[Federal Register: February 3, 2003 (Volume 68, Number 22)]
[Notices]
[Page 5491-5527]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03fe03-113]
[[Page 5491]]
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Part VII
Office of Management and Budget
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Draft 2003 Report to Congress on the Costs and Benefits of Federal
Regulations; Notice
[[Page 5492]]
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OFFICE OF MANAGEMENT AND BUDGET
Draft 2003 Report to Congress on the Costs and Benefits of
Federal Regulations
AGENCY: Office of Management and Budget, Executive Office of the
President.
ACTION: Notice and request for comments.
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SUMMARY: OMB requests comments on the attached Draft Report to Congress
on the Costs and Benefits of Federal Regulation. The Draft Report is
divided into two chapters. Chapter I presents estimates of the costs
and benefits of Federal regulation and paperwork with an emphasis on
the major regulations issued between October 1, 2001 and September 31,
2002. Chapter II requests comments from the public in three areas: (1)
Guidelines for regulatory analysis; (2) Analysis and management of
emerging risks; and (3) Improving analysis of regulations to homeland
security.
DATES: To ensure consideration of comments as OMB prepares this Draft
Report for submission to Congress, comments must be in writing and
received by OMB no later than April 3, 2003.
ADDRESSES: We are still experiencing delays in the regular mail,
including first class and express mail. To ensure that your comments
are received, we recommend that comments on this draft report be
electronically mailed to OIRA_BC_RPT@omb.eop.gov, or faxed to (202)
395-7245. Comments on the OMB Draft Guidelines for the Conduct of
Regulatory Analysis and the Format of Accounting Statements (Appendix
C) should be e-mailed to OIRA_ECON_GUIDE@omb.eop.gov, or faxed, with
the title ``Comments on Draft Guidelines'' identified in the
transmittal page, to (202) 395-7245.
You may also submit comments to Lorraine Hunt, Office of
Information and Regulatory Affairs, Office of Management and Budget,
NEOB, Room 10202, 725 17th Street, NW., Washington, DC 20503.
FOR FURTHER INFORMATION CONTACT: Lorraine Hunt, Office of Information
and Regulatory Affairs, Office of Management and Budget, NEOB, Room
10202, 725 17th Street, NW., Washington, DC 20503. Telephone: (202)
395-3084.
SUPPLEMENTARY INFORMATION: Congress directed the Office of Management
and Budget (OMB) to prepare an annual Report to Congress on the Costs
and Benefits of Federal Regulations. Specifically, Section 624 of the
FY2001 Treasury and General Government Appropriations Act, also know as
the ``Regulatory Right-to-Know Act,'' (the Act) requires OMB to submit
a report on the costs and benefits of Federal regulations together with
recommendation for reform. The Act says that the report should contain
estimates of the costs and benefits of regulations in the aggregate, by
agency and agency program, and by major rule, as well as an analysis of
impacts of Federal regulation on State, local, and tribal government,
small business, wages, and economic growth. The Act also states that
the report should go through notice and comment and peer review.
John D. Graham,
Administrator, Office of Information and Regulatory Affairs.
Draft 2003 Report to Congress on the Costs and Benefits of Federal
Regulation
Executive Summary
This Draft Report to Congress on regulatory policy was prepared
pursuant to the Regulatory Right-to-Know Act (Section 624 of the
Treasury and General Government Appropriations Act, 2001), which
requires such an account each year. It provides a statement of the
costs and benefits of federal regulations and recommendations for
regulatory reforms. The report will be published in its final form
after revisions to this draft are made based on public comment,
external peer review, and interagency review.
The major feature of this report is the estimates of the total
costs and benefits of regulations reviewed by OMB. Major federal
regulations reviewed by OMB from October 1, 1992 to September 30, 2002
were examined to determine their quantifiable benefits and costs. The
estimated annual benefits range from $135 billion to $218 billion while
the estimated annual costs range from $38 billion to $44 billion.
OMB seeks public comment on all aspects of this Draft Report. OMB
is specifically interested in public comment in the following three
areas:
[sbull] Guidelines for regulatory analysis. In order to make
continued improvements in the quality of the regulatory analyses
prepared by agencies, OIRA initiated in 2002 a process to refine the
OMB guidelines for regulatory analysis. The OIRA Administrator and a
member of the Council of Economic Advisers (CEA) are serving as co-
chairs of this effort. OMB and CEA staff have drafted proposed revised
guidelines which are presented in Appendix C of this report. We are
requesting comment on these draft guidelines for regulatory analysis.
[sbull] Analysis and management of emerging risks. An Interagency
Work Group on Risk Management, co-chaired by the OIRA Administrator and
the Chairman of the White House Council on Environmental Quality has
been formed to foster Administration-wide dialogue and coordination on
the management of emerging risks to public health, safety and the
environment. To assist in the Work Group's efforts, OMB requests
comments on current U.S. approaches to analysis and management of
emerging risks.
[sbull] Improving analysis of regulations related to homeland
security. In light of the significant interest in regulations related
to homeland security, OMB is seeking public comment on how to more
effectively evaluate the benefits and costs of these proposals,
including how agencies might better forecast the anti-terrorism
benefits and the direct and indirect costs of such rules, including
time, convenience, privacy, and economic productivity.
Chapter I: The Costs and Benefits of Federal Regulations
Section 624 of the FY 2001 Treasury and General Government
Appropriations Act, the ``Regulatory Right-to-Know Act,'' \1\ requires
OMB to submit ``an accounting statement and associated report''
including:
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\1\ 31 U.S.C. 1105 note, Pub. L. 106-554, Section 1(a)(3) [Title
VI, section 624], Dec. 21, 2000, 114 Stat. 2763, 2763A-161 (see
Appendix F).
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(1) An estimate of the total annual costs and benefits (including
quantifiable and nonquantifiable effects) of Federal rules and
paperwork, to the extent feasible:
(A) In the aggregate;
(B) By agency and agency program; and
(C) By major rule;
(2) An analysis of impacts of Federal regulation on State, local,
and tribal government, small business, wages, and economic growth; and
(3) Recommendations for reform.\2\
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\2\ Recommendations for reform are discussed in Chapter II.
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This chapter presents the accounting statement. It revises the
benefit-cost estimates in last year's report by updating the estimates
to the end of fiscal year 2002 (September 30, 2002) and including new
estimates from Ocotober 1, 1992 to March 31, 1995. Our new estimates
are now based on the major regulations reviewed by OMB over the last
ten years. All of the
[[Page 5493]]
estimates presented in this chapter are based on agency information or
transparent modifications of agency information performed by OIRA. We
have not provided new information on the impacts of Federal regulation
on State, local, and tribal government, small businesses, wages, and
economic growth in this draft report. The 2002 Report issued in
December 2002 includes discussions of these issues (see pages 41 to
46). We request public comment and any additional information on these
impacts for this year's final report.
We also include in this chapter a discussion of major rules issued
by independent regulatory agencies, although OMB does not review these
rules under Executive Order 12866. This discussion is based on data
provided by these agencies to the General Accounting Office (GAO) under
the Congressional Review Act.
A. Estimates of the Total Benefits and Costs of Regulations Reviewed by
OMB \3\
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\3\ In previous reports, we presented detailed discussions about
the difficulty of estimating and aggregating the costs and benefits
of different regulations over long time periods and across many
agencies. We do not repeat those discussions here. Our previous
reports are on our Web site at <http://www.whitehouse.gov/omb/inforeg/regpol.html
.
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Table 1 presents estimates by agency of the costs and benefits of
major rules reviewed by OMB over the period October 1, 2001 to
September 30, 2002. We reviewed 31 final major rules over that period.
These 31 rules represent less than ten percent of the 330 final rules
reviewed by OMB and less than one percent of the 4,153 final rules
documents published in the Federal Register during this 12-month
period. However, OIRA believes that the costs and benefits of major
rules are quantitatively more important than all other rules combined.
Of the 31 rules, 25 implemented Federal budgetary programs, which
caused income transfers from one group to another. The remaining six
regulations were ``social regulations'', requiring substantial
additional private expenditures and/or providing new social
benefits.\4\ Four of these six ``social regulations'' imposed mandates
on State and local entities or the private sector. The other two
``social regulations'' were enabling regulations that did not impose
mandates.
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\4\ Rules that transfer Federal dollars among parties are not
included because transfers are not social costs or benefits. If
included, they would add equal amounts to benefits and costs.
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Of the six ``social regulations,'' we are able to present estimates
of both monetized costs and benefits for three rules.\5\ We did not
include the 3 other rules that did not have monetized estimates for
either costs or benefits or both. Three agencies, DOE, DOT, and EPA
issued 3 major regulations adding a combined $2.0 billion to $6.5
billion in annual benefits and $1.6 billion to $2.0 billion in annual
costs.
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\5\ We used agency estimates where available. If an agency
quantified estimates but did not monetize, we used standard
assumptions to monetize as explained in Appendix A.
Table 1.--Estimates of the Annual Benefits and Costs of Major Federal Rules, October 1, 2001 to September 30,
2002
[Millions of 2001 dollars]
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Agency Benefits Costs
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Energy................................... 710....................... 636.
Transportation........................... 409 to 944................ 749 to 1,206.
Environmental Protection Agency.......... 913 to 4,818.............. 192.
-----------------------------
Total.............................. 2,032 to 6,472............ 1,577 to 2,034.
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Table 2 presents an estimate of the total costs and benefits of all
regulations reviewed by OMB over the ten-year period from October 1,
1992 to September 30, 2002 that met two conditions.\6\ Each rule
generated costs or benefits of at least $100 million annually, and a
substantial portion of its costs and benefits were quantified and
monetized by the agency or, in some cases, monetized by OMB. The
estimates are therefore not a complete accounting of all the costs and
benefits of all regulations issued by the Federal government during
this period. We have expanded the number of years covered by our
estimates to ten from the six and half years presented in last year's
report. We provide estimates of the cost and benefits of social
regulation (health, safety and environmental regulation) for each rule
for the periods covering October 1, 1992 to March 31, 1995 and October
1, 2001 to September 30, 2002 in Appendix A.\7\ OMB has chosen a 10-
year period for aggregation because pre-regulation estimates prepared
for rules adopted more than ten years ago are of questionable relevance
today. The estimates of the costs and benefits of Federal regulations
over the period October 1, 1992 to September 30, 2002 are based on
agency analyses subject to public notice and comments and OMB review
under E.O. 12866.
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\6\ We calculated Table 2 estimates by adding the estimates in
Table 1 above and the estimates from Table 6 in Appendix A to Table
8 of the 2002 OMB report.
\7\ Agency estimates of the cost and benefits of major
regulations for October 1, 1992 to March 31, 1995 are provided in
Appendix B. Appendix A contains revised estimates.
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In last year's report, the aggregate costs of regulations fell
within the range of the estimated benefits--albeit at the lower end of
the range. The aggregate benefits reported in Table 2, however, are
roughly three to five times the aggregate costs and are substantially
larger than the aggregate benefits reported in our 2002 report. There
are two reasons for this. First, the additional rules added to cover a
10-year period included EPA's rule implementing the sulfur dioxide
limits of the acid rain provisions in the 1990 Amendments to the Clean
Air Act. This rule adds calculated benefits of over $70 billion per
year to the aggregate benefits estimate. Second, in reviewing our
estimates, we inadvertently subtracted incorrect cost estimates for
EPA's rules establishing National Ambient Air Quality Standards for
Ozone and Particulate Matter. This correction reduces the aggregate
cost of the rules covered over the 10-year period by roughly $20
billion per year.
It is important to note that four EPA rules--two rules limiting
particulate matter and NOX emissions from heavy duty highway
engines, the Tier 2 rule limiting the emissions from light duty
vehicles, and the Acid Rain rule cited above--account for a substantial
fraction of the aggregate benefits reported in Table 2. These four EPA
rules have estimated benefits of $96 to $113 billion per year and costs
of $8 to
[[Page 5494]]
$8.8 billion per year.\8\ The aggregate benefits and costs for the
other 103 rules are $38 to $104 billion and $30 to $35 billion,
respectively. Table 3 provides additional information on aggregate
benefits and costs for select agency programs.
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\8\ These four EPA rules will reduce ambient levels of fine
particulate matter by reducing direct PM emissions and/or the
emissions of precursor pollutants like SO2 and
NOX that contribute to the formation of fine PM. Many
studies show an association between both short- and long-term
exposure to fine PM and a variety of adverse health effects ranging
from increases in the frequency of hospital admissions to premature
mortality. There are, however, important uncertainties associated
with these benefit estimates. For example key assumptions underlying
the benefit estimates associated with premature mortality include
the following: (1) The benefits analysis assumes there is a causal
association between inhalation of fine particles and such health
effects as premature mortality at exposure levels near those
experienced by most Americans on a daily basis. While the biological
mechanisms for this effect have not yet been definitively
established, EPA has concluded that the weight of the available
epidemiological and toxicological evidence supports an assumption of
causality; (2) The benefits analysis assumes that all fine
particles, regardless of their chemical composition, are equally
toxic. This is an important assumption because fine particles from
power plant emissions are chemically different from those emitted
from both mobile sources and other industrial facilities. However,
no clear scientific grounds exist for supporting differential
effects estimates by particle type; (3) The benefits analysis
assumes that the concentration-response function for fine particles
is approximately linear within the range of ambient concentrations
under consideration. Thus, the estimates include health benefits
from reducing fine particles in areas that are in attainment with
the fine particle standard and those that do not meet the standard;
(4) The benefits analysis assumes that the forecasts for future
emissions and associated air quality modeling are valid. The EPA's
analyses are based on peer-reviewed scientific literature and up-to-
date assessment tools. However such models are themselves based on
an evolving understanding and research continues to provide the data
necessary for model evaluation; and (5) The valuation of estimated
reduction in mortality risk is largely taken from studies of the
tradeoff associated with the willingness to accept risk in labor
markets. Alternative estimates may, however, be more relevant for
rules addressing air pollution. Further information on these
benefits estimates can be found at http://www.epa.gov/air/clearskies/tech_adden.pdf
, http://www.whitehouse.gov/omb/inforeg/
costbenefitreport1998.pdf, http://www.whitehouse.gov/omb/inforeg/2000fedreg-report.pdf
.
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Based on the information released in previous reports, the total
costs and benefits of all Federal rules now in effect (major and non-
major, including those adopted more than 10 years ago) could easily be
a factor of ten or more larger than the sum of the costs and benefits
reported in Table 2. More research is necessary to provide a stronger
analytic foundation for comprehensive estimates of total costs and
benefits by agency and program. OMB's examination of the benefits and
costs of Federal regulation supports the need for a common-sense
approach to modernizing Federal regulation that involves the expansion,
modification, and rescission of regulatory programs as appropriate.
Table 2.--Estimates of the Annual Benefits and Costs of Major Federal
Rules, October 1, 1992 to September 30, 2002
[Millions of 2001 dollars]
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Agency Benefits Costs
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Agriculture...................... 3,108 to 6,203.... 1,649 to 1,679.
Education........................ 658 to 816........ 363 to 612.
Energy........................... 4,704 to 4,722.... 2,473.
Health & Human Services.......... 8,733 to 11,724... 3,168 to 3,337.
Housing & Urban Development...... 527 to 601........ 796.
Labor............................ 1,808 to 4,200.... 1,057.
Transportation................... 6,150 to 9,465.... 4,313 to 6,812.
Environmental Protection Agency.. 108,858 to 179,757 23,867 to 27,028.
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Total...................... 134,547 to 217,539 37,686 to 43,794.
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Table 3.--Estimates of Annual Benefits and Costs of Major Federal Rules:
Select Programs and Agencies, October 1, 1992-September 30, 2002
[Millions of 2001 dollars]
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Agency Benefits Costs
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Energy: Energy Efficiency and 4,704 to 4,772.... 2,473.
Renewable Energy.
Health & Human Services: Food and 2,021 to 4,558.... 482 to 651.
Drug Administration.
Labor: Occupational Safety and 1,808 to 4,200.... 1,057.
Health Administration.
Transportation:
National Highway Traffic 4,330 to 7,645.... 2,795 to 5,295.
Safety Administration.
Coast Guard.................. 68................ 1,282.
Environmental Protection Agency:
Office of Air................ 106,010 to 163,893 18,362 to 20,978.
Office of Water.............. 891 to 8,103...... 2,424 to 2,937.
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In order for comparisons or aggregation to be meaningful, benefit
and cost estimates should correctly account for all substantial effects
of regulatory actions, including potentially offsetting effects, which
may or may not be reflected in the available data. We have not made any
changes to agency monetized estimates other than connecting them to
annual equivalents. Any comparison or aggregation across rules should
also consider a number of factors which our presentation does not
address. To the extent that agencies have adopted different
methodologies--for example, different monetized values for effects,
different baselines in terms of the regulations and controls already in
place, different treatments of uncertainty--these differences remain
embedded in the table 2. While we have relied in many instances on
agency practices in monetizing costs and benefits, our citation of or
reliance on agency data in this report should not be taken as an
endorsement of all the
[[Page 5495]]
varied methodologies used to derive benefits and cost estimates.
B. Estimates of Benefits and Costs of This Year's ``Major'' Rules
In this section, we examine in detail the benefits and costs of
each ``major'' rule, as required by section 624(a)(1)(C). We have
included in our review those final regulations on which OMB concluded
review during the 12-month period October 1, 2001 through September 30,
2002.
The statutory language that categorizes the rules we consider for
this report differs from the definition of ``economically significant''
in Executive Order 12866 (section 3(f)(1)). It also differs from
similar statutory definitions in the Unfunded Mandates Reform Act and
subtitle E of the Small Business Regulatory Enforcement Fairness Act of
1996--Congressional Review of Agency Rulemaking. Given these varying
definitions, we interpreted section 624(a)(1)(C) broadly to include all
final rules promulgated by an Executive branch agency that meet any one
of the following three measures:
[sbull] Rules designated as ``economically significant'' under
section 3(f)(1) of Executive Order 12866;
[sbull] Rules designated as ``major'' under 5 U.S.C. 804(2)
(Congressional Review Act); and
[sbull] Rules designated as meeting the threshold under Title II of
the Unfunded Mandates Reform Act (2 U.S.C. 1531-1538)
Of the 31 rules received by OMB, USDA submitted four; the Veterans
Administration, DOE, EPA, OMB, the Social Security Administration, and
SBA each submitted one; HHS eight; The Departments of Interior,
Justice, Defense, and FEMA each submitted two; and DOT five.
Social Regulation
Of the 31 economically significant rules reviewed by OMB, six are
regulations requiring substantial additional private expenditures and/
or providing new social benefits. Table 4 summarizes the costs and
benefits of these rules and provides other information taken from rule
preambles and agency RIAs. Of the six regulations received by OMB, EPA
and DOE each submitted one, and DOI and DOT each submitted two. Agency
estimates and discussion are presented in a variety of ways, ranging
from a mostly qualitative discussion--for example, the NHTSA light
truck corporate average fuel economy (CAFE) standard--to a more
complete benefit-cost analysis, such as DOE's central air conditioner
rule.
1. Benefits Analysis
Agencies monetized at least some benefit estimates for five of the
six rules. In the case of EPA's recreational engines rule, the agency
provides some monetized benefit estimates, but discusses other benefits
qualitatively. In one case--NHTSA's tire pressure monitoring systems
(TPMS) rule--the agency did not monetize all of the quantified
benefits. In another case--NHTSA's CAFE rule--the agency did not report
any quantified or monetized benefit estimates.
2. Cost Analysis
For three of the six rules, agencies provided monetized cost
estimates. These include DOE's air conditioner rule, NHTSA's TPMS rule
and EPA's recreational vehicle rule. For the remaining three rules,
both DOI migratory bird hunting rules and NHTSA's CAFE rule, the
agencies did not estimate costs.
3. Net Monetized Benefits
Three of the six rules provided at least some monetized estimates
of both benefits and costs. Of these, the estimated monetized benefits
of both the DOE air conditioner rule and the EPA recreational engine
rule exceed the estimated monetized costs. The magnitude of the net
benefits varies from $75 million per year for the air conditioner rule
to as much as $4.6 billion for the recreational engine rule. One rule,
NHTSA's TPMS rule, has negative net monetized benefits ranging from
approximately $706 to $862 million per year.
4. Rules Without Quantified Effects
One rule, NHTSA's CAFE rule, is classified as economically
significant even though the agency did not provide any quantified
estimates of their effects.
