yes         Yes       Yes         Yes           Yes                Yes         ?

Safe Drinking Water Act (SDWA)
Maximum contaminant levels                                   Yes       Yes         Yes           Yes                Yes        Yes

Toxic Substances Control Act (TSCA)                          Yes       Yes         Yes           Yes                Yes        Yes

Resouce Conservation and Recovery
Act (RCRA)                                                   Yes       Yes         Yes            ?                  ?          ?

Federal Insecticide, Fungidice and
Rodenticide Act (FIFRA)                                      Yes       Yes                       Yes                Yes        Yes
Source: Mogenstern, Richard D., ed. 1997. Economic Analysis at EPA. Washington, D.C.: Resources for the Future.
Structure of the EPA
                 Executive Order 12866
                  (as amended by Executive Order 13258)

• In Deciding Whether and How to Regulate
  – Assess all costs and benefits of all alternatives
  – Include option of not regulating
  – Both quantifiable and non-quantifiable measures

• Maximize Net Benefits Including
  – Economic                          – Distributive impacts
  – Environmental                     – Equity
  – Public health and safety

• Propose Regulation
  – “Upon a reasoned determination that the benefits of the intended
    regulation justify its costs”
       Other Statutory and Executive
• The Unfunded Mandates Reform Act of 1995
• The Regulatory Flexibility Act of 1980 as
  amended by The Small Business Regulatory
  Enforcement Fairness Act of 1996
• Executive Order 12898, “Environmental Justice”
• Executive Order 13045, “Children’s Health”
• Executive Order 13084, “Tribal Governments”
• Executive Order 13132, “Federalism”
EPA’s Budget
            Number of EPA Economists in 1996
          Discipline                      Doctorate             or J.D.           Total Percent
Law                                              50               1,201           1,251   18.1%
Biological Science                               50                 624           1,124   16.2%
Engineering                                     104                 992           1,096   15.8%
Physical Science                                323                 613             936   13.5%
Economics                                        31                  85             116    1.7%
All Other Disciplines                           690               2,159           2,399   34.7%
Total                                         1,248               5,674           6,922 100.0%
Source: Mogenstern, Richard D., ed. 1997. Economic Analysis at EPA. Washington, D.C.: Resources for the
            The National Center for
       Environmental Economics (NCEE)
• Over 20 PhD-level environmental economists
• Conducts and supervises research and development on
  economic analytic methods and empirical applications
• Leads production of EPA economic reports
• Provides guidance and support for performing economic
• Promotes consistency in the preparation and presentation
  of economic information in the Agency
• Provides regulatory review support to improve EPA’s
  use of economics in regulatory development and
        EPA’s Rule Development Process
 Circulate Agency-
                              Early          WG: Prepares Analytic
   wide the Action
                            Guidance                Blueprint
Initiation ("Tiering")
                           from A/DA       • Risk, Economic Analyses
   Form. Offices
                                           • Statutory & EO Req’ts
    designate WG

                      Senior           WG: Data collection, consultation
                   Management             (state, local & tribal govts.,
                 Approves Detailed     industry, interest groups), analysis,
                    Blueprint                 options development

                                                          Senior Input
EPA’s Rule Development Process

                    WG: Prepare
Options            Preamble, Rule,        Final
Selection            Supporting          Agency
by A/DA           Documents, Action      Review

      OMB Review         Administrator        FR
      (90-120 days)       Signature        Publication

                                          Senior Input
          Components of an Economic
•   Baseline and Counterfactual Policy Options
•   Benefits Analysis
•   Cost Analysis
•   Distributional Analyses
    – Economic Impact Analyses
    – Equity Assessment
• Uncertainty Analyses
Benefit Categories

      Source: EPA 2000. Guidelines for Preparing Economic Analyses.
      Washington, D.C.: Office of the Administrator. EPA 240-R-00-003
Measuring Water Quality Benefits
Cost Categories

     Source: EPA 2000. Guidelines for Preparing Economic Analyses.
     Washington, D.C.: Office of the Administrator. EPA 240-R-00-003
          What Is Benefit-Cost Analysis?
• Benefit-cost analysis calculates the social
  benefits and costs of an environmental policy
• Answers the question of whether the benefits are
  sufficient for the gainers to potentially
  compensate the losers
• Addresses the economic efficiency of a
• One component of decision-making process
      Multiple Decision Criteria Consistent with
      Economic Science
• Factors in Decision Making Process
      • Ethics
            – Distributive Justice
            – Environmental Justice
      •   Sustainability
      •   Political Concerns
      •   Legal Consistency
      •   Institutional Feasibility
      •   Technical Feasibility
      •   Enforceability
      •   Efficiency (Benefits/Costs)

       Why use Benefit-Cost Analysis?
• Benefit-Cost Analysis attempts to simulate a private market test
  on the production of public goods (e.g., environmental protection)

• It is governed by positive science; it is not a normative.
  Economists do not make up values based on their own beliefs or
  understandings of the environment.

        Private Market Test
• Private Markets allocate resources to efficient uses automatically.
• If a manufacturer cannot sell its output for more than it costs to
  produce, it goes out of business.
   – This manufacturer was an “inefficient” user of society’s scarce resources.
   – The cost of the resources used in production was greater than the value of
     goods produced.
   – Discipline of the private market forces this inefficiency out of the system
     and rewards efficient users of resources - i.e., those who create net positive
     value or net benefits.

       Public Good: Environmental Protection
• Benefit-Cost analysis attempts to measure the value of
  environmental protection and the costs of its production.
       • The rules for determining value and costs are the same as those in the
         private market.
       • Value is determined by what consumers are willing to pay for a
         commodity (e.g., environmental protection).
       • Costs are what producers must expend to provide environmental
       • Consistent with private markets, efficient outcomes are those in which
         net benefits or net values are positive.


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