Table 4.--Summary of Agency Estimates for Final Rules 10/01/2001-9/30/02
[As of Date of Completion of OMB Review]
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Agency Rule Benefits Costs Other Information
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DOE Energy Conservation $9.1 billion $7.3 billion Monetized benefit and cost
Standards for (present value) in (present value) for values are obtained from the
Central Air energy savings purchases between ``National Energy Savings/
Conditions and Heat between 2006 and 2006 and 2030. Net Present Value/
Pumps. 2030. Shipments'' spreadsheet,
available on DOE's web site:
http://www.eren.doe.gov/
buildings/codes--standards/
applbrf/central--air--
conditioner--3.html DOE
projects a cumulative
reduction in nitrogen oxide
emissions of 119.3 thousand
metric tons (undiscounted)
over the period 2006-2030
and a cumulative reduction
in carbon dioxide equivalent
emissions of 53.8 million
metric tons (undiscounted)
over the period 2006-2030
[DOE Technical Support
Document Appendix M, Table
M.9].
DOI Early Season $50 million to $192 Not estimated....... The analysis was based on the
Migratory Bird million/yr. 1996 National Hunting and
Hunting Regulations Fishing Survey and the U.S.
2002-2003. Department of Commerce's
County Business Patterns,
from which it was estimated
that migratory bird hunters
would spend between $429
million and $1,084 million
at small businesses [67 FR
54704]. The listed benefits
represent estimated
consumer.
DOI Late-Season $50 million to $192 Not estimated....... The analysis was based on the
Migratory Bird million/yr. 1996 National Hunting and
Hunting Regulations Fishing Survey and the U.S.
2002-2003. Department of Commerce's
County Business Patterns,
from which it was estimated
that migratory bird hunters
would spend between $429
million and $1,084 million
at small businesses [67 FR
54704]. The listed benefits
represent estimated
consumer.
[[Page 5496]]
DOT Light Truck Average Not estimated....... Not estimated....... ``* * * [T]he agency has been
Fuel Economy operating under a
Standard, Model restriction on the use of
Year 2004. appropriations for the last
six fiscal years. The
restriction has prevented
the agency from gathering
and analyzing data relating
to fuel economy capabilities
and the costs and benefits
of improving the level of
fuel economy. Particularly
since that restriction was
lifted only on December 18,
2001, the agency has been
unable to prepare a separate
economic analysis for this
rulemaking. The agency
notes, however, that the
standard it is setting for
the 2004 model year will not
make it necessary for the
manufacturers with a
substantial share of the
market to change their
product plans.'' [67 FR
16059]
DOT Tire Pressure 79-124 fatalities $749-$1,206 million/ Unquantified Benefits: ``The
Monitoring Systems and 5,176- 8,722 yr. agency cannot quantify the
(TPMS). injuries prevented benefits from a reduction in
per year; $43-$344 crashes associated with
million per year in hydroplaning and overloading
fuel savings and vehicles. The primary reason
reduced tire wear. that the agency has been
unable to quantify these
benefits is the lack of
crash data indicating tire
pressure and how often these
conditions are the cause or
contributing factors in a
crash. The agency does not
collect tire pressure in its
crash investigations. NHTSA
also has not been able to
quantify the benefits
associated with reductions
in property damage and
travel delays that will
result from fewer crashes or
reductions in the severity
of crashes.'' [67 FR 38739]
Unquantified Costs: ``The
agency anticipates that
there may be other
maintenance costs for both
direct and indirect TPMS.
For example, with indirect
TPMSs, there may be problems
with wheel speed sensors and
component failures. With
direct TPMSs, the pressure
sensors may be broken off
when tires are changed. The
agency requested comments on
this issue in the NPRM, but
received none. Without
estimates of these
maintenance problems and
costs, the agency is unable
to quantify their impact.
The agency also notes that
in order to benefit from the
TPMS, drivers must respond
to a warning by re-inflating
their tires. To accomplish
this, most drivers will
either make a separate trip
to a service station or take
additional time to inflate
their tires when they are at
a service station for fuel.
The process of checking and
re-inflating tires is
relatively simple, and
probably would take from
three to five minutes. The
time it would take to make a
separate trip to a service
station would vary depending
on the driver's proximity to
a station at the time he or
she was notified.'' 67 FR
38741]
EPA Control of Emissions $410 million/yr. in $192 million/yr..... EPA also lists a variety of
From Nonroad Large reduced engine other benefit categories
Spark-Ignition operation costs; which it was not able to
Engines, and $900 million to quantify or monetize,
Recreational $7.88 billion in ranging from infant
Engines. air quality mortality to damage to urban
benefits in ornamental plants. [67 FR
calendar year 2030. 68328].
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Transfer Regulations
Of the 31 economically significant rules reviewed by OMB, Table 5
lists the 25 that implement Federal budgetary programs. The budget
outlays associated with these rules are ``transfers'' to program
beneficiaries. Of the transfer rules, HHS promulgated eight rules, most
of which implement Medicare and Medicaid policy. Four are USDA rules.
Of the four, three are crop assistance and disaster aids for farmers
and one is a food stamp program rule. The Department of Transportation
issued three transfer rules. The Departments of Defense, Justice, and
the Federal Emergency Management Administration issued two each. The
Social Security Administration, Veterans Administration, Small Business
Administration and Office of Management and Budget each promulgated one
rule.
[[Page 5497]]
Table 5.--Agency Transfer Rules: 10/01/01 to 9/30/02
[As of date of completion of OMB review]
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Office of Management and Budget (OMB)
Regulation for Air Carrier Guaranteed Loan Program.
Dept. of Agriculture (USDA)
2000 Crop Agricultural Disaster and Market Assistance.
2002 Farm Bill Regulations: Sugar Program.
Peanut Quota Buyout Program.
Work Provisions of the PRWORA of 1996 and the Food Stamp Provisions of the Balance Budget Act of 1997.
Dept. of Defense
CHAMPUS/TRICARE: Partial Implementation of Pharmacy Benefits Programs; NDAA for FY 2001.
TRICARE: Sub-Acute Care Program; Uniform Skilled Nursing Benefit; Home Healthcare Benefit; Medicare Payment
Methods for Skilled Nursing Facilities.
Dept. of Health and Human Services (HHS)
Contraception and Infertility Research Loan Repayment Program.
Medicare Program: Revisions to Payment Policies and 5-Year Review and Adjustments to the Relative Value Units
Under the Physician Fee Schedule for CY 2002.
Medicare Program: Prospective Payment System for Hospital Outpatient Services for CY 2002 and Pro Rata Reduction
on Transitional Pass-Through Payments.
Medicaid Program: Modification of the Medicaid Upper Payment Limit for Non-State, Government-Owned or Operated
Hospitals.
Medicare Program: Modifications to Managed Care Rules Based on Payment Provisions in BIPA and Technical
Corrections.
Medicare Program: Notice of Modification of Beneficiary Assessment Requirements for Skilled Nursing Facilities.
Changes to Hospital Inpatient Prospective Payment Systems and FY 2003 Rate.
Medicaid Managed Care; New Provisions.
Social Security Administration
Revised Medical Criteria for Determination of Disability Musculoskeletal System and Related Criteria.
Department of Justice
Claims Under the Radiation Exposure Compensation Act Amendments of 2000.
September 11 Victim Compensation Fund of 2001.
Dept. of Transportation
Procedures for Compensation of Air Carriers.
Imposition and Collection of Passenger Civil Aviation Security Fees in the Wake of September 11.
Aviation Security Infrastructure Fees.
Veterans Administration
Diseases Specific to Radiation-Exposed Veterans.
Federal Emergency Management Administration
Assistance to Firefighters Grant Program.
Disaster Assistance; Federal Assistance to Individuals and Households.
Small Business Administration
Disaster Loan Program.
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Major Rules for Independent Agencies
The congressional review provisions of the Small Business
Regulatory Enforcement Fairness Act (SBREFA) require the General
Accounting Office (GAO) to submit reports on major rules to the
committees of jurisdiction, including rules issued by agencies not
subject to Executive Order 12866 (the ``independent'' agencies). We
reviewed the information on the costs and benefits of major rules
contained in GAO reports for the period of October 1, 2001 to September
30, 2002. GAO reported that three independent agencies issued eight
major rules during this period. Two agencies did not conduct benefit-
cost analyses. One agency considered benefits and costs of the rules.
OIRA lists the agencies and the type of information provided by them
(as summarized by GAO) in Table 6. The Securities and Exchange
Commission consistently considered benefits and costs in their
rulemaking processes while the Federal Communications Commission and
the Nuclear Regulatory Commission did not prepare benefit-cost
analyses.
In comparison to the agencies subject to E.O. 12866, the
independent agencies provided relatively little quantitative
information on the costs and benefits of the major rules. As Table 6
indicates, three of the eight rules included some discussion of
benefits and costs. Three of the eight regulations had monetized cost
information; one regulation monetized benefits. It is difficult to
discern, however, whether the rigor and the extent of the analyses
conducted by the independent agencies are similar to those of the
analyses performed by agencies subject to the Executive Order.
Table 6.--Rules for Independent Agencies (October, 2001-September, 2002)
----------------------------------------------------------------------------------------------------------------
Information on
Agency Rule benefits or costs Monetized benefits Monetized Costs
----------------------------------------------------------------------------------------------------------------
FCC................... Broadcast Services; No................. No................. No.
Digital Television.
[[Page 5498]]
FCC................... Ultra-Wideband No................. No................. No.
Transmission Systems.
FCC................... Assessment and Collection No................. No................. No.
of Regulatory Fees for
Fiscal Year 2002.
FCC................... Order to Permit Operation No................. No................. No.
of NGSO FSS Systems Co-
Frequency with GSO and
Terrestrial Systems in
the Ku-Band Frequency
Range; Authorize
Subsidiary Terrestrial
Use of the 12.2-12.7 GHz
Band by Direct Broadcast
Satellite Licensees and
Their Affiliates; and in
Re-Applications of
Broadwave USA, PDC
Broadband Corporation,
and Satellite Receivers,
Ltd. in the 12.2-12.7 GHz
Band.
NRC................... Revision of Fee Schedules; No................. No................. No.
Fee Recovery for FY 2002.
SEC................... Books and Records Yes................ Yes................ Yes.
Requirements for Brokers
and Dealers Under the
Securities Exchange Act
of 1934.
SEC................... Certification of Yes................ No................. Yes.
Disclosure in Companies'
Quarterly and Annual
Reports.
SEC................... Acceleration of Periodic Yes................ No................. Yes.
Report Filing Dates and
Disclosure Concerning Web
Site Access to Reports.
----------------------------------------------------------------------------------------------------------------
Chapter II. Developing Better Regulation
In addition to estimates of the cost and benefits of Federal rules
and paperwork, the Regulatory Right-to-Know Act requires OMB to publish
``recommendations for reform.'' In response to this requirement, OMB
seeks public comment in the following three areas.
A. Guidelines for Regulatory Analysis
The evaluation of both the benefits and costs of alternative
options through regulatory analysis helps agency policymakers arrive at
sound regulatory decisions and also helps the public, Congress, and the
courts understand those decisions. Although the preparation of such an
analysis may require significant investments of agency staff and
resources, carefully completed analyses will result in well-designed
regulations and larger net benefits to society as a whole. To help
support the development of better analysis, OMB has provided guidance
to the agencies since the 1980s on how to conduct regulatory analysis.
The current OMB guidelines were issued in 1996 as a ``best practices''
document and were revised and issued as guidance in 2000.
In order to make continued improvements in the quality of the
regulatory analyses prepared by agencies, OIRA initiated in 2002 a
process to refine these guidance documents. The OIRA Administrator and
a member of the Council of Economic Advisers (CEA) are serving as co-
chairs of this effort. OMB and CEA staff have drafted proposed revised
guidelines which are presented in Appendix C. Through these proposed
guidelines, we seek to establish more uniform analytic guidance for the
agencies to follow in preparing their regulatory analysis. We will also
incorporate new insights and recent innovations in what constitutes a
good analysis. Finally, we expect the guidelines to increase the
transparency of the analysis of prospective regulations to both
technical and nontechnical readers.
While these proposed guidelines include some additional
requirements on the agencies in performing RIAs, we believe that
adherence to the proposed revisions will yield improvements in the
information provided by these analyses. Improved analyses will
strengthen the regulatory development process, resulting in better
designed regulations and potentially large net benefits to society as a
whole.
The key changes in the proposed guidelines include the following:
[sbull] The proposal encourages agencies to perform both cost-
effectiveness analysis and benefit-cost analysis of major rules because
the two techniques offer regulators somewhat different but useful
perspectives. In addition, however, we recognize that cost-
effectiveness analysis will be feasible in certain situations where a
benefit-cost analysis may not be feasible.
[sbull] The proposal recommends that agencies report analytic
results based on two discount rates--3 percent and 7 percent--for major
rules whose effects will be felt primarily within this generation
(i.e., the next 20 or 30 years). If benefits and costs are expected to
last beyond the current generation, the proposal permits additional
sensitivity analysis with discount rates as low as 1 percent.
[sbull] The proposal requires agencies to support rulemakings with
formal probabilistic analysis of the key scientific and economic
uncertainties regarding costs and benefits for rules with economic
effects that exceed more than $1 billion per year. In particular, the
analysis must present a probability distribution for the estimated
benefits and costs, unless the benefits and costs are known with a high
degree of certainty.
The draft guidelines are being released today for a 60-day public
comment period as well as independent peer review by leading academic
experts in the field of regulatory analysis. We also plan to conduct an
interagency review of the draft guidelines following public and peer
review comments.
We will continue to use our current guidance until we complete this
review process and publish revised guidelines.
B. Request for Comment on U.S. Approaches to Analysis and Management of
Emerging Risks
Regulators often must decide on an appropriate course of action to
protect public health, safety or the environment before science has
resolved all the key factual questions about a potential hazard. The
appropriate level of precaution in risk assessment and management is
complicated by the need to balance efforts to mitigate these potential
risks with countervailing risks that may arise from other sources. For
example, policies to facilitate the growth of the diesel-engine market
may be desirable from a global environmental and energy security
perspective since diesel offers significant fuel efficiency advantages
over gasoline-powered vehicles, and would likely lead to less reliance
on importation of foreign oil and reduce the emission of greenhouse
gases. However, diesel fuels pose greater risk to public health and
environment from smog and soot caused by relatively higher emission of
particles and nitrogen dioxide than conventional gasoline.
U.S. regulators rely on various science-based precautionary
approaches in assessing potential hazards and taking protective
actions. These
[[Page 5499]]
approaches have evolved over time and reflect statutory requirements,
agency specific policy decisions, and advancements in scientific
understanding. For purposes of collecting and analyzing current risk
assessment and management practices in federal agencies, with an
emphasis on the role of precaution in risk policy and regulation, the
Administration has formed an Interagency Work Group on Risk Management
co-chaired by James L. Connaughton, Chairman of the White House Council
on Environmental Quality and John D. Graham, Administrator, Office of
Information and Regulatory Affairs, Office of Management and Budget.
The Work Group includes representatives from the Department of
Agriculture, the Department of Commerce, the Department of Health and
Human Services, the Department of Interior, the Environmental
Protection Agency, and the Office of Science and Technology Policy.
To assist in the Work Groups efforts, OMB requests comments for the
next 60 days on current U.S. approaches to analysis and management of
emerging risks. Specifically, we seek public input on:
[sbull] Ways in which ``precaution'' is embedded in current risk
assessment procedures through ``conservative'' assumptions in
estimation of risk, or through explicit ``protective'' measures in
management decisions as required by statutory requirements as well as
agency judgments.
[sbull] Examples of approaches in human and ecological risk
assessment and management methods addressed by U.S. regulatory agencies
(e.g., consumer product safety, drug approval, pesticide registration,
protection of endangered species) which appear unbalanced.
[sbull] How the U.S. balances precautionary approaches to health,
safety and environmental risks with other interests such as economic
growth and technological innovation.
C. Request for Comment on Improving the Analysis of Regulations Related
to Homeland Security
In last year's final Report to Congress, OMB noted that 58
significant new federal regulations had been enacted in the aftermath
of September 11th to protect national security and provide post-attack
assistance. As an integral part of the expedited issuance of these
rules, OIRA conducted its full regulatory review and coordination
function under Executive Order 12866. These efforts made sure that all
the rules related to September 11th received priority attention from
the appropriate reviewers, and that the Administration's best solutions
to respond to potential terrorist attacks were implemented.
Looking to the future, OMB expects additional homeland-security
proposals from federal agencies covering concerns ranging from airline
safety and immigration to food safety. For example, USDA and HHS will
propose new regulations required to implement the Bioterrorism
Preparedness and Control Act of 2002. Similarly, the Department of
Homeland Security will face major challenges in developing sensible
regulations covering many facets of American society. In light of the
significant interest in these regulations, OMB is seeking public
comment for the next 60 days on how to more effectively evaluate the
benefits and costs of these proposals. OMB seeks comment on how
agencies might assess the probability of future terrorist attacks and
the likely damages, and the resulting effectiveness of new federal
regulations in preventing future attacks, reducing America's
vulnerability, or mitigating the damage of attacks which do occur. OMB
seeks comment on how agencies might better identify, quantify and weigh
the direct and indirect costs of such rules, including impacts on time,
convenience, privacy and economic productivity. OMB also seeks comment
on how evaluation of such regulation could include auxiliary benefits
not directly related to the homeland security purpose of the
regulation. OMB's request for comment is concerned with these issues as
they apply to future rulemakings and is not intended to address a
specific rulemaking.
Appendix A.--Calculations of Benefits and Costs: Explanation
Chapter I presents estimates of the annual costs and benefits of
selected final major regulations reviewed by OMB between October 1,
1992 and September 30, 2002. The explanation of the calculations for
the major rules reviewed by OMB between April 1, 1995 and March 31,
1999 can be found in Chapter IV of our 2000 report (OMB 2000). Table
19, Appendix E, of the 2002 Report presents OIRA's estimates of the
benefits and costs of the 20 individual rules reviewed between April
1, 1999 and September 30, 2001. All benefit and cost estimates were
adjusted to 2001 dollars.
In assembling estimates of benefits and costs, OIRA has:
(1) Applied a uniform format for the presentation of benefit and
cost estimates in order to make agency estimates more closely
comparable with each other (for example, annualizing benefit and
cost estimates); and
(2) Monetized quantitative estimates where the agency has not
done so (for example, converting Agency projections of quantified
benefits, such as, estimated injuries avoided per year or tons of
pollutant reductions per year to dollars using the valuation
estimates discussed below).
The adoption of a uniform format for annualizing agency
estimates allows, at least for purposes of illustration, the
aggregation of benefit and cost estimates across rules. While OIRA
has attempted to be faithful to the respective agency approaches,
the reader should be cautioned that agencies have used different
methodologies and valuations in quantifying and monetizing effects.
Thus, this aggregation involves the assemblage of benefit and cost
estimates that are not comparable.
Table 7.--Estimate of Benefits and Costs of 47 Major Rules October 1, 1992 to March 31, 1995
[Millions of 2001 dollars]
----------------------------------------------------------------------------------------------------------------
Regulation Agency Benefits Costs Explanation
----------------------------------------------------------------------------------------------------------------
Nutrition Labeling of Meat and USDA--FSIS...... 205 25-32 Present value estimates
Poultry Products. amortized over 20 years.
Food Labeling (combined HHS--FDA........ 438-2,637 159-249 Present value estimates
analysis of 23 individual amortized over 20 years.
rules).
Real Estate Settlement HUD............. 258-332 135 ..........................
Procedures.
Manufactured Housing Wind HUD............. 79 511 ..........................
Standards.
Confined Spaces............... DOL-OSHA........ 540 250 We valued each fatality at
$5 million and each lost-
workday injury at
$50,000. We did not value
non-lost-workday
injuries.
[[Page 5500]]
Occupational Exposure to DOL-OSHA........ 92 448 We assumed a 20-year
Asbestos. latency period between
exposure and the onset of
cancer or asbestosis and
valued each death and
each case of asbestosis
at $5 million.
Vessel Response Plans......... DOT-Coast Guard. 8 324 Present values amortized
over 30 years. We valued
each barrel of oil not
spilled at $2,000.
Double-Hull Standards......... DOT-Coast Guard. 15 641 Present values amortized
over 30 years. We valued
each barrel of oil not
spilled at $2,000.
Controlled Substances and DOT-FHWA........ 1,539 114 ..........................
Alcohol Use and Testing.
Prevention of Prohibited Drug DOT............. 107 37 Present values amortized
Use in Transit Operations. over 10 years.
Stability Control of Medium DOT-NHTSA....... 1,650-2,539 694 We valued each
and Heavy Vehicles During ``equivalent fatality''
Braking. at $3 million.
Oil and Gas Extraction........ EPA............. 35-129 35 First-year costs amortized
costs over 15 years and
added to annual (15th
year) costs.
Acid Rain Permits Regulations. EPA............. 76,854-77,206 1,109-1,871 We valued SO2 reductions
at $7,300 per ton.
Vehicle Inspection and EPA............. 219-992 671 We used the estimates of
Maintenance (I/M). and cost and emission
reductions of the new I/M
program compared to the
baseline of no I/M
program. We valued VOC
reductions at $520-$2360
per ton. We did not
assign a value to CO
reductions.
Evaporative Emissions from EPA............. 243-1,104 161-248 We assumed the VOC
Light-Duty Vehicles, Light- emission reductions began
Duty Trucks, and Heavy-Duty in 1995 and rise linearly
Vehicles.. until 2020, after which
point they remain at the
2020 level. Annualizing
this stream results in an
average of 468,000 tons
per year. We valued these
tons at $520-$2360 per
ton.
Onboard Diagnostic Systems.... EPA............. 421-2,383 226 Emission reductions and
costs amortized over 15
years. We valued VOC
reductions at $520-$2360
per ton and NOX
reductions at $700-$4900
per ton.
Phase II Land Disposal EPA............. 26 240-272 We valued each cancer case
Restrictions. at $5 million.
Phase-out of Ozone-Depleting EPA............. 1,260-3,993 1,681 Present values amortized
Chemicals and Listing of over 16 years.
Methyl Bromide.
Reformulated Gasoline......... EPA............. 184-637 1,085-1,395 Estimates are for Phase
II, which include Phase I
benefits and costs. We
used the benefit
estimates that assume the
enhanced I/M program is
in place. We valued VOC
reductions at $520-$2360
per ton and NOX
reductions at $700-$4900
per ton. We valued each
cancer case at $5
million. We assumed the
phase II aggregate costs
are an additional 25
percent of the Phase I
costs based on EPA's
reported per-gallon cost
estimates.
Acid Rain NOX Title IV CAAA... EPA............. 661-4,725 372 Values are for Phase II.
We valued NOX reductions
at $350-$2500 per ton.
Hazardous Organic NESHAP...... EPA............. 520-2,360 292-333 We valued VOC emissions at
$520-$2360 per ton and
NOX emissions (which are
a cost in this instance)
at $350-$2500 per ton. We
did not value changes in
CO emissions.
Refueling Emissions from Light- EPA............. 148-673 33 We assumed Stage II
Duty Vehicles. controls will remain in
place and valued VOC
emissions at $520-$2360
per ton.
[[Page 5501]]
Non-Road Compression Ignition EPA............. 412-2,881 29-70 We annualized the NOX
Engines. emissions which yielded
an average annual
emission reduction of
588,000 tons beginning in
2000. We valued NOX
emissions at $700-$4900
per ton.
Bay/Delta Water Quality EPA............. 2-26 37-248 ..........................
Standards.
Deposit Control Gasoline...... EPA............. 374-1,480 197 We valued estimates of
combined emission
reductions at $520-$2360
per ton. Present value
cost estimates amortized
over 5 years.
------------------------------------
Total................... 86,290-106,708 9,506-11,087 ..........................
----------------------------------------------------------------------------------------------------------------
Table 8.--Estimate of Benefits and Costs of 3 Major Rules, October 1, 2001 to September 30, 2002
[Millions of 2001 dollars]
----------------------------------------------------------------------------------------------------------------
Regulation Agency Benefits Costs Explanation
----------------------------------------------------------------------------------------------------------------
Energy Conservation Standards for DOE................... 710 636 Present value estimates
Central Air Conditioners and Heat amortized over 24 years.
Pumps. We valued NOX emission
reductions at $350-$2500
per ton.
Tire Pressure Monitoring Systems DOT................... 409-944 749-1,206 We valued each equivalent
(TPMS). fatality (see p. iv of
the Executive Summary of
the Final Economic
Assessment) at $3
million.
Control of Emissions From Nonroad EPA................... 913-4,818 192 We amortized the benefit
Large Spark-Ignition Engines, and estimates in proportion
Recreational Engines. to the estimated NOX
emission reductions. The
lower end of the range
reflects the alternative
approach to valuing
benefits of EPA rules
discussed elsewhere.
--------------------------
Total....................... ...................... 2,032-6,472 1,577-2,034
-----------------------------------
Assumptions: 7 percent discount rate unless another rate explicitly identified by the agency. For DOL: $5
million VSL assumed for deaths averted when not already quantified. Injuries averted valued at $50,000 from
Viscusi.\9\ All values converted to 2001 dollars. All costs and benefits stated on a yearly basis.
----------------------------------------------------------------------------------------------------------------
\9\ W. Kip Viscusi, Fatal Tradeoffs: Public & Private Responsibilities for Risk. New York, NY, Oxford University
Press, 1992, p. 65.
Valuation Estimates for Regulatory Consequences \10\
---------------------------------------------------------------------------
\10\ The following discussion updates the monetization approach
used in previous reports and draws on examples from this and
previous years.
---------------------------------------------------------------------------
Agencies continue to take different approaches to monetizing
benefits for rules that affect small risks of premature death. As a
general matter, we continue to defer to the individual agencies'
judgment in this area. In cases where the agency both quantified and
monetized fatality risks, we have made no adjustments to the
agency's estimate. In cases where the agency provided a quantified
estimate of fatality risk, but did not monetize it, we have
monetized these estimates in order to convert these effects into a
common unit.
The following is a brief discussion of OIRA's valuation
estimates for other types of effects that agencies identified and
quantified, but did not monetize. As a practical matter, the
aggregate benefit and cost estimates are relatively insensitive to
the values we have assigned for these rules because the aggregate
benefit estimates are dominated by those rules where EPA provided
quantified and monetized benefit and cost estimates.
Injury. For NHTSA's rules, we adopted NHTSA's approach of
converting nonfatal injuries to ``equivalent fatalities.'' These
ratios are based on NHTSA's estimates of the value individuals place
on reducing the risk of injury of varying severity relative to that
of reducing risk of death.\11\ For the OSHA rules, we monetized only
lost workday injuries using a value of $50,000 per injury averted.
---------------------------------------------------------------------------
\11\ National Highway Traffic Safety Administration, The
Economic Cost of Motor Vehicle Crashes, 1994, Table A-1. http://www.nhtsa.dot.gov/people/economic/ecomvc1994.html
.
---------------------------------------------------------------------------
I. Change in Gasoline Fuel Consumption. We valued reduced
gasoline consumption at $.80 per gallon pre-tax. This equates to
retail (at-the-pump) prices in the $1.10-$1.30 per gallon range.
II. Reduction in Barrels of Crude Oil Spilled. OIRA valued each
barrel prevented from being spilled at $2,000. This is double the
sum of the most likely estimates of environmental damages plus
cleanup costs contained in a published journal article [Brown and
Savage, ``The Economics of Double-Hulled Tankers,'' Maritime Policy
and Management, Volume 23(2), 1996, pages 167-175].
III. Change in Emissions of Air Pollutants. We used estimates of
the benefits per ton for reductions in hydrocarbon and nitrogen
oxide emissions derived from recent EPA regulatory analyses, as
follows (1996$):
Hydrocarbon: $520 and $2360 per ton
Nitrogen Oxide (stationary): $350 and $2500 per ton
Nitrogen Oxide (mobile): $700 and $4900 per ton
Sulfur Dioxide: $7300 per ton
The estimates for reductions in hydrocarbon emissions were
obtained from EPA's RIA for the 1997 rule revising the primary NAAQS
for ozone and fine PM. OIRA has revised the estimates for reductions
in NOX emissions to reflect a range of estimates from
recent EPA analyses for several rules and for proposed legislation.
In particular, OIRA has adopted different benefit transfer estimates
for NOX reductions from stationary sources (e.g.,
electric utilities) and from mobile sources. EPA believes that there
are a number of reasons to expect that reductions in NOX
emissions from utility sources achieve different air quality
[[Page 5502]]
improvements relative to reductions from ground-level mobile
sources. For example, mobile source tailpipe emissions are located
in urban areas at ground level (with limited dispersal) while
electric utilities emit NOX from ``tall stacks'' located
in rural (remote) locations with substantial geographic dispersal
(Letter to Don Arbuckle, Deputy Administrator, OIRA from Tom Gibson,
Associate Administrator, Office of Policy, Economics and Innovation,
EPA, May 16, 2002.) There remain considerable uncertainties with the
development of these estimates. The discussion below outlines the
various EPA analyses serving as the basis for the NOX
benefit transfer values presented above and discusses the
uncertainties that attend these estimates.
Analysis of recent EPA rules yield several estimates for the
NOX benefits per ton from electric utility sources. (See
the Regulatory Impact Analyses for the ``NOX SIP Call''
and the Section 126 rules, available on the Web at http://www.epa.gov/ttn/ecas/econguid.html.
In addition, see Memo to NSR
Docket from Bryan Hubbell, Senior Economist, Innovative Strategies
and Economics Group, EPA.) Based on these studies, the upper end of
the range for the benefits of NOX reductions from
stationary sources (electric utilities) is $2500 per ton. These
studies also developed estimates for the benefits associated with
reductions in SO2 from electric utilities. Based on an
analysis outlined in a June 20, 2001 EPA memo to the file,
``Benefits Associated with Electricity Generating Emissions
Reductions Realized Under the NSR Program,'' we used $7300 per ton
SO2 emissions for the 1992 EPA Acid Rain rule.
For mobile sources, EPA recently published the final Tier 2/
Gasoline Sulfur rule RIA (EPA, 1999) and Heavy Duty Engine/Diesel
Fuel RIA (EPA, 2000). For the Tier 2 rule, which affects light-duty
vehicles, NOX reductions account for around 90 percent of
PM precursor emissions and 86 percent of ozone precursor emissions.
Based on the final Tier 2/Gasoline Sulfur RIA, EPA estimates that
NOX reductions will yield benefits of $4,900/ton (1996$).
EPA believes this analysis provides a more appropriate source for
the NOX benefit transfer value for mobile sources.
(Letter from Tom Gibson, pp. B2 and B3, May 16, 2002.) Additional
details on the Tier 2 benefits analysis are available in the Tier 2/
Sulfur Final Rulemaking RIA, available on the Web at http://www.epa.gov/oms/fuels.htm
.
The Heavy Duty Engine/Diesel Fuel benefits analysis examined the
impacts in 2030 of reducing SO2 emissions by 141,000 tons
and NOX emissions by 2,750 thousand tons, as well as a
109,000 ton reduction in direct PM emissions. Based on this
analysis, EPA estimates a value for NOX reductions of
$10,200/ton in 2030. (Letter from Tom Gibson, p. B3, May 16, 2002.)
Complete details of the emissions, air quality, and benefits
modeling conducted for the HD Engine/Diesel Fuel Rule can be found
at http://www.epa.gov/otaq/diesel.htm and http://www.epa.gov/ttn/ecas/regdata/tsdhddv8.pdf.
Because the Heavy Duty Engine/Diesel Fuel
ecas/regdata/tsdhddv8.pdf. Because the Heavy Duty Engine/Diesel Fuel
estimate includes an adjustment for income growth out to 2030 and
involves reductions in several PM-related pollutants, OIRA has
adopted a value of $4900 per ton from EPA's analysis of the Tier 2
rule as a benefits transfer value for reductions in NOX
emissions from mobile sources.
Reductions in the risk of premature mortality dominate the
benefits estimates in all of these analyses. The size of the
mortality risk estimates from the underlying epidemiological
studies, the serious nature of the effect itself, and the high
monetary value ascribed to prolonging life make mortality risk
reduction the most important health endpoint quantified in these
analyses.\12\ Because of the importance of this endpoint and the
considerable uncertainty among economists and policymakers as to the
appropriate way to value reductions in mortality risks, EPA has
developed alternative estimates for its ``Clear Skies'' legislation
that show the potential importance of some of the underlying
assumptions. (See ``Human Health and Environmental Benefit Achieved
by the Clear Skies Initiative'' at http://www.epa.gov/clearskies.)
OIRA has used this analysis to identify an alternative estimate of
the benefits from NOX reductions. In its Clear Skies
analysis, EPA presented alternative benefits estimates of $14
billion and $96 billion per year in 2020, or a difference in the
estimates of roughly a factor of seven.\13\ Using this ratio, an
alternative estimate of the benefits of NOX reductions
from stationary sources would be $350 per ton from stationary
sources and $700 per ton from mobile sources.
---------------------------------------------------------------------------
\12\ There are several key assumptions underlying the benefit
estimates for reductions in NOX emissions, including:
1. Inhalation of fine particles is causally associated with
premature death at concentrations near those experienced by most
Americans on a daily basis. While no definitive studies have yet
established any of several potential biological mechanisms for such
effects, the weight of the available epidemiological evidence
supports an assumption of causality.
2. All fine particles, regardless of their chemical composition,
are equally potent in causing premature mortality. This is an
important assumption, because fine particles from power plant
emissions are chemically different from directly emitted fine
particles from both mobile sources and other industrial facilities,
but no clear scientific grounds exist for supporting differential
effects estimates by particle type.
3. The concentration-response function for fine particles is
approximately linear within the range of outdoor concentrations
under policy consideration. Thus, the estimates include health
benefits from reducing fine particles in both attainment and non-
attainment regions.
4. The forecasts for future emissions and associated air quality
modeling are valid.
5. The valuation of the estimated reduction in mortality risk is
largely taken from studies of the tradeoff associated with the
willingness to accept risk in the labor market.
\13\ The difference between the estimates reflects several
assumptions, including differences in the estimation and valuation
of mortality risk and the valuation of a reduction in the incidence
of chronic bronchitis.
---------------------------------------------------------------------------
OIRA recognizes that there are potential problems and
significant uncertainties that are inherent in any benefits analysis
based on $/ton benefit transfer techniques. The extent of these
problems and the degree of uncertainty depends on the divergence
between the policy situation being studied and the basic scenario
providing the benefits transfer estimate. Examples of other factors
include sources of emissions, meteorology, transport of emissions,
initial pollutant concentrations, population density, and population
demographics, such as the proportion of elderly and children and
baseline incidence rates for health effects. Because of the
uncertainties associated with benefits transfer, OIRA decided not to
include three mobile source rules that are projected to achieve
substantial reductions in SO2 and PM emissions that OIRA
included in previous years in the monetized estimates presented in
Tables 5 and 6 of the 2002 Report.\14\
---------------------------------------------------------------------------
\14\ These are: Municipal Waste Combustors (1995), Emission
Standards for New Locomotives (1997) and Emission Standards for Non-
Road Diesel Engines (1998).
---------------------------------------------------------------------------
Adjustment for Differences in Time Frame Across These Analyses
Agency estimates of benefits and costs cover widely varying time
periods. The differences in the time frames used for the various
rules evaluated generally reflect the specific characteristics of
individual rules such as expected capital depreciation periods or
time to full realization of benefits. In order to allow us to
provide an aggregate estimate of benefits and costs, we developed
benefit and cost time streams for each of the rules. Where agency
analyses provide annual or annualized estimates of benefits and
costs, we used these estimates in developing streams of benefits and
costs over time. Where the agency estimate provided only annual
benefits and costs for specific years, we used a linear
interpolation to represent benefits and costs in the intervening
years.\15\
---------------------------------------------------------------------------
\15\ In other words, if hypothetically we had costs of $200
million in 2000 and $400 million in 2020, we would assume costs
would be $250 million in 2005, $300 million in 2010, and so forth.
For example, for the Regional Haze rule, EPA provided only an
estimate of benefits and costs in 2015. To develop benefit and cost
streams, we used a linear extrapolation of benefits and costs
beginning in 2009 and scaling up to the reported 2015 estimates.
---------------------------------------------------------------------------
Further Caveats
In order for comparisons or aggregation to be meaningful,
benefit and cost estimates should correctly account for all
substantial effects of regulatory actions, including potentially
offsetting effects, which may or may not be reflected in the
available data. We have not made any changes to agency monetized
estimates. To the extent that agencies have adopted different
monetized values for effects--for example, different values for a
statistical life or different discounting methods--these differences
remain embedded in the tables. Any comparison or aggregation across
rules should also consider a number of factors which our
presentation does not address. For example, these analyses may adopt
different baselines in terms of the regulations and controls already
in place. In addition, the analyses for these rules may well treat
uncertainty in different ways. In some cases,
[[Page 5503]]
agencies may have developed alternative estimates reflecting upper-
and lower-bound estimates. In other cases, the agencies may offer a
midpoint estimate of benefits and costs. In still other cases the
agency estimates may reflect only upper-bound estimates of the
likely benefits and costs. While we have relied in many instances on
agency practices in monetizing costs and benefits, our citation of
or reliance on agency data in this report should not be taken as an
OIRA endorsement of all the varied methodologies used to derive
benefits and cost estimates.
Appendix B. Agency Estimates of Benefits and Costs
Table 9.--Agency Estimates of Benefits and Costs of Major Rules
[October 1, 1992 to September 30, 1993]
----------------------------------------------------------------------------------------------------------------
Rule Agency Benefits Costs Other information
----------------------------------------------------------------------------------------------------------------
Nutrition labeling of meat and USDA-FSIS $1.75 billion $218-272 million 20-year NPV discounted at
poultry products. (NPV). (NPV). 7%.
Food Labeling: Use of Nutrient HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Content Claims for Butter. billion. billion plus analysis for the food
$163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Declaration of HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Ingredients. billion. billion plus analysis for the food
$163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling, Declaration of HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Ingredients: Common or Usual billion. billion plus analysis for the food
Name Declaration for Protein $163 million in labeling requirements
Hydrolysates and Vegetable costs to imposed by this rule and
Broth in Canned Tuna ``and/ Federal the other 22 HHS-FDA
or'' Labeling for Soft Drinks. government. rules in this table
related to food
labeling.
Food Labeling: Declaration of HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Ingredients for Dairy billion. billion plus analysis for the food
Products and Maple Syrup. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Nutrient HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Content Claims, Definition of billion. billion plus analysis for the food
Term Healthy. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Label HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Statements on Foods for billion. billion plus analysis for the food
Special Dietary Use. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims, HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Zinc and Immune Function in billion. billion plus analysis for the food
the Elderly. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling, Reference Daily HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Intakes and Daily Reference billion. billion plus analysis for the food
Values (Decision). $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements, Sodium billion. billion plus analysis for the food
and Hypertension. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements: Omega-3 billion. billion plus analysis for the food
Fatty Acids and Coronary $163 million in labeling requirements
Heart Disease. costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements, Dietary billion. billion plus analysis for the food
Fat and Cancer. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims, HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Calcium and Osteoporosis. billion. billion plus analysis for the food
$163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statement, billion. billion plus analysis for the food
Antioxidant Vitamins and $163 million in labeling requirements
Cancer. costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
[[Page 5504]]
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements, Dietary billion. billion plus analysis for the food
Saturated Fat and Cholesterol $163 million in labeling requirements
and Coronary Heart Disease. costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Regulation Impact Analysis of HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
the Final Rules to Amend the billion. billion plus analysis for the food
Food Labeling Regulations. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements, Folic billion. billion plus analysis for the food
Acid and Neural Tube Defects. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements, Dietary billion. billion plus analysis for the food
Fiber and Cardiovascular $163 million in labeling requirements
Disease. costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling: Health Claims HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
and Label Statements, Dietary billion. billion plus analysis for the food
Fiber and Cancer. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling, General HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Requirements for Health billion. billion plus analysis for the food
Claims for Food. $163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling, Mandatory HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Status of Nutrition Labeling billion. billion plus analysis for the food
and Nutrient Content $163 million in labeling requirements
Revision, Form for Nutrition costs to imposed by this rule and
Label. Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling, Nutrient HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Content Claims, General billion. billion plus analysis for the food
Principles, Petitions, $163 million in labeling requirements
Definition of Terms, costs to imposed by this rule and
Definitions of Nutrient Federal the other 22 HHS-FDA
Content Claims for the Fat, government. rules in this table
Fatty Acid, and Cholesterol. related to food
labeling.
Food Labeling Regulation HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Implementing the Nutrition billion. billion plus analysis for the food
Labeling and Education Act of $163 million in labeling requirements
1990, Opportunity for costs to imposed by this rule and
Comments. Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Food Labeling--Metric Labeling HHS-FDA $4.4-$26.5 $1.4-$2.3 HHS-FDA performed one
Requirements. billion. billion plus analysis for the food
$163 million in labeling requirements
costs to imposed by this rule and
Federal the other 22 HHS-FDA
government. rules in this table
related to food
labeling.
Real Estate Settlement HUD $119,014,950 Cost of
Procedures Act (Regulation annually in duplicate good-
X), FR-1942. greater faith
competition in estimates:
title insurance $56,824,627 per
business; $89.1- year; Cost of
148.5 million new disclosure
net benefit for controlled
annually in business
reducing arrangements:
transaction $48,147,000 per
costs by year; Cost of
packaging computerized
services with loan
affiliated originations:
services. $3,607,890 per
year; Cost of
two additional
years for
storage
(discount rate
= 6%): $24,305.
Manufactured Housing HUD Net Benefit: $300
Construction and Safety million per year
Standards. present value in
energy savings;
$50-160 million
per year present
value in reduced
NOX, SOX, and PM
emission.
[[Page 5505]]
Final frameworks for early- DOI Not Estimated.... Not Estimated.
season migratory bird hunting
regulations.
Migratory bird hunting, final DOI Not Estimated.... Not Estimated.
frameworks for late-season
migratory bird hunting
regulations.
The Family and Medical Leave DOL-ESA Not Estimated.... $674 million Estimate provided by U.S.
Act of 1993. annually. General Accounting
Office (Parental Leave:
Estimated Costs of H.R.
925, the Family and
Medical Leave Act of
1987--GAO/HRD-88-34,
Nov. 10, 1987).
Permit Required Confined DOL-OSHA Reduced annually: $202.4 million ``OSHA anticipates that
Spaces. 54 fatalities; annually. improved worker
5,931 lost- productivity as a result
workday injury of the standard will
and illness help to lower production
cases; 5,908 non- costs and contribute to
lost-workday higher quality output.
cases. Although OSHA did not
quantify these cost
offsets, the Agency
believes they will be
substantial'' (RIA, pp.
I-10, I-13). ``OSHA
anticipates that greater
use of mechanical
ventilation to reduce
atmospheric hazard in
permit spaces may result
in additional release of
hazardous substances to
the air. Incremental
release quantities
related to the permit
space standard are not
determinable at present,
but are expected to be
minor relative to
current overall
releases'' (RIA, pp. I-
17--I-18).
Lead Exposure in Construction. DOL-OSHA Near-term avoided $365-445 million
annual health annually plus
effects; Reduced one-time start-
nerve conduction up costs of
velocity: 16,199- $150-$183
22,831 cases; million.
Reduced blood
ALA-D levels:
130,056-164,044
cases; Increased
urinary ALA:
60,389-78,676
cases;
Gastrointestinal
disturbances:
1,135-4,413
cases; Detected
blood-lead
levels above MRP
trigger: 24,262-
35,163 cases.
Long-term
avoided health
effects over 10
years; Fatal/
nonfatal
infractions:
2,164-2,322
cases; Fatal/
nonfatal stroke:
644-698 cases;
Renal disease:
1,258-2,157
cases.
Response Plans for Marine DOT-USCG 58,838 barrels of $176,105,666 Timeline of the analysis:
Transportation-Related oil not spilled (NPV). 1996-2025 Discount Rate:
Facilities. (NPV). 7%; $1996.
Vessel Response Plans......... DOT-USCG 50,312 barrels of $3,245,869,985 Timeline of the analysis:
oil not spilled (NPV). 1996-2025 Discount Rate:
(NPV). 7%; $1996.
Light Truck Average Fuel DOT Not Estimated.... Not Estimated.
Economy Standard for Model
Year 1995.
[[Page 5506]]
Water quality standards EPA Not Estimated.... Not Estimated... ``The analysis performed
regulation: Compliance with was limited to assessing
CWA Section 303(C)(2)(B) only the potential
Amendments. reduction in cancer
risk; no assessment of
potential reductions in
risks due to
reproductive,
developmental, or other
chronic and subchronic
toxic effects was
conducted. However,
given the number of
pollutants, there could
be: (1) Decreased
incidence of systemic
toxicity to vital organs
such as liver and
kidney; (2) decreased
extent of learning
disability and
intellectual impairment
due to the exposure to
such pollutants as lead;
and (3) decreased risk
of adverse reproductive
effects and
genotoxity.'' (57 FR
60848-). ``The
ecological benefits that
can be expected from
today's rule include
protection of both fresh
and salt water
organisms, as well as
wildlife that consume
aquatic organisms * * *
In addition, the rule
would result in the
propagation and
productivity of fish and
other organisms,
maintaining fisheries
for both commercial and
recreational purposes.
Recreational activities
such as boating, water
skiing, and swimming
would also be preserved
along with the
maintenance of an
aesthetically pleasing
environment'' (57 FR
60848-). ``EPA
acknowledges that there
will be a cost to some
dischargers for
complying with new water
quality standards as
those standards are
translated into specific
NPDES permit limits * *
* Revised wasteload
allocations may result
in adjustments to
individual NPDES permit
limits for point source
dischargers, and these
adjustments could result
in increased wastewater
treatment costs or other
pollution control
activities such as
recycling or process
changes. The magnitude
of these costs depends
on the types of
treatment or other
pollution control, the
number and type of
pollutants being
treated, and the level
of control that can be
achieved by technology-
based effluent limits
for each industry.
Similar sources of costs
and the variables
affecting costs may also
apply to indirect
industrial dischargers
to the extent that the
industrial discharger is
a source of toxic
pollutants discharged by
the POTW * * * Nonpoint
sources of toxic
pollutants may also
incur increased costs to
the extent that best
management practices
need to be modified or
applied to more sources
to reflect the revised
water quality standards.
Although there is no
Federal permit program
for nonpoint sources
comparable to that for
point sources, there are
State regulatory
programs to control
nonpoint source
discharges. Monitoring
programs are another
source of potential
incremental costs to
dischargers and
States.'' (57 FR 60848-
).
[[Page 5507]]
Coastal nonpoint pollution EPA Not Estimated.... $389,940,000-$59 The RIA identified
control program development 0,640,000 generally the types of
and approval guidance (EPA, (annualized). ``off-site benefits''
NOAA), guidance specifying that could be related to
management measures for water quality
sources of nonpoint * * * improvements, including
Section 6217. 4 use benefits (in-
stream, near stream,
option value, and
diversionary) and 3 non-
use (intrinsic) benefits
(aesthetic, bequest, and
existence).
Oil and Gas Extraction Point EPA $28.2-103.9 Total annualized ``Other benefits that are
Source Category, Offshore million per year. BAT and NSPS quantified, to the
Subcategory, Effluent costs: 1st year extent possible, but not
Limitations Guidelines and = $122 million, monetized due to lack of
New Source Performance 15th year = $32 appropriate data,
Standards (Final Rule). million. include: (1) Human
health risk reductions
associated with
systemics other than
lead, pH-dependent leach
rates, carcinogens for
which there are no risk
factors available,
exposure to pollutants
via sediment or food
chair; (2) ecological
risk reductions; (3)
fishery benefits; and
(4) intrinsic benefits *
* * The non-quantified,
non-monetized benefits
assessed in this RIA
include increased
recreational fishing,
increased commercial
fishing, improved
aesthetic quality of
waters near the
platform, and benefits
to threatened or
endangered species [the
Kemp's Ridley Turtle and
the Brown Pelican] in
the Gulf of Mexico.''
(58 FR 12454-).
Acid Rain Permits, Allowance EPA 10 million tons/ $894-1,509 SO2 emission reductions
System, Emissions Monitoring, year reduction million are expected to: (1)
Excess Emissions and Appeals in SO2 emission (annualized). reduce acidification of
Regulations Under Title IV of (mandated by surface waters, thereby
the Clean Air Act Amendments Title IV); Cost increasing the presence
of 1990. savings: $689- and diversity of aquatic
973 million species; (2) improve
(annualized). visibility by reducing
haze; (3) may improve
human health as lower
SO2 emissions reduce air
concentrations of acid
sulfate aerosols and
thus acute and chronic
exposure to the acid
aerosols that adversely
affect human health may
even affect even
mortality; (4) eliminate
damage to forest soils
and foliage, especially
of high-elevation spruce
trees in the eastern
U.S. and allow recovery
of previously damaged
tree populations; (5)
may reduce damage to
auto paint, reduce
soiling of buildings and
monuments, and thus the
life of some materials
and structures may be
extended and the costs
of maintenance or repair
reduced (RIA, pp. 1-5 to
1-6, and 6-1 to 6-3).
Engineering costs
associated with CEM
retrofit were not
analyzed (RIA, pp. 4-
18). ``The annualized
costs of the
implementation
regulations are
estimated to increase
the annual costs of
generating electricity
by 0.5 to 1.2 percent.''
(58 FR 3590-).
[[Page 5508]]
Vehicle Inspection and EPA Emission Continuing ``These repairs have been
Maintenance Requirements for reductions from current I/M found to produce fuel
State Implementation Plan continuing program: NET economy benefits that
(Final Rule). current I/M COST = $894 will at least partially
program million offset the cost of
unchanged ($2000); New I/ repairs. Fuel economy
(baseline = no I/ M program: NET improvements of 6.1% for
M program) in COST = $541 repair of pressure test
2000: 116016 million ($2000). failures and 5.7% for
tons VOC, repair of purge test
1566395 tons CO failures were observed.
(annual tons in Vehicles that failed the
2000); Emission transient short test at
reductions from the established
new I/M program cutpoints were found to
in 2000 enjoy a fuel economy
(baseline = no I/ improvement of 12.6% as
M program): a result of repairs.''
420415 tons VOC, (57 FR 52950-). ``In
2845754 tons CO conclusion, today's
(annual tons in action may cause
2000). significant shifts in
business opportunities.
Small businesses that
currently do both
inspections and repairs
in decentralized I/M
programs may have to
choose between the two.
Significant new
opportunities will exist
in these areas for small
businesses to continue
to participate in the
inspection and repair
industry. This will mean
shifts in jobs but an
overall increase in jobs
in the repair sector and
a small to potentially
large increase in the
inspection sector,
depending on state
choices.'' (57 FR 52950-
).
Evaporative emission EPA Total VOC Annual total ``[Emission] projections
regulations for gasoline- Reduction in program cost are made for the year
fueled and methanol-fueled 2020: 1,120,000 without fuel 2020 in order to provide
light duty vehicles, light- metric tons. savings: $130- benefit predictions for
duty trucks, and heavy-duty 200 million a fully turned-over
vehicles--SAN 2969. ($1992, NPV to fleet and to factor in
the year of the other known trends, such
sale). as the effects of other
new Clean Air Act
programs. These new
programs include high-
technology inspection
and maintenance and
reformulated gasoline.
Reformulated gasoline
achieving a 25 percent
overall VOC emission
reduction standard is
assumed to be used in 40
percent of the nation.''
(58 FR 16002-). ``[The
cost] estimate does not
include the offsetting
fuel savings.'' (58 FR
16002-).
Control of air pollution from EPA 4.0 million tons $16.6 billion Discount rate: 7% (58 FR
new motor vehicles and new HC, 30.8 million (NPV) ($1993). 9468-) Timeline: 2005-
motor vehicle engines, tons CO, 2.5 2020 (58 FR 9468-).``EPA
regulations requiring on- million tons NOX has not been able to
board diagnostic systems on (NPV). adequately quantify some
1994 and later model year potential cost savings
light-duty vehicles. not included in these
estimates. Potential
cost savings can accrue
due to early repairs of
malfunction which, if
left undetected and
unrepaired, could result
in the need for even
more costly repairs in
the future. Also,
improved repair
effectiveness should
reduce the potential for
a part to be
unnecessarily replaced
in attempting to fix a
problem. Repair
facilities should also
benefit from the
availability of generic
tools for accessing and
using the OBD system in
problem diagnosis and
repair. These service
facility benefits could
be passed along to the
consumer in the form of
lower repair costs.''
(58 FR 9468-).
----------------------------------------------------------------------------------------------------------------
[[Page 5509]]
Table 10.--Agency Estimates of Benefits and Costs of Major Rules
[October 1, 1993 to September 30, 1994]
----------------------------------------------------------------------------------------------------------------
Rule Agency Benefits Costs Other information
----------------------------------------------------------------------------------------------------------------
Manufactured Home Construction HUD............... $63,726,314 $412,106,180 The cost estimates do
and Safety Standards on Wind annually. annually. not include costs
Standards. associated with ``out
of pocket expenses
related to
deductibles or non-
covered losses''
(RIA, pp. 1-2). Non-
quantified benefits
include: ``purchasers
will experience less
dislocation caused by
damage to or
destruction of their
manufactured homes.
Fourth, residents who
choose to remain in
their units during
storms will suffer
fewer injuries and
deaths'' (RIA, p. 1)
Discount rate used =
6.64 percent (RIA, p.
8) Basis for public
benefit assessment:
Hurricane Andrew
(RIA, p. 9).
Designate critical habitat for DOI............... Net benefit: ................. Increase employment by
four endangered Colorado $7.92 million. 710 jobs, increase
River fishes. earnings by $6.62
million, increase
government revenue by
$3.20 million from
1995-2020 (59 FR
13374-).
Occupational Exposure to DOL-OSHA.......... Reduction in $361.4 million Non-quantified
Asbestos. annual cancer annually. benefits include:
risk: 2.12 avoided cases of
cancer deaths in asbestosis for
general building occupants
industry, 40.48 and others
cancer deaths in secondarily exposed,
construction reduced risks of
industry, 14.2 cancer and fires
cancers among (from rages
building contaminated with
occupants. solvent), more rapid
Reduction in building
asbestosis: 14 reoccupation, reduced
cases annually. probability of
asbestos-related
lawsuits (RIA, pp 52-
57).
Financial Responsibility for DOT-USCG.......... 525,316 barrels $451,440,918 Timeline of the
Water Pollution (Vessels). of oil not (NPV). analysis: 1996-2025;
spilled (NPV). Discount Rate: 7%;
$1996.
Antidrug Program for Personnel DOT-FAA........... $206.64 million $138.13 million Timeline of the
Engaged in Specified Aviation (NPV). (NPV). analysis: 1994-2003
Activities. (RIA, p. 12); $1992
(RIA, p. 12);
Discount rate = 7%
(RIA, p. 20).
Controlled Substances and DOT-FHWA.......... Reduced fatal $93,947,750 in ......................
Alcohol Use and Testing. accidents: $680 1995, and
million in 1st $92,453,950 per
year, $952 year in 1996 and
million per year thereafter.
in 2nd and
subsequent
years. Reduced
injury cost:
$152.4 million
in 1st year,
$213.4 million
per year in 2nd
and subsequent
years assuming
the highest
deterrence
scenario.
Reduced property
damage: $47.5
million in 1993,
$66.5 million
per year from
1994-2002.
Reduced traffic
delays: $3.5
million in 1993,
$4.9 million per
year thereafter
assuming highest
deterrence rate;
Reduced other
costs of freeway
accidents: $1.9
million in 1995
and $2.7 million
thereafter.
Light Truck Average Fuel DOT............... Not Estimated.... Not Estimated. ......................
Economy standards, Model
Years 1996-1997.
Prevention of Prohibited Drug DOT............... $608,520,643 $208,970,087 Timeline: 1995-2004;
Use in Transit Operations. (NPV). (NPV). Discount rate: 7%;
$1991.
[[Page 5510]]
Land disposal restrictions EPA............... 0.22 cancer cases $194-219 million ``The timeframe to
phase II, universal treatment per year avoided (annualized). which these benefits
standards and treatment from are attributable
standards for organic groundwater, begins 30 years
toxicity, characteristic 0.037 cancer following
wastes, and newly listed cases per year promulgation of the
wastes. avoided from rule.'' (59 FR 47982-
air; $20 million ). ``However, there
avoided property are some benefits
value damage which the Agency has
(annualized). not attempted to
quantify which are
potentially
attributable to
today's rule. For
example, the agency
has not attempted to
quantify any
potential non-use-
value benefits from
protection of
resources through
treatment of
hazardous wastes.
Furthermore, the risk
analysis performed by
the Agency for
today's rule does not
account for many
other potential
benefits from today's
rule. Ecological risk
reduction from
treatment of wastes
under today's rule
has not been
quantified. Nor do
the Agency's air and
groundwater benefit
estimates account for
karst terrain,
complex flow
situations, or other
factors which could
contribute to
underestimates of
benefits.'' (59 FR
47982-).
Accelerated phase-out of ozone EPA............... Ozone depleting Ozone depleting Discount rate: 7% (58
depleting chemicals and chemicals: $8-24 chemicals: $12 FR 65018-). Timeline
listing and phase-out of billion (NPV) billion (NPV); for methyl bromide
methyl bromide. Methyl Bromide: Methyl Bromide: cost: 1994-2010 (58
$1.6-6.4 billion $0.8 billion FR 65018-). Timeline
(NPV). (NPV). for methyl bromide
benefits: 1994-2001
(58 FR 65018-).
Fuel and fuel additives: EPA............... Phase I-- Phase I--Annual ``Reductions in mobile
standards for reformulated Summertime VOC costs: $700-940 source emissions of
gasoline. emission million. the air toxics
reduction: 90- Phase II-- addressed in the
140 thousand (incremental to reformulated gasoline
tons per year; Phase I): program (benzene, 1,3-
Reduction in Increase butadiene,
cancer gasoline formaldehyde,
incidence: 16 production cost acetaldehyde and POM)
per year by 1.2 cents/ may result in fewer
(assuming gallon during cancer incidences. A
enhanced I/M in the VOC control number of adverse
place) or 24 per period, since noncancer health
year (assuming only the toxics effects have also
basic I/M in standard been associated with
place). changes, and exposures experience
Phase II-- there is not in particular
(incremental to expected to be a microenvironments
Phase I): cost for year- such as parking
Summertime VOC round toxics garages and refueling
emission control above stations. These other
reduction: that required health effects
approximately for Phase I; EPA include blood
42,000 tons doesn't expect disorders, heart and
Summer time NOx non-production lung diseases, and
emission related costs, eye, nose and throat
reduction: such as irritation. Some of
approximately distribution the toxics may also
22,000 tons costs, be developmental and
Number of cancer recordkeeping reproductive
avoided: 3-4 and reporting toxicants, while very
fewer cancer costs, etc., to high exposure can
incidence per increase cause effects on the
year. isgnificantly brain leading to
relative to respiratory paralysis
Phase I. and even death. The
uses of reformulated
gasoline meeting the
Phase II standards
will likely help to
reduce some of these
health effects as
well.'' (59 FR 7716-
). Phase I: The cost
of producing
reformulated gasoline
is expected to
increase by
approximately 3-5
cents per gallon in
1995. (59 FR 7716-).
The cost of testing,
enforcement, and
recordkeeping not
reflected in the
annual cost estimate.
(59 FR 7716-).
[[Page 5511]]
Acid Rain NOX Regulations EPA............... Phase I: 400,000 Phase I: $77 Qualitative human
under Title IV of the Clean tons NOX reduced million/year health benefits:
Air Act Amendments of 1990. Phase II: 1.89 Phase II: $300 Lower ambient levels
million tons NOX million/year. of NOX (and
reduced. associated lower PM
and lower ozone
levels) may mean
fewer lost school
days, fewer
disability days for
children; for all,
less eye irritation
and its associated
acute and chronic
health effects; for
exercising
asthmatics, improved
pulmonary function.
Also ambient
concentrations of
nitrates will be
lower and fewer toxic
nitrogenous compounds
will be formed. (RIA,
pp. 9-1 to 9-4)
Qualitative welfare
effects: reduced
materials damage,
increased visibility
that is associated
with enhanced
enjoyment of vistas
and fewer aircraft
and motor vehicle
accidents. The
potential ecological
effect include
minimizing the
adverse effects of
excess nitrogen
deposition in forest
soils and surface
waters, including the
``acid pulses'' that
precede fish kills
and consequently,
reduced biodiversity.
(RIA, pp. 9-1 to 9-4)
``Moreover, EPA
expects that most or
all utility expenses
from meeting NOX
requirements will be
passed along to
ratepayers * * *
Under today's rule
the cost to
ratepayers is very
small, relative to
their current
expenditures on
electricity. The
average increase in
electric rates across
the United States is
estimated to be only
0.03 and 0.13 percent
under Phases I and II
respectively.'' (59
FR 13538-).
Hazardous Organic NESHAP (HON) EPA............... HAP reduction: Total nationwide ``Thus, the estimates
for the Synthetic Organic 510,000 tons/ annual cost: represent annual
Chemical Manufacturing year; VOC $230 million/ impacts occurring in
Industry (SOCMI) and Other reduction: year ($1989); CO the fifth year.'' (59
Processes Subject to the 1,000,000 tons/ emission FR 19402-). ``As
Negotiated Regulation for year. increase: 1,900 discussed in section
Equipment Leaks. tons/year; NOx III.B.3 of this
emission preamble, the EPA has
increase: 19,000 deferred the final
tons/year. decision regarding
control of medium-
sized storage vessels
at existing sources.
Therefore, emission
reductions for
storage vessels shown
in Table 1, and
consequently the
total, may be
slightly
overstated.'' (59 FR
19402-). ``Because of
the EPA's deferral of
a final decision on
control of medium-
sized storage vessels
at existing sources,
as discussed in
section III.B.3 of
this preamble, the
cost impacts for
storage vessels, and
consequently the
total cost impact,
may be slightly
overstated.'' (59 FR
19402-). ``Market
analyses for a subset
of 21 of the
chemicals estimated
price increases from
0.1 percent to 3.9
percent and quantity
decreases from 0.1
percent to 4
percent.'' (59 FR
19402-).
Control of air pollution from EPA............... Without Stage II Without Stage II ``It should be noted
new motor vehicles and new controls, controls, the that the RIA was
motor vehicle engines, average VOC average annual completed prior to
refueling emission annual emission cost: -$6 EPA's decision to
regulations for light-duty reductions: over million (1998- delay the
vehicles and trucks and heavy- 420,000 tons per 2020); With requirements for LDTs
duty vehicles. year; With Stage Stage II and and to exclude HDVs.
II phase-out phasing out at These controls were
when ORVR and 2010, the included in the
Stage II would average annual analysis and were
cover the same cost: $2 million assumed to begin in
percent of fuel, (1998-2020); 1998. EPA expects
average annual With Stage II that inclusion of
emission and no phase these items in the
reduction: out, the average analysis has no
378,000 tons; If annual cost: $27 significant effect on
retain Stage H million (1998- the results and does
controls, an 2020); In 1998 not affect the
incremental NPV, costs are conclusions which are
emission $102 million, based on the
reduction: $264 million and analysis.'' (59 FR
285,000 tons. $435 million 16262-). ``In the
respectively. cases where costs are
negative, it is
because the value of
the recovery credits
exceeds the hardware
and R, D, & T
costs.'' (59 FR 16262-
).
[[Page 5512]]
Determination of significance EPA............... NOX annual Average annual ``EPA maintains that
for nonroad sources and reduction in cost: $29-70 the impact of this
emission standards for new 2010: 800,000 million (59 FR rule on fleet average
nonroad compression ignition tons; NOx annual 31306). fuel consumption will
engines at or above 37 reduction in be minimal.'' (59 FR
kilowatts, control of air 2025: over 31306-).
pollution * * *--SAN 3112. 1,200,000 tons.
----------------------------------------------------------------------------------------------------------------
Table 11.--Agency Estimates of Benefits and Costs of Major Rules
----------------------------------------------------------------------------------------------------------------
Rule Agency Benefits Costs Other information
----------------------------------------------------------------------------------------------------------------
The Family and Medical Leave DOL-ESA............ Not Estimated.... $674 million Estimate provided by
Act of 1993. annually. U.S. General
Accounting Office
(Parental Leave:
Estimated Costs of
H.R. 925, the
Family and Medical
Leave Act of 1987--
GAO/HRD-88-34, Nov.
10, 1987).
Double Hull Standards for DOT-USCG........... 94,172 barrels of $6,413,027,637 Timeline of the
Vessels Carring Oil in bulk. oil not spilled (NPV). analysis: 1996-
(NPV). 2025.
FMVSS: Stablity and Control of DOT-NHTSA.......... Equivalent Total consumer Discount rate: 7%.
Medium and Heavy Vehicles fatalities cost = $560.5
During Braking. forgone: 415-683 million annually.
per year;
Forgone property
damage: $327-
394.9 million
annually.
Bay/Delta water quality EPA................ $2.1-21.5 million For the urban ``Important benefits
standards. annually in sector, $4.3 of the water
economic million/yr on quality regulations
benefits to average and include the
commercial and $15.8 million/yr following:
recretional during dry Biological
fisheries and years; $28.3 productivity and
have associated million/yr on health for many
employment gains average gains estuarine species
of an estimated $165.3 million/ are expected to
145-1585 full- yr during dry increase. The
time equivalent years without decline of species
jobs annually water transfers is expected to be
(RIA ES-7). or waterbanks. reversed and the
For agriculture existence of
sector, $27 species unique to
million/yr on the Bay/Delta, such
average, $43 as Delta smelt,
million/year in winter-run Chinook
the driest 10% salmon, long fin
of years (RIA ES- smelt, and
5) If using Sacramento
sharing approach splittail, will be
(spread water protected.
supply impacts Populations of a
to entities variety of
diverting water estuarine species
from the are expected to
Sacramento and increase; although
San Joaquin the extent of the
River systems), - population
$0.5 million/yr increases has not
average years, - been determined for
$5.5 million/yr all species, the
for dry years increases are
for agricultural anticipated to
sector, -$10.5 benefit the
million/yr for recreational and
average years commercial
and -$54 million/ fisheries.'' (60 FR
yr for day years 4703-)
(RIA ES-6).
[[Page 5513]]
Water quality guidance for EPA................ Given the site- $64.0-394.6 ``The benefit
Great Lakes system. specific nature million ($1996, analysis is based
of water quality annualized). on a case study
benefits and the approach, suing
unavailability benefits transfer
of site-specific applied sources to
data across the three case studies
Great Lakes . . . The case
Basin, only case studies include:
study monetized (1) the lower Fox
benefits are River drainage,
estimated in the including Green
RIA. Average Bay, located on
monetized Lake Michigan in
benefits across northeastern
the three case Wisconsin; (2) the
studies Saginaw River and
evaluated are Saginaw Bay,
$0.3 million per located on Lake
year to $6.2 Huron in
million per Northeastern
year, with a Michigan; and (3)
midpoint of $2.9 the Black River,
million per year located on Lake
(in 1996 Erie in north-
dollars); central Ohio . . .
average annual EPA did attempt to
costs across calculate longer-
case studies are term benefits to
also $2.8 human health,
million per year wildlife, and
(1996 dollars).. aquatic life once
the final Guidance
provisions are
fully implemented
by nonpoint sources
as well as point
sources and the
minimum protection
levels are attained
in the ambient
water.'' (60 FR
15382). ``The three
case studies
combine to account
for nearly 14
percent of the
total cost of the
final Guidance,
nearly 17 percent
of the loadings
reductions, and
from four percent
to 10 percent of
the benefits
proxies (i.e.,.
basin-wide
population,
recreational
angling,
nonconsumptive
recreation, and
commercial fishery
harvest.'' (60 FR
15382). ``In
addition to the
cost estimates
described above,
EPA estimated the
cost to comply with
requirements
consistent with the
antidegradation
provisions of the
final Guidance.
This potential
future cost is
expressed as a
`lost opportunity'
cost for facilities
impacted by the
antigradation
requirements. This
cost could result
in the addition of
about $22 million
each year.'' (60 FR
15381).
Interim Requirements for EPA................ HC, CO and NOX $650 million
Deposit Control Gasoline reduction during (NPV, discount
Additives, Regulations of the 18-month rate = 7%, 1995-
Fuels and Fuel Additives. interim period: 2000 (59 FR
700,000 tons (59 54678-)).
FR 54678-); HC,
CO and NOX
reduction after
the interim
period: 600,000
tons per year
(59 FR 54678-)
Fuel economy
savings: 390
million gallons
in 1995-2000 (59
FR 54678-).
----------------------------------------------------------------------------------------------------------------
Appendix C. OMB Draft Guidelines for the Conduct of Regulatory Analysis
and the Format of Accounting Statements
Preface
This Circular provides OMB's guidance to federal agencies on the
development of regulatory analysis as required under Executive Order
No. 12866 and a variety of related authorities. The Circular also
provides guidance to agencies on the regulatory accounting
statements that are required under the Regulatory Right-to-Know Act.
This draft Circular refines OMB's ``best practices'' document of
1996 http://www.whitehouse.gov/omb/inforeg/riaguide.html, which was
issued as a guidance in 2000 http://www.whitehouse.gov/omb/memoranda/m00-08.pdf
, and reaffirmed in 2001 http://
www.whitehouse.gov/omb/memoranda/m01-23.html. It will replace both
the 1996 ``best practices'' and the 2000 guidance. Before issuing
the Circular, this draft will go through a process of peer review,
public comment and interagency review.
Introduction
These guidelines are designed to help analysts in the regulatory
agencies by encouraging good regulatory impact analysis--called
either ``regulatory analysis'' or ``analysis'' for brevity--and
standardizing the way benefits and costs of Federal regulatory
actions are measured and reported.
Why Analysis of Proposed\16\ Regulatory Actions Is Needed
Regulatory analysis is a tool regulatory agencies use to
anticipate and evaluate the likely consequences of their actions. It
provides a formal way of organizing the evidence on the key
effects--good and bad--of the various alternatives that should be
considered in developing regulations. The motivation is to (1) learn
if the benefits of an action are likely to justify the costs or (2)
discover which of various possible alternatives would be the most
cost-effective. By choosing actions that maximize net
[[Page 5514]]
benefits, agencies direct resources to their most efficient use.
---------------------------------------------------------------------------
\16\ We use the term ``proposed'' to refer to any regulatory
actions under consideration regardless of the stage of the
regulatory process.
---------------------------------------------------------------------------
A good regulatory analysis informs the public and other parts of
the Government as well as the agency conducting the analysis of the
effects of alternative actions. Regulatory analysis will sometimes
show that a proposed action is misguided, but it can also
demonstrate that well-conceived actions are reasonable and
justified.
Where all significant benefits and costs can be quantified and
expressed in monetary units, benefit-cost analysis provides
decisionmakers with a clear indication of the most efficient
alternative, that is, the alternative that generates the largest net
benefits to society ignoring distributional effects. This is useful
information for the public to receive, even when economic efficiency
is not the only or the overriding public policy objective.
It will not always be possible to assign monetary values to all
of the important benefits and costs, and when it is not, the most
efficient alternative will not necessarily be the one with the
largest net-benefit estimate. In such cases, you should exercise
professional judgment in determining how important the non-
quantifiable benefits or costs may be in tipping the analysis one
way or the other, but you should not use non-quantifiables as
``trump cards,'' especially in cases where the measured net benefits
overwhelmingly favor a particular alternative. When there are other
competing public policy objectives, as there often are, they must be
balanced with efficiency objectives.
What Should Go Into a Regulatory Analysis?
A good regulatory analysis should include the following three
basic elements:
(1) A statement of the need for the proposed action.
(2) An examination of alternative approaches.
(3) An evaluation of the benefits and costs of the proposed
action and the main alternatives identified by the analysis.
To properly evaluate the benefits and costs of regulations and
their alternatives, you will need to do the following:
[sbull] Explain how the actions required by the rule are linked
to the expected benefits. For example, indicate how additional
safety equipment will reduce safety risks. A similar analysis should
be done for each of the alternatives.
[sbull] Identify a baseline. Benefits and costs are defined in
comparison with a clearly stated alternative. This is normally a
``no action'' baseline, what the world would be like if the proposed
rule was not adopted.
[sbull] Identify the expected undesirable side-effects and
ancillary benefits of the proposed regulatory action and the
alternatives. These should be added to the direct costs and benefits
as appropriate.
With this information, you should be able to assess
quantitatively the benefits and costs of the proposed rule and its
alternatives. When your analysis is complete, you should present a
summary of the benefit and cost estimates for each alternative,
sometimes called a ``regulatory accounting statement,'' so that
readers can evaluate them.
As you proceed through your regulatory analysis, you should seek
out the opinions of those who will be directly affected by the
regulation you are considering as well as the views of those
individuals and organizations with special knowledge or insight into
the regulatory issues. Consultation can be useful in making sure
your analysis addresses all of the relevant issues and that you have
access to all the pertinent data. Early consultation can be
especially helpful. You should not limit consultation to the final
stages of your analytical efforts.
A good analysis is transparent. It should be possible for anyone
reading the report to see clearly how you arrived at your estimates
and conclusions. For transparency's sake, you should state in your
report what assumptions were used, such as the discount rates or the
monetary value of a statistical life. It is usually helpful to
provide a sensitivity analysis to reveal whether, and to what
extent, the results of the analysis are influenced by plausible
changes in the main assumptions.
You will find that you cannot conduct a good regulatory analysis
according to a formula. The conduct of high-quality analysis
requires competent professional judgment. Different regulations may
call for different emphases in the analysis, depending on the nature
and complexity of the regulatory issues and the sensitivity of the
benefit and cost estimates to the key assumptions.
I. Why Regulatory Action is Needed
Before proceeding with a regulatory action, you must demonstrate
that the proposed action is necessary. Executive Order 12866 states
that ``Each agency shall identify the problem that it intends to
address (including, where applicable, the failures of private
markets or public institutions that warrant new agency action) as
well as assess the significance of that problem.'' This means that
you should try to explain whether the action is intended to address
a significant market failure or to meet some other compelling public
need such as improving governmental processes or promoting
distributional fairness, privacy, or personal freedom. If you are
trying to correct a significant market failure, the failure should
be described both qualitatively and (where feasible) quantitatively,
and you should show that a government intervention is likely to do
more good than harm. For other interventions, you should also
provide a demonstration of compelling social purpose and the
likelihood of effective action.
If your regulatory intervention results from a statutory or
judicial directive, you should describe the specific authority for
your action, the extent of discretion available to you, and the
regulatory instruments you might use.
A. There Is a Market Failure or Other Social Purpose To Address
The major types of market failure include: externality, market
power, and inadequate or asymmetric information. Correcting market
failures is a reason for regulation, but it is not the only reason.
Other possible justifications include improving the functioning of
government, removing distributional unfairness, or promoting privacy
and personal freedom.
1. Externality
An externality occurs when one party's actions impose
uncompensated benefits or costs on another. Environmental problems
are a classic case of externality--for example, the smoke from a
factory may adversely affect the health of local residents while
soiling the property in nearby neighborhoods. Common property
resources that may become congested or overused, such as fisheries
or the broadcast spectrum, represent a second example. ``Public
goods,'' such as defense or basic scientific research, provide a
positive externality, where provision of the good to some
individuals cannot occur without providing the same benefits free of
charge to other individuals.
2. Market Power
Firms exercise market power when they reduce output below what
would be offered in a competitive industry. They may exercise market
power collectively or unilaterally. Government action can be a
source of market power, for example, if regulatory actions exclude
low-cost imports. Generally, regulations that increase market power
should be avoided. However, there are some circumstances in which
government may choose to validate a monopoly. If a market can be
served at lowest cost only when production is limited to a single
producer--local gas and electricity distribution services, for
example--a natural monopoly is said to exist. In such cases, the
government may choose to approve the monopoly and to regulate its
prices and production decisions.
3. Inadequate or Asymmetric Information
Market failures may also result from inadequate or asymmetric
information. The market will often supply less than the appropriate
level of information because it is infeasible to exclude people from
reaping the benefits from the information others have provided even
though they have not paid for the information. The providers will
not willingly supply the socially optimal quantity of information,
unless they are paid for it, and that may not be possible.
Because information, like other goods, is costly, your
evaluation will need to do more than demonstrate the possible
existence of less than optimal or asymmetric information. Even
though the market may supply a less than an optimal amount of
information, the amount it does supply may be reasonably adequate
and therefore not require government regulation. Sellers do have an
incentive to provide information through advertising that can
increase sales by highlighting distinctive characteristics of their
products. Buyers may also obtain reasonably adequate information
about product characteristics through other channels, for example,
if a buyer's search costs are low (as when the quality of a good can
be determined by inspection at the point of sale), if a buyer has
previously used the product, if the seller offers a warranty, or if
adequate information is provided by third parties.
In the case of uncertain information about low-probability high-
consequence events,
[[Page 5515]]
markets may underreact or overreact depending on the rules-of-thumb
and other mental assumptions that people use to cope with difficult
issues. Regulators should be aware of such mental quirks and not
adopt policies based on a misunderstanding of the underlying
reality.
4. Other Social Purposes
There are justifications for regulations in addition to
correcting market failures. A regulation may be appropriate when you
have a clearly identified measure that can make government operate
more efficiently. In other cases, regulation may be used to reduce
unfairness. Regulatory action may also be appropriate to protect
privacy or to promote civil rights or permit more personal freedom.
B. Showing That Regulation at the Federal Level Is the Best Way To
Solve the Problem
Even where a market failure clearly exists, you should consider
other means of dealing with the failure before turning to
regulation. Alternatives to regulation include the courts acting
through the product liability system, antitrust enforcement,
consumer-initiated litigation, or workers' compensation systems.
In assessing whether Federal regulation is the best solution,
you should also consider the possibility of regulation at the State
or local level. In some cases, the nature of the market failure may
itself suggest the most appropriate governmental level of
regulation. For example, problems that spill across State lines
(such as acid rain whose precursors are transported widely in the
atmosphere) are probably best addressed by Federal regulation. More
localized problems, including those that are common to many areas,
may be more efficiently addressed locally.
A diversity of regulation may generate gains for the public as
governmental units compete with each other to serve the public, but
duplicative regulations can also be costly. Where Federal regulation
is clearly appropriate, for example, to address interstate commerce
issues, you should try to examine whether it would be more efficient
to reduce State and local regulation. For example, the burdens on
interstate commerce arising from different State and local
regulations such as compliance costs for firms operating in several
States, may exceed any advantages associated with the diversity of
State and local regulation. Your analysis should consider the
possibility of reducing as well as expanding State and local
rulemaking.
The role of federal regulation in facilitating U.S.
participation in global markets should also be considered.
Harmonization of U.S. and international rules may require a strong
Federal regulatory role. Concerns that new U.S. rules could act as
non-tariff barriers to imported goods should be evaluated carefully.
C. The Presumption Against Economic Regulation
Government actions can be unintentionally harmful, and even
useful regulations can impede the efficiency with which markets
function. For this reason, there is a presumption against certain
types of regulatory action. In light of both economic theory and
actual experience, a particularly demanding burden of proof is
required to demonstrate the need for any of the following types of
regulations:
[sbull] Price controls in competitive markets;
[sbull] Production or sales quotas in competitive markets;
[sbull] Mandatory uniform quality standards for goods or
services if the potential problem can be adequately dealt with
through voluntary standards or by disclosing information of the
hazard to buyers or users; or
[sbull] Controls on entry into employment or production, except
(a) where indispensable to protect health and safety (e.g., FAA
tests for commercial pilots) or (b) to manage the use of common
property resources (e.g., fisheries, airwaves, Federal lands, and
offshore areas).
II. Alternative Approaches To Consider
Once you have determined that Federal regulatory action is
appropriate, you will need to consider alternative regulatory
approaches. Ordinarily, it will be possible to eliminate some
alternatives through a preliminary analysis, leaving a manageable
number of alternatives to be evaluated according to the formal
principles of the Executive Order. The number and choice of
alternatives selected for detailed analysis is a matter of judgment.
There must be some balance between thoroughness and the practical
limits on your analytical capacity. With this qualification in mind,
you should nevertheless explore modifications of some or all of a
regulation's attributes or provisions to identify appropriate
alternatives. The following is a list of alternative regulatory
actions that you should consider:
A. Different Choices Defined by Statute
When a statute establishes a specific regulatory requirement and
the agency plans to exercise its discretion to adopt a more
stringent standard, you should examine the benefits and costs of
reasonable alternatives that reflect the range of the agency's
statutory discretion, including the specific statutory requirement.
B. Different Compliance Dates
The timing of a regulation may also have an important effect on
its net benefits. For example, costs of a regulation may vary
substantially with different compliance dates for an industry that
requires a year or more to plan its production runs efficiently. In
this instance, a regulation that provides sufficient lead time is
likely to achieve its goals at a much lower overall cost than a
regulation that is effective immediately, although delay would also
typically lower the value of the benefits.
C. Different Enforcement Methods
Compliance alternatives for Federal, State, or local enforcement
include on-site inspections, periodic reporting, and compliance
penalties structured to provide the most appropriate incentives.
When alternative monitoring and reporting methods vary in their
costs and benefits, you should consider promising alternatives in
identifying the most appropriate enforcement framework. For example,
in some circumstances random monitoring or parametric monitoring
will be less expensive and nearly as effective as continuous
monitoring in achieving compliance.
D. Different Degrees of Stringency
In general, both the benefits and costs associated with a
regulation will increase with the level of stringency (although
marginal costs generally increase with stringency, whereas marginal
benefits may decrease). You should study alternative levels of
stringency to understand more fully the relationship between
stringency and the size and distribution of benefits and costs among
different groups.
E. Different Requirements for Different Sized Firms
You should consider setting different requirements for large and
small firms basing any difference in the standards on perceptible
differences in the costs of compliance or in the expected benefits.
The balance of costs and benefits can shift depending on the size of
the firms being regulated. Small firms may find it more costly to
comply with regulation, especially if there are large fixed costs
required for regulatory compliance. On the other hand, it is not
efficient to place a heavier burden on one segment of a regulated
industry solely because it can better afford the higher cost; this
has the potential to load costs on the most productive firms, costs
that are disproportionate to the damages they create.
You should also remember that a rule with a significant impact
on a substantial number of small entities will trigger the
requirements set forth in the Regulatory Flexibility Act.
F. Different Requirements for Different Geographic Regions
Rarely do all regions of the country benefit uniformly from
government regulation and it is also unlikely that costs will be
uniformly distributed across the country. Where there are
significant regional variations in costs and/or benefits, you should
consider the possibility of setting different requirements for the
different regions.
G. Performance Standards Rather Than Design Standards
Performance standards are generally superior to engineering or
design standards because performance standards give the regulated
parties the flexibility to achieve regulatory objectives in the most
cost-effective way. This is only possible, of course, if there is
more than one feasible way to meet the performance standard. In
general, you should consider setting a performance standard if
performance can be measured or reasonably imputed and where
controlling performance provides a scope appropriate to the problem
the regulation seeks to address. For example, compliance with air
emission standards can be allowed on a plant-wide, firm-wide, or
region-wide basis rather than vent by vent, provided this does not
produce unacceptable local air quality outcomes (such as ``hot
spots'' from local pollution concentration).
[[Page 5516]]
H. Market-Oriented Approaches Rather Than Direct Controls
Market-oriented approaches that use economic incentives should
be explored. These alternatives include fees, penalties, subsidies,
marketable permits or offsets, changes in liability or property
rights (including policies that alter the incentives of insurers and
insured parties), and required bonds, insurance or warranties.
I. Informational Measures Rather Than Regulation
If intervention is contemplated to address a market failure that
arises from inadequate or asymmetric information, informational
remedies will often be the preferred approach. Measures to improve
the availability of information include government establishment of
a standardized testing and rating system (the use of which could be
made mandatory or left voluntary), mandatory disclosure requirements
(e.g., by advertising, labeling, or enclosures), and government
provision of information (e.g., by government publications,
telephone hotlines, or public interest broadcast announcements). A
regulatory measure to improve the availability of information
(particularly about the concealed characteristics of products)
provides consumers a greater choice, than a mandatory product
standard or ban.
Specific informational measures should be evaluated in terms of
their benefits and with a comprehensive view of their costs. Some
effects of informational measures are easily overlooked. For
example, the costs of a mandatory disclosure requirement for a
consumer product will include not only the cost of gathering and
communicating the required information, but also the loss of net
benefits of any information displaced by the mandated information,
the effect of providing too much information that is ignored or
information that is misinterpreted, and inefficiencies arising from
the incentive that mandatory disclosure may give to overinvest in a
particular characteristic of a product or service.
Where information on the benefits and costs of alternative
informational measures is insufficient to provide a clear choice
between them, you should consider the least intrusive informational
alternative sufficient to accomplish the regulatory objective. For
example, to correct an informational market failure it may be
sufficient for government to establish a standardized testing and
rating system without mandating its use, because competing firms
that score well according to the system should thereby have an
incentive to publicize the fact.
III. Analytical Approaches
Both benefit-cost analysis (BCA) and cost-effectiveness analysis
(CEA) provide a systematic framework for identifying and evaluating
the likely outcomes of alternative regulatory choices. A major
rulemaking should be supported by both types of analysis wherever
possible. Specifically, you should prepare a CEA for all major
rulemakings for which the primary benefits are improved public
health and safety. You should also perform a BCA for major health
and safety rulemakings to the extent that valid monetary values can
be assigned to the expected health and safety outcomes. For all
other major rulemakings, you should carry out a BCA. If some of the
primary benefit categories cannot be expressed in monetary units,
you should also conduct a CEA.
A. Benefit-Cost Analysis
The distinctive feature of BCA is that both benefits and costs
are expressed in monetary units, which allows you to evaluate
different regulatory options with a variety of attributes using a
common measure. This can be especially helpful in choosing the
appropriate scope for your regulatory intervention. By measuring
incremental benefits and costs of successively more stringent
regulatory alternatives, you can identify the alternative that
maximizes societal net benefits.
The size of net benefits, the absolute difference between total
benefits and total costs, is the key to determining whether one
policy is more efficient than another. That will be achieved at the
point where the cost of a marginal increment in regulatory
stringency is just matched by the marginal benefit. The ratio of
total benefits to total costs is not a meaningful indicator of net
benefits and should not be used for that purpose. It is well known
that considering such ratios alone can yield misleading results.
Even when a benefit or cost cannot be expressed in monetary
units, you should still try to measure it in terms of its physical
units, and if it is not possible to measure the physical units, you
should still describe the benefit or cost qualitatively. When
important benefits and costs cannot be expressed in monetary units,
BCA is less useful, and it can even be misleading, because the
calculation of net benefits in such cases does not provide a full
evaluation of all relevant benefits and costs.
You should exercise professional judgment in identifying the
importance of non-quantifiable factors, where they exist, and assess
as best you can how they might change the ranking of alternatives
based on estimated net benefits. Non-quantifiable benefits or costs
may be important in tipping an analysis one way or the other, but
you should not use non-quantifiables as ``trump cards,'' especially
in cases where the measured net benefits overwhelmingly favor a
particular alternative.
B. Cost-Effectiveness Analysis (CEA)
Cost-effectiveness analysis provides a rigorous way to identify
options that achieve the most effective use of the resources
available without requiring you to monetize all of the relevant
benefits or costs. Generally, cost-effectiveness analysis is most
helpful for comparing a set of regulatory actions with the same
primary outcome (e.g., an increase in the acres of wetlands
protected) or multiple outcomes that can be integrated into a single
numerical index (e.g., units of health improvement).
Cost-effectiveness results based on averages need to be treated
with great care. They suffer from the same drawbacks as benefit-cost
ratios. The alternative that exhibits the smallest cost-
effectiveness ratio may not be the one that maximizes net benefits,
just as the alternative with the highest benefit-cost ratio is not
always the one that maximizes net benefits. Incremental cost-
effectiveness analysis (discussed below) can help to avoid mistakes
that can occur when policy choices are based on average cost-
effectiveness.
CEA can also be misleading when the ``effectiveness'' measure
does not weight appropriately the consequences of each of the
alternatives. For example, when effectiveness is measured in tons of
reduced pollutant emissions, cost-effectiveness estimates will be
misleading unless the reduced emissions of diverse pollutants result
in the same health and environmental benefits.
When you have identified a range of alternatives (e.g.,
different levels of stringency), you should determine the cost-
effectiveness of each option compared with the baseline as well as
its incremental cost-effectiveness compared with successively more
stringent requirements. Ideally, your CEA would present an array of
cost-effectiveness estimates that would allow comparison across
different alternatives. However, analyzing all possible combinations
is not practical where there are many options (including possible
interaction effects). In these cases, you should use your judgment
to choose reasonable alternatives for careful consideration.
Accuracy of CEA depends on the consistency of analysis across a
diverse set of possible regulatory actions. To achieve consistency,
you need to construct very carefully the two key components of any
CEA: The cost and the ``effectiveness'' or performance measures for
the alternative policy options.
With regard to measuring costs, you should be sure to include
all the relevant costs to society--whether public or private.
Rulemakings may also yield cost savings (e.g., energy savings
associated with new technologies). The numerator in the cost-
effectiveness ratio should reflect net costs, defined as the gross
cost incurred in meeting the requirements (sometimes called
``total'' costs) minus any cost savings.
Where regulation may yield several different beneficial
outcomes, a cost-effectiveness comparison becomes more difficult to
interpret because there is more than one measure of effectiveness to
incorporate in the analysis. To arrive at a single measure you will
need to weigh the value of disparate benefit categories, but this
computation raises some of the same difficulties you will encounter
in BCA. If you can assign a reasonable monetary value to all of the
regulation's different benefits, then you should do so, but in that
case you will be doing BCA not CEA.
When you can estimate the monetary value of some but not all of
the ancillary benefits of a regulation, but cannot assign a monetary
value to the primary measure of effectiveness, you should subtract
the monetary estimate of the ancillary benefits from the gross cost
estimate to yield an estimated net cost. This net cost estimate for
the rule may turn out to be negative--that is, the other benefits
exceed the cost of the rule. If you are unable to estimate the value
of
[[Page 5517]]
some of the ancillary benefits, the cost-effectiveness ratio will be
overstated, and this should be acknowledged in your analysis. CEA
does not yield an unambiguous choice when there are benefits that
have not been incorporated in the net cost estimates.
You also may use CEA to compare regulatory alternatives in cases
where the statute specifies the level of benefits to be achieved.
C. The Effectiveness Metric for Public Health and Safety
Rulemakings
The validity of cost-effectiveness analysis depends on the
application of appropriate ``effectiveness'' or performance measures
that permit comparison of the regulatory options being considered.
Agencies currently use a variety of methods for determining
effectiveness, including number of lives saved, number of equivalent
lives saved, and number of quality-adjusted life years saved. It is
difficult for OMB to draw meaningful cost-effectiveness comparisons
between rulemakings that employ different cost-effectiveness
measurements. As a result, agencies should provide OMB with the
underlying data, including mortality and morbidity data, the age
distribution of the affected population, and the severity and
duration of disease conditions or trauma, so that OMB can make
apples-to-apples comparisons between rulemakings that employ
different measures.
D. Evaluating Distributional Effects
Both benefit-cost analysis and cost-effectiveness analysis tend
to focus on economic efficiency. Decision-makers may desire (or be
required) to consider other values as well such as fairness. Your
regulatory analysis should provide a separate description of
distributional effects (i.e., how both benefits and costs are
distributed among sub-populations of particular concern) so that
decisionmakers can properly consider them along with the effects on
economic efficiency. E.O. 12866 authorizes this approach. The
presentation of distributional effects is especially important when
you have reason to believe that there will be significant
disparities in how your regulatory actions may affect different
groups of people. Effects that fall most heavily on those least able
to bear the cost should be highlighted for policymakers' attention.
Actions that benefit small groups at the expense of the larger
public also deserve special scrutiny.
IV. Identifying and Measuring Benefits and Costs
This Section provides guidelines for your preparation of the
benefit and cost estimates required by Executive Order No. 12866 and
the ``Regulatory Right-to-Know Act.'' The preliminary analysis
described in Sections I, II and III will help you identify a
workable number of alternatives for consideration in your analysis
and an appropriate analytical approach to use.
A. How To Develop a Baseline
1. General Issues
You need to measure the benefits and costs of a rule against a
baseline. This baseline should be the best assessment of the way the
world would look absent the proposed action. The choice of a proper
baseline may require consideration of a wide range of potential
factors, including:
[sbull] Evolution of the market,
[sbull] Changes in external factors affecting expected benefits
and costs,
[sbull] Changes in regulations promulgated by the agency or
other government entities, and the degree of compliance by regulated
entities with other regulations.
You may often find it reasonable to forecast that the world
absent the regulation will resemble the present. If this is the
case, however, your baseline should reflect the future effect of
current programs and policies. For review of an existing regulation,
a baseline assuming ``no change'' in the regulatory program
generally provides an appropriate basis for evaluating reasonable
regulatory alternatives. When more than one baseline is reasonable
and the choice of baseline will significantly affect estimated
benefits and costs, you should consider measuring benefits and costs
against alternative baselines. In doing so you can analyze the
effects on benefits and costs of making different assumptions about
other agencies' regulations, or the degree of compliance with your
own existing rules. In all cases, you must evaluate benefits and
costs against the same baseline. You should also discuss the
reasonableness of the baselines used in these sensitivity analyses.
EPA's 1998 final PCB disposal rule provides a good example. EPA
used several alternative baselines, each reflecting a different
interpretation of existing regulatory requirements. In particular,
one baseline reflected a literal interpretation of EPA's 1979 rule
and another the actual implementation of that rule in the year
immediately preceding the 1998 revision. The use of multiple
baselines illustrated the substantial effect changes in EPA's
implementation policy could have on the cost of a regulatory
program. In the years after EPA adopted the 1979 PCB disposal rule,
changes in EPA policy--especially allowing the disposal of
automobile ``shredder fluff'' in municipal landfills--reduced the
cost of the program by more than $500 million per year.
In some cases, substantial portions of a rule may simply restate
statutory requirements that would be self-implementing even in the
absence of the regulatory action. In these cases, you should use a
pre-statute baseline. If you are able to separate out those areas
where the agency has discretion, you may also use a post-statute
baseline to evaluate the discretionary elements of the action.
2. Evaluation of Alternatives
You should decide on and describe the number and choice of
alternatives available to you and discuss the reasons for your
choice. Alternatives that rely on incentives and offer increased
flexibility are often more cost-effective than more prescriptive
approaches. For example, user fees and information dissemination may
be good alternatives to direct command-and-control regulation.
Within a command-and-control regulatory program, performance-based
standards generally offer advantages over standards specifying
design, behavior, or manner of compliance.
You should carefully consider all appropriate alternatives for
the key attributes or provisions of the rule. Section II above
outlines examples of appropriate alternatives.
Where there is a ``continuum'' of alternatives for a standard
(for example, the level of stringency), you should generally analyze
at least three options:
[sbull] The option serving as a focus for the Agency or program
office regulatory initiative;
[sbull] A more stringent option that achieves additional
benefits (and presumably costs more) beyond those realized by the
preferred option; and
[sbull] A less stringent option that costs less (and presumably
generates fewer benefits) than the preferred option.
You should choose options that are reasonable alternatives
deserving careful consideration. In some cases, the regulatory
program will focus on an option that is near or at the limit of
technical feasibility or that fully achieves the objectives of the
regulation. In these cases, the analysis would not need to examine a
more stringent option. For each of the options analyzed, you should
compare the anticipated benefits to the corresponding costs. It is
not adequate to simply compare the Agency's preferred option to a
``do nothing'' or ``status quo'' option.
Whenever you can compare the benefits and costs of alternative
options, you should present them in terms of both total and
incremental benefits and costs. You must measure total benefits and
costs against the same baseline. By contrast, you should present
incremental benefits and costs as differences from the corresponding
estimates associated with the next less-stringent alternative.\17\
It is important to emphasize incremental effects are simply
differences between successively more stringent alternatives.
---------------------------------------------------------------------------
\17\ For the least stringent alternative, you should estimate
the incremental benefits and costs relative to the baseline. Thus,
for this alternative, the incremental effects would be the same as
the corresponding totals.
---------------------------------------------------------------------------
In some cases, you may decide to analyze a wide array of
options. For example, DOE's 1998 rule setting new energy efficiency
standards for refrigerators and freezers analyzed a large number of
options and produced a rich amount of information on their relative
effects. This analysis--examining more than 20 alternative
performance standards for one class of refrigerators with top-
mounted freezers--enabled DOE to select an option that produced $200
more in net benefits per refrigerator than the least attractive
option.
You should analyze the benefits and costs of different
regulatory provisions separately when a rule includes a number of
distinct provisions. If the existence of one provision affects the
benefits or costs arising from another provision, the analysis
becomes more complicated, but the need to examine provisions
separately remains. In this case, you should evaluate each specific
provision by determining the net benefits of the proposed regulation
with and without it.
[[Page 5518]]
Analyzing all possible combinations of provisions in this way is
impractical if their number is large and interaction effects are
widespread. You need to use judgment to select the most significant
or relevant provisions for such analysis.
You should also discuss the statutory requirements that affect
the selection of regulatory approaches. If legal constraints prevent
the selection of a regulatory action that best satisfies the
philosophy and principles of Executive Order No. 12866, you should
identify these constraints and estimate their opportunity cost.
B. How To Develop Benefit and Cost Estimates
1. Some General Considerations
You should discuss the expected benefits and costs of the
selected regulatory option and any reasonable alternatives for each
rule. How is the proposed action expected to provide the anticipated
benefits and costs? What are the monetized values of the potential
real incremental benefits and costs to society? To present your
results, you should:
[sbull] Include separate schedules of the monetized benefits and
costs that show the type and timing of benefits and costs and
express the estimates in this table in constant, undiscounted
dollars (for more on discounting see part C below).
[sbull] List the benefits and costs you can quantify, but cannot
monetize, including their timing.
[sbull] Describe benefits and costs you cannot quantify.
[sbull] Identify or cross-reference the data or studies on which
you base the benefit and cost estimates.
Similarly, you should discuss the expected cost of the selected
regulatory option and any reasonable alternatives.
When benefit and cost estimates are uncertain (for more on this
see part D below):
[sbull] You should calculate benefits (including benefits of
risk reductions) and costs that reflect the full probability
distribution of potential consequences. Where possible, present
probability distributions of benefits and include the upper and
lower bound estimates as complements to central tendency and other
estimates.
[sbull] If fundamental scientific disagreement or lack of
knowledge prevents construction of a scientifically defensible
probability distribution, you should describe benefits under
plausible assumptions and characterize the evidence underlying each
alternative.
2. The Key Concepts Needed To Estimate Benefits and Costs
``Opportunity cost'' is the appropriate concept for valuing both
benefits and costs. The principle of ``willingness-to-pay'' (WTP)
captures the notion of opportunity cost by measuring what
individuals are willing to forgo to enjoy a particular benefit. In
general, economists tend to view WTP as the most appropriate measure
of opportunity cost, but an individual's ``willingness-to-accept''
(WTA) compensation for not receiving the improvement can also
provide a valid measure of opportunity cost. WTP and WTA are
comparable measures when the change being evaluated is small and
especially where there are reasonably close substitutes available.
WTP is generally considered to be more readily measurable and to
provide a more conservative measure of benefits. Adoption of WTP as
the measure of value implies that individual preferences of the
affected population should be a guiding factor in the regulatory
decision and that the existing distribution of income is acceptable.
Market prices provide the richest data for estimating benefits
based on willingness-to-pay if the goods and services affected by
the regulation trade in well-functioning free markets. The
opportunity cost of an alternative includes the value of the
benefits forgone as a result of choosing that alternative. The
opportunity cost of banning a product--a drug, food additive, or
hazardous chemical--is the forgone net benefit (i.e., lost consumer
and producer surplus \18\) of that product, taking into account the
mitigating effects of potential substitutes. The use of any resource
has an opportunity cost regardless of whether the resource is
already owned or has to be purchased. That opportunity cost is equal
to the net benefit the resource would have provided in the absence
of the requirement. For example, if regulation of an industrial
plant affects the use of additional land or buildings within the
existing plant boundary, the cost analysis should include the
opportunity cost of using the additional land or facilities. To the
extent possible, you should monetize any such forgone benefits and
add them to the other costs of that alternative. You should also try
to monetize any costs averted as a result of an alternative and
either add it to the benefits or subtract it from the costs of that
alternative.
---------------------------------------------------------------------------
\18\ Consumers' surplus is the difference between what a
consumer pays for a unit of a good and the maximum amount the
consumer would be willing to pay for that unit. It is measured by
the area between the price and the demand curve for that unit.
Producers' surplus is the difference between the amount a producer
is paid for a unit of a good and the minimum amount the producer
would accept to supply that unit. It is measured by the area between
the price and the supply curve for that unit.
---------------------------------------------------------------------------
Estimating benefits and costs when market prices are hard to
measure or markets do not exist is more difficult. In these cases,
regulatory analysts need to develop appropriate proxies that
simulate market exchange. Estimates of willingness-to-pay based on
observable and replicable behavior generally are the most reliable.
As one example, analysts sometimes use ``hedonic price equations''
based on multiple regression analysis of market behavior to simulate
market prices for the commodity of interest.\19\ Going through the
analytical process of deriving benefit estimates by simulating
markets may also suggest alternative regulatory strategies that
create such markets.
---------------------------------------------------------------------------
\19\ The hedonic technique allows analysts to develop an
estimate of the price for specific attributes associated with a
product. For example, houses are a product characterized by a
variety of attributes including the number of rooms, total floor
area, and type of heating and cooling. If there are enough data on
transactions in the housing market, it is possible to develop an
estimate of the implicit price for specific attributes, such as the
implicit price of an additional bathroom or for central air
conditioning. This technique can be extended, as well, to develop an
estimate for the implicit price of public goods that are not
directly traded in markets. For example, the analyst can develop
implicit price estimates for public goods like air quality and
access to public parks by adding measures for these attributes to
the hedonic price equation for housing.
---------------------------------------------------------------------------
Other approaches may be necessary when a commodity is not
directly or indirectly traded in markets. Valuation estimates
developed using these approaches are less certain than estimates
derived from market transactions or based on behavior that is
observable and replicable. While innovative estimation methods are
sometimes necessary, they increase the need for quality control to
ensure that estimates conform closely to what would be observed if
markets did exist.
Ultimately, the method selected to develop a monetized estimate
should focus on a value for the specific attribute or end-point of
interest (for example, lost school-days). As a cautionary note, the
transfer of a valuation estimate from an unrelated context (say, for
example, the valuation of lost work-days from labor market studies)
as a measure of the value of the attribute (lost school-days) may
yield an incorrect benefits estimate.
You also need to guard against double-counting, since some
attributes are embedded in other broader measures. For example, when
a regulation improves the quality of the environment in a community,
the value of real estate in the community generally rises to reflect
the greater attractiveness of living in a better environment. Simply
adding the increase in property values to the estimated value of
improved public health would be double counting if the increase in
property values reflects the improvement in public health. To avoid
this problem you should separate the embedded effects on the value
of property arising from improved public health. At the same time,
of course, valuation estimates that fail to incorporate the
consequence of land use changes will not capture the full effects of
regulation.
3. How To Use Market Data Directly
Economists ordinarily consider market prices as the most
accurate measure of the value of goods and services to society. In
some instances, however, market prices may not reflect the true
value of goods and services. If a regulation involves changes to
goods or services where the market price is not a good measure of
the value to society, you should use an estimate that reflects the
true value to society (often called the ``shadow price''). For
example, suppose a particular air pollutant damages crops. One of
the benefits of controlling that pollutant is the value of the
increase in crop yield as a result of the controls. That value is
typically measured by the price of the crop. If the price is held
above the market price by a government program that affects supply,
however, a value estimate based on this price would overstate the
true benefits of controlling the pollutant. In this case, you should
calculate the value to society of the increase in crop yields by
estimating the
[[Page 5519]]
shadow price, which reflects the value to society of the marginal
use of the crop. If the marginal use is for exports, you should use
the world price. If the marginal use is to add to very large surplus
stockpiles, you should use the value of the last units released from
storage minus storage cost. If stockpiles are large and growing, the
shadow price may be low or even negative.
4. Indirect Uses of Market Data
Some benefits or costs correspond to goods or services that are
indirectly traded in the marketplace. Their value is reflected in
the prices of related goods that are directly traded. Examples
include reductions in health and safety risks, the use-values of
environmental amenities (for example, recreational fishing or hiking
and camping), and the value of improved scenic visibility. You
should use willingness-to-pay measures as the basis for estimating
the monetary value of such indirectly traded goods. When practical
obstacles prevent the use of direct ``revealed preference'' methods
based on actual market behavior to measure willingness-to-pay, you
may consider the use of alternative ``stated preference'' methods
based on survey techniques. As discussed below, you may use
alternative methods where there are practical obstacles to the
accurate application of direct willingness-to-pay methodologies.
A variety of methods have been developed for estimating
indirectly traded goods or services. Examples include estimates of
the value of environmental amenities derived from travel-cost
studies, hedonic price models that measure differences or changes in
the value of land, and statistical studies of occupational-risk
premiums in wage rates. Under each of these methods, care is needed
in designing protocols for reliably estimating the value of these
attributes. For example, the use of occupational-risk premiums can
be a source of bias because the risks, when recognized, may be
voluntarily rather than involuntarily assumed,\20\ and the sample of
individuals upon which premium estimates are based may be skewed
toward more risk-tolerant people.
---------------------------------------------------------------------------
\20\ Distinctions between ``voluntary'' and ``involuntary'' are
arbitrary and should be treated with care. These terms are merely a
proxy for differences in the cost of avoiding risks.
---------------------------------------------------------------------------
Many goods that are affected by regulation--such as preserving
environmental or cultural amenities--are not traded directly in
markets. These ``non-market'' values arise both from use and non-
use. Estimation of these values is difficult because of the absence
of an organized market. However, overlooking or ignoring these
values in your regulatory analysis may significantly understate the
benefits of regulatory actions.
a. Use Values--the value an individual derives from directly
using the resource now (or in the future). Use values are associated
with activities such as swimming, hunting, and hiking where the
individual comes into direct contact with the environment. These
values also include commercial uses of natural resources, such as
fishing, and consumptive uses, such as clean air and drinking water.
b. Nonuse Values--the value an individual places on an
environmental resource even though the individual will not use the
resources now or in the future. Non-use value includes bequest,
existence and option values.
Use values are typically estimated through ``revealed''
preference models, which rely on observed behavior. It is important
that you utilize revealed preference models that adhere to economic
criteria that are consistent with utility maximizing behavior
[example of RUM study]. Examining averting or defensive expenditures
(as distinct from avoided cost of compliance with other regulatory
requirements) is another way to estimate use values. This approach
may reveal a minimum willingness to pay, particularly if there is
reason to believe the market for averting behavior is not in
equilibrium.
5. Contingent Valuation
Contingent valuation (CV) methods have become increasingly
common for estimating indirectly traded benefits. However, the
reliance of these methods on stated preferences regarding
hypothetical scenarios and the complexities of the goods being
valued by this technique raise issues about its accuracy in
estimating willingness to pay compared to methods based on
(indirect) revealed preferences. Accordingly, value estimates
derived from contingent-valuation studies require greater analytical
care than studies based on observable behavior. For example, the
contingent valuation instrument must portray a realistic choice
situation for respondents--where the hypothetical choice situation
corresponds closely with the policy context to which the estimates
will be applied. Below we provide a more complete list of important
criteria that affect the reliability of results from contingent
valuation surveys. The practice of contingent valuation is rapidly
evolving, and agencies relying upon this tool for valuation should
judge the reliability of their estimates using this technique in
light of advances in the state of the art.
Some types of goods, such as preserving environmental or
cultural amenities apart from their use and direct enjoyment by
people, are not traded directly or indirectly in markets. The
practical obstacles to accurate measurement are similar to (but
generally more severe than) those arising with respect to indirectly
traded goods and services, principally because there are no related
market transactions to provide data for willingness-to-pay
estimates.
For many of these goods, particularly goods providing a
substantial ``nonuse'' component of value, contingent-valuation
methods may provide the only analytical approaches currently
available for estimating values. The absence of observable and
replicable behavior with respect to the good or service, combined
with the complex and often unfamiliar nature of the goods being
valued, argues for great care in the design and execution of
surveys, rigorous analysis of the results, and a full
characterization of the uncertainties in the estimates to meet best
practices in the use of this method. Current ``best practices'' for
CV surveys include the following:
Sampling, etc.
[sbull] Probability sampling: this usually requires the guidance
of a professional sampling statistician;
[sbull] Low non-response rate: high non-response rates would
make the results unreliable;
[sbull] Personal interview: face-to-face and telephone
interviews may elicit more reliable information.
Survey Instrument Design
[sbull] Accurate description: adequate information must be
provided to respondents about the good or amenity they are being
asked to value;
[sbull] Reminder of substitute commodities: respondents must be
reminded of substitute commodities, and this reminder should be
introduced forcefully and directly prior to the main valuation
question;
[sbull] Reminder of alternative expenditure possibilities:
respondents must be reminded that their willingness to pay would
reduce their expenditures for other goods;
[sbull] Deflection of transaction value: the survey should be
designed to deflect the general ``warm glow'' of giving or a
particular dislike of the source of the problem being addressed.
Transparency and Replicability of Results
[sbull] Reporting: CV studies should make clear the definition
of population sampled, sampling frame used, overall sample non-
response rate, and item non-response rate on all important
questions; the report should also include the exact wording and
sequence of questionnaire and other communications to respondents;
[sbull] Data quality: special care should be taken to ensure
compliance with OMB's ``Guidelines for Ensuring and Maximizing the
Quality, Objectivity, Utility, and Integrity of Information
Disseminated by Federal Agencies' (``data quality guidelines'')
http://www.whitehouse.gov/omb/fedreg/reproducible.html;
[sbull] Since there is no economic theory that can describe
hypothetical behavior, it is important to assure the respondents
that their decisions are consequential and may influence policy.
As with all other estimates of benefits and costs, your CV
results should be consistent with economic theory. First, as price
increases and the amount of the good is held constant, the number of
respondents willing to pay a particular price should fall. This is
akin to negative own-price elasticity for a marketed good. Second,
respondents should be willing to pay more for a larger amount (or
higher quality) of the good. This is often referred to as being
sensitive to scope. If your only test of consistency with economic
theory is a scope test, it should be an external (split sample) test
rather than an internal (within sample) test.
6. Benefit Transfer Methods
In many cases, conducting an original study may not be possible
due to the time and expense involved. The alternative to an original
study is the use of benefit transfer methods. Benefit transfer is
defined as the practice of transferring existing estimates of
[[Page 5520]]
non-market values from the context of study to a new context.
Although benefit transfer offers a quick, low cost approach for
establishing values for goods and attributes of goods, you should
consider it as a last resort option. Several studies have documented
difficulties in applying benefit transfer methods. If a benefit
transfer approach is necessary, you should adopt the approach of
transferring the entire demand function (referred to as benefit
function transfer) rather than adopting a single point estimate
(referred to as benefit point transfer). The former approach has
been shown to yield more precise estimates than the latter approach.
In conducting benefit transfer, the first step is to specify the
value to be estimated at the policy site. The analyst should
identify the relevant measure of the policy change at this initial
stage. For instance, you can derive the relevant willingness-to-pay
measure by specifying an indirect utility function. This
identification allows an analyst to ``zero in'' on key aspects of
the benefit transfer.
The next step is to identify appropriate studies to conduct
benefit transfer. In selecting transfer studies for either point
transfers or function transfers, you should base your choices on the
following criteria:
a. The selected studies should be based on adequate data, sound
empirical methods and defensible empirical techniques.
b. The selected studies should document parameter estimates of
the valuation function.
c. The study context and policy context should have similar
populations (e.g., demographic characteristics, target population
size).
d. The good, and the magnitude of change in that good, should be
similar in the study and policy contexts.
e. The relevant characteristics of the study and the policy
contexts should be similar. For example, are they similar in the
following respects?
[sbull] The reversibility of the policy change
[sbull] The degree of embedding of other values
[sbull] The order in which the good is supplied
[sbull] The functional relationship between the consumer surplus
and its determinants.
f. The distribution of property rights should be similar so that
the analysis uses the same welfare measure. If the property rights
in the study context support the use of willingness-to-accept (WTA)
measures while the rights in the policy context support the use of
willingness-to-pay (WTP) measures, benefit transfer is not
appropriate.
g. The availability of substitutes across study and policy
contexts should be similar.
Clearly, all of these criteria are difficult to meet. However,
you should attempt to satisfy as many as possible when choosing
studies from the existing economic literature. In addition to the
above criteria, an analyst should keep in mind some of the
difficulties in transferring benefit estimates or functions from one
context to another:
[sbull] Is the policy change irreversible?
[sbull] Does the order in which the good is supplied affect
valuation?
[sbull] Is the embedding problem significant?
[sbull] Is the assumed functional relationship between the
consumer surplus measure and its determinants explicit and
appropriate?
Finally, you should not use benefit transfer in estimating
benefits if:
[sbull] Resources are unique or have unique attributes.
[sbull] If the study examines a resource that is unique or has
unique attributes, you should not transfer benefit estimates or
functions to value a different resource and vice versa. For example,
if a study values visibility improvements at the Grand Canyons,
these results should not be used to value visibility improvements in
urban areas.
[sbull] There are significant problems with applying an ex ante
valuation estimate to an ex post policy context. If a policy yields
a significant change in the attributes of the good, you should not
use the study estimates to value the change using a benefit transfer
approach.
[sbull] You also should not use a value developed from a study
involving, small marginal changes in a policy context involving
large changes in the quantity of the good.
7. Methods for Treating Nonmonetized Benefits and Costs
Sound quantitative estimates of benefits and costs are
preferable to qualitative descriptions of benefits and costs to help
decision-makers understand the full effects of alternative actions.
Although we prefer that agencies use acceptable monetized benefit
and cost estimates, we recognize that monetizing some of the effects
of regulations is difficult, and even quantifying some effects may
not be feasible.
a. What To Do With Benefits and Costs That Are Difficult To Monetize?
You should monetize quantitative estimates whenever possible.
Use sound and defensible values or procedures to monetize costs and
benefits, and ensure that key analytical assumptions are defensible.
If monetization is impossible, explain why and present all available
quantitative information. For example, if you can quantify, but
cannot monetize, improvements in water quality and increases in fish
populations resulting from water quality regulation, you can
describe benefits in terms of stream miles of improved water quality
for boaters and increases in game fish populations for anglers. You
should describe the timing and likelihood of such effects and avoid
double-counting of benefits when estimates of monetized and physical
effects are mixed in the same analysis. You should also apply the
discounting procedures described above to all quantified effects,
whether or not you are able to monetize them.
b. What To Do With Benefits and Costs That Are Difficult To Quantify?
If you are not even able to quantify the effects, you should
present any relevant quantitative information along with a
description of the unquantifiable effects. Such descriptions could
include ecological gains, improvements in quality of life, and
aesthetic beauty. For cases in which the presence of unquantifiable
benefits or costs affects a policy choice, you should provide a
clear explanation of the rationale behind the choice. Such an
explanation could include detailed information on the nature,
timing, likelihood, location, and distribution of the unquantified
benefits and costs. Also, please include a summary table that lists
all the unquantifiable benefits and costs, ordered by expected
magnitude, if possible.
8. Monetizing Health and Safety Benefits and Costs
We expect you to provide a benefit and cost analysis of major
health and safety rulemakings in addition to a CEA. The BCA provides
additional insight because (a) it provides some indication of what
the public is willing to pay for improvements in health and safety
and (b) it offers additional information on preferences for health
using a different research design than is used in CEA. Since the
health-preference methods used to support CEA and BCA have some
different strengths and drawbacks, it is important that you provide
decision makers with both perspectives.
In monetizing health benefits, a willingness-to-pay measure is
the conceptually appropriate measure as compared to other
alternatives (e.g., cost of illness or lifetime earnings), in part
because it attempts to capture pain and suffering and other quality-
of-life effects. Using the willingness-to-pay measure for health and
safety allows you to directly compare your results to the other
costs and benefits in your analysis, which will also typically be
based on willingness to pay.
If well-conducted, revealed-preference studies of relevant
health and safety risks are available, you should consider using
them in developing your monetary estimates. If appropriate revealed-
preference data are not available, you may consider whether valid
and relevant data from stated-preference studies are available. You
will need to use your professional judgement when you are faced with
limited information on revealed preference and substantial
information based on stated preference studies.
A key advantage of stated-preference and health-utility methods
(compared to revealed preference) is that they can be tailored in
their design to address ranges of probabilities, types of health
risks and specific populations affected by your rule. In many
rulemakings there will be no relevant information from revealed-
preference studies. In this situation you should consider
commissioning a stated-preference study or using values from
published stated-preference studies. For the reasons discussed in
the section above IVB5, you should be cautious about using values
from stated-preference studies and describe in the analysis some of
the inherent drawbacks of this approach.
a. Nonfatal Health and Safety Risks
With regard to nonfatal health and safety risks, there is
enormous diversity in the nature and severity of impaired health
states. A minor traumatic injury that can be treated effectively in
the emergency room without hospitalization or long-term care is
different from a traumatic injury resulting in paraplegia. Severity
differences also are important in evaluation of chronic diseases. A
severe bout of bronchitis, though perhaps less frequent, is far more
painful and debilitating than the more frequent bouts of
[[Page 5521]]
mild bronchitis. The duration of an impaired health state, which can
range from a day or two to several years or even a lifetime (e.g.,
birth defects inducing mental retardation), need to be considered
carefully. Information on both the severity and duration of an
impaired health state are necessary before the task of monetization
can be performed.
When monetizing nonfatal health effects, it is important to
consider two components: (1) The private demand for prevention of
the nonfatal health effect, to be represented by the preferences of
the target population at risk, and (2) the net financial
externalities associated with poor health such as net changes in
public medical costs and any net changes in economic production.
Revealed-preference or stated-preference studies are necessary to
estimate the private demand; health economics data from published
sources can typically be used to estimate the financial
externalities of poor health. If you use literature values to
monetize nonfatal health and safety risks, it is important to make
sure that the values you have selected are appropriate for the
severity and duration of health effects to be addressed by your
rule.
If data are not available to support monetization, you might
consider an alternative approach that makes use of health-utility
studies. Although the economics literature on the monetary valuation
of impaired health states is growing, there is a much larger
clinical literature on how patients, providers and community
residents value diverse health states. This literature typically
measures health utilities based on the standard gamble, the time
tradeoff or the rating scale methods. This health utility
information may be combined with known monetary values for well-
defined health states to estimate monetary values for a wide range
of health states of different severity and duration. If you use this
approach, you should be careful to acknowledge your assumptions and
the limitations of your estimates.
b. Premature Mortality Risks
The adoption of a monetary value for projected reductions in
premature mortality is the subject of continuing research and
discussion within the economics and policy analysis communities.
Although there is a substantial academic literature on this topic,
the methods used and resulting estimates vary substantially. The two
most widely used measures consider the number of statistical lives
saved and the number of expected years of life saved and their
associated monetary values. Both of these measures are applicable to
settings where a rule changes small probabilities of death faced by
the public.
The phrase ``statistical life'' is widely used in the technical
literature but it can be misleading and easily misinterpreted.
Unlike an identified life, whose name and background are known
(e.g., a trapped coal miner or patient dying of kidney failure), a
statistical life refers to the sum of risks experienced by a
population. For example, if 10,000 people each face a risk of 1 in
10,000 of immediate death, one statistical life is expected to be
lost. Statistical lives that are lost are real people but, given the
background rate of fatal events in the population, it is not
feasible to determine which actual lives will be saved or lost by a
specific rule.
The monetary value of saving a statistical life (VSL) is derived
by assessing the public's willingness to pay to avert one
statistical fatality. The bulk of the studies in the literature,
which address wage premiums for hazardous jobs, are based on
revealed preference. A small but growing number of stated-preference
studies have also been used to derive VSLs. The estimates of VSL in
the literature vary considerably but this is not surprising because
VSL is not expected to be a universal constant. Economic theory
predicts that VSLs may vary in different lifesaving contexts
depending upon factors such as the magnitude of the probabilities
and the health preferences of the target population.
You should not use a VSL estimate without considering whether it
is appropriate for the size and type of risks addressed by your
rule. Studies aimed at deriving VSL values for middle-aged
populations are not necessarily applicable to rules that address
lifesaving among children or the elderly. Moreover, VSL values based
on fatal cancers or heart attacks are not necessarily relevant to a
rule that prevents fatal causes of trauma, violence, or infectious
disease. If you choose to apply a VSL derived in one setting to a
different setting, you should disclose the salient differences in
the lifesaving contexts and, where feasible, make appropriate
quantitative adjustments to the VSL value.
Since everyone is expected to die sooner or later, it has been
suggested that the VSL be replaced or augmented by the monetary
value of a statistical life year (VSLY). The assumption is that the
public is willing to pay more money for a rule that saves an average
of 10 life years per person than a rule that saves one life year per
person. A key assumption implicit in this approach is that public
willingness to pay for risk reduction is strictly proportional to
the number of life years at risk. This may not always be the case.
For example, the elderly may have substantial willingness to pay for
reductions in their mortality risk precisely because they have
relatively few life years remaining. Where there is good reason to
believe that these values are not strictly proportional, you should
attempt to develop appropriate estimates. In all instances, whether
or not you are able to develop ideal estimates, agencies should
consider providing estimates of both VSL and VSLY, while recognizing
the developing states of knowledge in this area.
In summary, you should use valid, relevant data and methods to
assign monetary values to changes in the risk of premature death,
illness or injury. Some of the key issues include:
[sbull] Whether the monetary valuations have been shown to be
appropriately sensitive to the scope of the health change,
considering probability, severity and longevity.
[sbull] Whether the specific data and methods used for
monetization are relevant to the specific health change induced by a
proposed regulation.
The valuation of fatal and nonfatal risk reduction is an
evolving area in terms of research design, methods and results. You
should utilize valuation methods that you consider appropriate for
the regulatory circumstances. You should present estimates based on
alternative approaches, and if you monetize mortality risk
reduction, you should do so on a consistent basis to the extent
feasible. You should clearly indicate your methodology and document
your choice of a particular methodology. If you use different
methodologies in different rules, you should clearly disclose the
fact and explain your reasons.
C. What Discount Rate To Use
Benefits and their associated costs do not always take place in
the same time period, and when they do not, it is usually incorrect
simply to add up all of the expected benefits or costs without
taking account of when they actually occur. If benefits or costs are
delayed or otherwise separated in time from each other, the
difference in timing should be reflected in your analysis.
As a first step, you should present the annual time stream of
benefits and costs expected to result from the rule, clearly
identifying when the benefits and costs are expected to occur. The
beginning point for your stream of estimates should be the year in
which the final rule will begin to have effects, even if that is
expected to be some time in the future. In presenting the stream of
benefits and costs, it is important to measure them in constant
dollars. That way you avoid the misleading effects of inflation on
your estimates. If the benefits or costs are initially measured in
prices reflecting expected future inflation, you can convert them to
constant dollars by dividing through by an appropriate inflation
index, one that corresponds to the inflation rate underlying the
initial estimates of benefits or costs.
Once these preliminaries are out of the way, you can begin to
adjust your estimates for differences in timing. This is a separate
calculation from the adjustment needed to remove the effects of
future inflation. Whether or not inflation is expected, it is
generally true that the sooner benefits occur the more valuable they
are. Resources that are invested will normally earn a positive
return, so current consumption is more expensive than future
consumption, because you are giving up that expected return when you
consume today. Looking at it another way, postponed benefits have a
cost because people are impatient and generally prefer present to
future consumption. Also, if consumption continues to increase over
time, as it has for most of U.S. history, an increment of
consumption will be less valuable in the future than it would be
today, because as total consumption increases, its marginal value
tends to decline. These are all reasons for valuing future costs and
benefits less than those occurring in the present.
A discount factor should be used to adjust the estimated costs
and benefits for differences in timing . The further in the future
the costs and benefits are expected to occur, the larger is this
discount factor. The discount factor can be calculated given a
discount rate. The formula is 1/(1+ the discount rate)\t\ where
``t'' measures the number of years in the future that the benefits
or costs are expected to occur. Benefits or costs that have been
adjusted in
[[Page 5522]]
this way are called discounted present values. Once the estimated
benefits and costs have been discounted, they can be combined to
determine the overall value of net benefits.
OMB's basic guidance on the discount rate is provided in OMB
Circular A-94. This Circular states that a real discount rate of 7
percent should be used as a base-case for regulatory analysis. The 7
percent rate is an estimate of the average before-tax rate of return
to private capital in the U.S. economy. It is a broad measure that
reflects the returns to real estate and small business capital as
well as corporate capital. It approximates the opportunity cost of
capital and is the appropriate discount rate whenever the main
effect of a regulation is to displace or alter the use of capital in
the private sector. OMB revised Circular A-94 in 1992 after
extensive internal review and following public comment. The average
rate of return to capital remains near the 7 percent rate estimated
in 1992. Circular A-94 also recommends using other discount rates to
show the sensitivity of the estimates to the discount rate
assumption.
The effects of regulation do not always fall exclusively on the
allocation of capital. When regulation primarily affects private
consumption (e.g., through higher consumer prices for goods and
services), a lower discount rate may be appropriate. The alternative
most often used is called the ``social rate of time preference.''
This simply means the rate at which ``society'' discounts future
consumption flows to their present value. Economic distortions,
including taxes on capital, create a divergence between this social
rate and the private rate of return to capital. If we take the rate
that the average saver uses to discount future consumption as our
measure of the social rate of time preference, then the real rate of
return on long-term government debt may provide a fair
approximation. This rate has averaged around 3 percent since the
mid-1950s.
For regulatory analysis, you should provide estimates of net
benefits using both 7 percent and 3 percent. An example of this
approach is EPA's analysis of its 1998 rule setting both effluent
limits for wastewater discharges and air toxic emission limits for
pulp and paper mills. In this analysis, EPA developed its present
discounted value estimates using real discount rates of 3 and 7
percent applied to benefit and cost streams that extended forward
for 30 years. (See EPA, Economic Analysis, October 1997, pages 10-3
and 10-4.) You should present a similar sensitivity analysis in your
own work.
In some instances, if there is reason to expect that the
regulation will cause resources to be reallocated away from private
investment in the corporate sector, then the opportunity cost may be
appreciably greater than the 3 to 7 percent discount rate. For
example, Tresch suggests that rates in the range of 10 to 25 percent
may be appropriate to reflect this opportunity cost, depending on
the sector affected by the regulation. If you are uncertain about
the nature of the opportunity cost, then you should present benefit
and cost estimates using a higher discount rate as a sensitivity
analysis as well as using 3 percent and 7 percent.
Circular A-94 points out that the analytically preferred method
of handling timing differences between benefits and costs would be
to adjust all the benefits and costs to reflect their value in
equivalent units of consumption.\21\ Due to distortions in the
economy such calculations require you to value the costs and
benefits using shadow prices, especially for capital goods. If all
costs and benefits are measured in terms of consumption equivalents,
it is appropriate to discount them using the social rate of
discount. Any agency that wishes to tackle this challenging
analytical task should check with OMB before proceeding.
---------------------------------------------------------------------------
\21\ A thorough discussion of this approach to discounting is
provided in Robert C. Lind (ed.), Discounting for Time and Risk in
Energy Policy, Baltimore: The Johns Hopkins University Press for
Resources for the Future, 1982.
---------------------------------------------------------------------------
When future benefits or costs are health-related, some have
questioned whether discounting is appropriate. Although some of the
rationales for discounting money may not seem to be applicable to
health (e.g., lives saved today cannot be invested in the bank to
save more lives in the future, although the resources that would
have been used to save those lives can often be saved with a higher
pay-off in future lives saved). However, people do prefer health
gains that occur immediately to identical health gains that occur
only in the future, which would justify discounting the future
gains. Also, if future health gains are not discounted while future
costs are, then the following perverse result occurs: an attractive
investment today in future health improvement can always be made
more attractive by delaying the investment. For such reasons, there
is a professional consensus that future health effects, including
both benefits and costs, should be discounted at the same rate as
generally used in both BCA and CEA.
A common challenge in health-related analyses is to quantify the
time lag between when a rule takes effect and when the resulting
physical improvements in health status will be observed in the
target population. In such situations, you must carefully consider
the timing of health benefits before present-value calculations are
performed. It is not reasonable to assume that all of the benefits
of reducing chronic diseases such as cancer and cardiovascular
disease will occur immediately when the rule takes effect. For rules
addressing traumatic injury, this lag period may be short while for
chronic diseases it may take years or even decades for a rule to
induce its full beneficial effects in the target population. When a
time period between exposure to a toxin and increased probability of
disease is likely (e.g., a so-called latency period), it is also
likely that there will be a lag between exposure reduction and
reduced probability of disease. This latter period has sometimes
been referred to as a ``cessation lag'' and it may or may not be the
same as the latency period. As a general matter, cessation lags will
apply only to populations with at least some higher-level exposure
(i.e., before the rule takes effect). For populations with no such
prior exposure, such as those born after the rule takes effect, only
the latency period will be relevant.
Ideally, your exposure-risk model would allow calculation of
reduced risk for each year following exposure cessation, perhaps
incorporating total cumulative exposure and age at the time of
exposure reduction into the calculation as well. The present value
calculation of benefits could then reflect an appropriate discount
factor for each year's risk reduction. Recent analyses of the cancer
benefits of reducing public exposure to radon in drinking water have
adopted this approach, supported by formal risk-assessment models
that allow estimates of how the timing of lung cancer incidence and
mortality are affected by different radon exposure levels. In many
cases, you will not have the benefit of such detailed risk
assessment modeling. You will need to use your professional
judgement as to the average cessation lag for the chronic diseases
affected by your rule. In situations where information exists on
latency but not on cessation lags, it may be reasonable to use
latency as a proxy for the cessation lag, unless there is reason to
believe, based on data, modeling, or knowledge of the mechanism of
action, that the two are different. When the average lag time
between exposures and disease is unknown, a range of alternative yet
plausible values for the time lag should be used in your analysis.
Special ethical considerations arise when comparing benefits and
costs across generations. Although most people demonstrate in their
own consumption behavior a preference for consumption now rather
than in the future, it may not be appropriate for society to
demonstrate a similar preference when deciding between the well-
being of current and future generations. Future citizens who are
affected by such choices cannot take part in making them, and
today's society must act in their interest. One way to do this would
be to follow the same discounting techniques described above, but to
supplement the analysis with an explicit discussion of the
intergenerational concerns and how they will be affected by the
regulatory decision. Policymakers would be provided with additional
information when the analysis covers many generations, but without
changing the general approach to discounting.
Some have argued, however, that it is ethically impermissible to
discount the utility of future generations. On this view, government
should treat all generations equally. Even under this approach, it
would still be correct to discount future costs and consumption
benefits, although perhaps at a lower rate than for
intragenerational analysis. There are two reasons for thinking that
a nonzero discount rate is the appropriate assumption for
intergenerational analysis, even when all generations are to be
treated equally. First, future generations are likely to be
wealthier than those currently living, so a marginal dollar of
benefits or costs will be worth less to them than it would be to
those alive today, at least on average. If that holds true, it is
appropriate to discount future benefits and costs relative to
currently consumed benefits and costs even if the welfare of future
generations is not being discounted. Estimates of the discount rate
[[Page 5523]]
appropriate in this case made in the 1990s ranged from 1 to 3
percent per annum.\22\
---------------------------------------------------------------------------
\22\ Approaches to discounting across generations are discussed
in a recent symposium volume published by Resources for the Future.
Paul R. Portney and John P. Weyant (eds.), Discounting and
Intergenerational Equity, Washington, DC: Resources for the Future,
1999.
---------------------------------------------------------------------------
A second reason for discounting the benefits and costs accruing
to future generations at a lower rate is increased uncertainty about
the appropriate value of the discount rate, the longer the horizon
for the analysis. Aversion to uncertainty discourages any such long-
term investments. Private market rates provide a reliable reference
for determining how society values time within a generation, but for
extremely long time periods no comparable private rates exist.
Symmetric uncertainty would have the effect of lowering the discount
factor applied to future costs and benefits. Again the reasonable
range might be expanded to include rates as low as 1 percent per
annum.
If you choose to use a lower discount rate for intergenerational
analysis, you should still be sure to show the calculated net
benefits using discount rates of 3 and 7 percent as well.
Discounting is appropriate whether you are doing a BCA or a CEA.
Even costs and benefits that are not expressed in monetary units
should be discounted if they are separated in time. This also
includes health benefits for reasons discussed above. For example,
in its 1998 rule, ``Control of Emissions from Nonroad Diesel
Engines,'' EPA estimated cost-effectiveness by discounting both the
monetary costs and the emission reduction benefits over the useful
expected life of the engines at the 7 percent real rate recommended
in OMB Circular A-94.
It may be possible in some cases to avoid discounting non-
monetized benefits, if the expected flow of benefits begins as soon
as the cost is incurred and if it is expected to be constant over
time. In such cases, annualizing the cost stream is sufficient, and
further discounting of benefits is unnecessary. As an example, such
an analysis might produce an estimate of the annualized cost per ton
of reducing emissions of a pollutant.
D. Treatment of Uncertainty
The precise consequences (benefits and/or costs) of regulatory
options are not always known for certain, but the probability of
their occurrence can often be predicted. The important uncertainties
connected with your regulatory decisions need to be analyzed and
presented as part of the overall regulatory analysis. Your analysis
of uncertainty should consider both the quantifiable risk associated
with the potential outcomes of alternative regulatory actions (for
example, the expected change in the distribution of automobile
accidents that might result from a change in automobile safety
standards) and the incomplete knowledge or uncertainty about the
relevant relationships (for example, the uncertain science of how
some economic activities might affect future climate change).
The treatment of uncertainty must be guided by the same
principles of full disclosure and transparency that apply to other
elements of your regulatory analysis. Any data and models that you
use to analyze uncertainty should be fully identified. Inferences
and assumptions used in your analysis should also be identified, and
your analytical choices should be explicitly evaluated and
adequately justified. Your presentation should explain how your
analytical choices have affected your analysis.
Uncertainty arises from various and fundamentally different
sources. These include the fundamental unpredictability of various
natural and social phenomena, but they also include lack of data and
the lack of knowledge about key relationships resulting from
limitations in fundamental scientific knowledge (both social and
natural). The different sources of uncertainty suggest different
approaches for dealing with it. For example, when the uncertainty is
due to a lack of data, you might consider deferring the decision, as
an explicit regulatory alternative, pending further study to obtain
sufficient data. We recognize that delaying a decision will also
have costs, as will further efforts at data gathering and analysis.
You will need to weigh the benefits of delay against these costs in
making your decision. Formal tools for assessing the value of
additional information are now well developed in the applied
decision sciences and can be used to help resolve this type of
complex regulatory question.
In some cases, the level of scientific uncertainty may be so
large that you can only present discrete alternative scenarios
without assessing the relative likelihood of each scenario
quantitatively. For example, in assessing the potential outcomes of
an environmental effect, there may be a limited number of scientific
studies with strongly divergent results. In such cases, you might
present results from a range of plausible scenarios, together with
any available information that might help in qualitatively
determining which scenario is most plausible.
Your analysis should include two fundamental components: A
quantitative analysis characterizing the probabilities of the
relevant outcomes and an assignment of economic value to the
projected outcomes. It is essential that both parts be conceptually
consistent. In particular, the quantitative analysis should be
conducted in a way that permits it to be applied within a more
general analytical framework, such as BCA. Similarly, the general
framework needs to be flexible enough to incorporate the
quantitative analysis without oversimplifying the results. For
example, you should address explicitly the implications for benefits
and costs of any probability distributions developed in your
analysis.
1. Quantitative Analysis of Uncertainty
Examples of quantitative analysis, broadly defined, would
include formal estimates of the probabilities of environmental
damage to soil or water, the possible loss of habitat, or risks to
endangered species as well as probabilities of harm to human health
and safety. There are also uncertainties associated with estimates
of economic benefits and costs, e.g., the cost savings associated
with increased energy efficiency. Your analysis should be credible,
objective, realistic, and scientifically balanced. In your
presentation, you should delineate its strengths along with any
lingering uncertainties about its conclusions. You should describe
the assumptions and the models you used and their impact on the
overall analysis. You should also discuss the quality of the
available data used.
As with other elements of regulatory analysis, you will need to
balance thoroughness with the practical limits on your analytical
capabilities. Your analysis does not have to be exhaustive, nor is
it necessary to evaluate each alternative at every step. In the
absence of adequate data, you will need to make assumptions. These
should be clearly identified and consistent with the relevant
science. Your analysis should provide sufficient information for
decision-makers to grasp the degree of scientific uncertainty and
the robustness of estimated probabilities, benefits, and costs to
changes in key assumptions. For major rules involving threshold
costs of $1 billion, you should present a formal quantitative
analysis of the relevant uncertainties.
In your analysis, you should try to provide some estimate of the
probability distribution of risks with and without the regulation,
and you must do this for rules that exceed the $1 billion threshold.
In characterizing the probability distributions quantitatively, you
should provide some estimate of the central tendency (e.g., mean and
median) along with any other information you think will be useful
such as ranges, variances, specified low-end and high-end percentile
estimates, and other characteristics of the distribution.
Your estimates cannot be more precise than their most uncertain
component. Thus, your analysis should report estimates in a way that
reflects the degree of uncertainty and not create a false sense of
precision. Your analysis should not reflect any unstated or
unsupported preferences, even for such worthy objectives as
protecting public health or the environment. Unstated assumptions
can affect the analysis in unsuspected ways, making it difficult for
decision-makers to evaluate the true magnitude of the uncertainties
involved.
Acceptable Analytical Approaches: Whenever possible, you should
use appropriate statistical techniques to determine a probability
distribution of the relevant outcomes, and for rules that exceed the
$1 billion threshold a formal quantitative analysis is required.
You may consider the following analytical approaches. They
entail increasing levels of complexity:
[sbull] Disclose qualitatively the main uncertainties in each
important input to the calculation of benefits and costs. These
disclosures should address the uncertainties in the data as well as
in the analytical results. However, major rules above the $1 billion
threshold require a formal treatment.
[sbull] Use a numerical sensitivity analysis to examine how the
results of your analysis vary with plausible changes in assumptions,
choices of input data, and alternative analytical approaches.
Sensitivity analysis is especially valuable when the information is
[[Page 5524]]
lacking to carry out a formal probabilistic simulation. Sensitivity
analysis can be used to find ``switch points''--critical parameter
values at which estimated net benefits change sign or the low cost
alternative switches. Sensitivity analysis usually proceeds by
changing one variable or assumption at a time, but it can also be
done by varying a combination of variables simultaneously to learn
more about the robustness of your results to widespread changes.
Again, however, major rules above the $1 billion threshold require a
formal treatment.
[sbull] Apply a formal probabilistic analysis of the relevant
uncertainties--possibly using simulation models and/or expert
judgment as revealed, for example, through Delphi methods. Such a
formal analytical approach is appropriate for complex rules where
there are large multiple uncertainties whose analysis raises
technical challenges, or where the effects cascade, and it is
required for rules that exceed the $1 billion threshold. For
example, in the analysis of regulations addressing air pollution,
there is uncertainty about the effects of the rule on future
emissions, uncertainty about how the change in emissions will affect
air quality, uncertainty about how changes in air quality will
affect health, and finally uncertainty about the economic and social
value of the change in health outcomes. You should make a special
effort to portray the probabilistic results--in graphs and/or
tables--clearly and meaningfully.
[sbull] New methods may become available in the future. This
document is not intended to discourage or inhibit their use, but
rather to encourage and stimulate their development.
2. Assigning Economic Values to Uncertain Outcomes
Uncertainty affects the values that you assign to the costs and
benefits of regulatory actions. Because the outcome of regulatory
action is not certain, but is instead best represented by a
probability distribution of potential outcomes, the value assigned
to the expected outcome from this probability distribution may be
different from that for an expected outcome of the same magnitude
that is certain to occur. In the financial world, for example,
riskier instruments must generally earn a higher rate of return, and
investors receive a higher expected reward for bearing uncertainty.
This principle can carry over to the analysis of regulations
depending on who bears the uncertainties from regulatory decisions.
When reporting benefit and cost estimates, where there is a
distribution of outcomes, you will often find it useful to emphasize
summary statistics or figures that can be readily understood and
compared to achieve the broadest public understanding of your
findings. It is a common practice to compare the ``best estimates''
of both benefits and costs with those of competing alternatives.
These ``best estimates'' are usually the average or the expected
value of benefits and costs. Emphasis on these expected values is
appropriate as long as society is ``risk neutral'' with respect to
the regulatory alternatives. This, however, may not always be the
case. For a risk-averse individual, the certainty equivalent of an
uncertain net benefit stream is less than its expected cash value,
because the uncertainty itself is valued negatively.
E. Other Key Considerations
1. Other Cost Considerations
You should include these effects in your analysis and provide
estimates of their monetary values wherever possible.
[sbull] Private-sector compliance costs;
[sbull] Government administrative costs;
[sbull] Losses in consumers' or producers' surpluses;
[sbull] Discomfort or inconvenience; and
[sbull] Loss of time.
Estimates of costs should be based on credible changes in
technology over time. For example, a slowing in the rate of
innovation or of adoption of new technology because of delays in the
regulatory approval process or the setting of more stringent
standards for new facilities than existing ones may entail
significant costs. On the other hand, a shift to regulatory
performance standards and incentive-based policies may lead to cost-
saving innovations that should be taken into account. The weight you
give to a study of past rates of cost savings resulting from
innovation (including ``learning curve'' effects) should depend on
both their timeliness and their direct relevance to the processes
affected by the regulatory alternative under consideration. In some
cases agencies are limited under statute to considering only
technologies that have been demonstrated to be feasible. In these
situations, it may also be useful to estimate costs and cost savings
assuming a wider range of technical possibilities.
Occasionally, one or more components of the analysis address
cost savings to one of the parties directly affected by the rule.
For example, a requirement that manufacturers reduce emissions from
engines they produce may lead to technologies that improve fuel
economy. These fuel savings will normally accrue to the purchasers
of the engines. There is no apparent market failure with regard to
the market value of fuel saved because one would expect that
consumers would be willing to pay for increased fuel economy that
exceeded the cost of providing it. When these cost savings are
substantial, and particularly when you estimate them to be greater
than the cost associated with achieving them, it is incumbent on you
to demonstrate convincingly why the market has not already captured
these gains. As a general matter, any costs that are averted as a
result of an alternative should be monetized wherever possible and
either added to the benefits or subtracted from the costs of that
alternative.
2. The Difference Between Costs (or Benefits) and Transfer Payments
Distinguishing between real costs and transfer payments is an
important, but sometimes difficult, problem in cost estimation. Cost
and benefit estimates should reflect real resource use. Transfer
payments are monetary payments from one group to another that do not
affect total resources available to society. For example, a
regulation that restricts the supply of a good, causing its price to
rise, produces a transfer of income from buyers to sellers. The
reduction in the total value of the supply of the good is a real
cost to society, but the transfer of income from buyers to sellers
resulting from the higher price is not. You should not include
transfers in the estimates of the benefits and costs of a
regulation.\23\ Instead, address them in a separate discussion of
the regulation's distributional effects.
---------------------------------------------------------------------------
\23\ However, transfers from the United States to other nations
should be included as costs, and transfers from other nations to the
United States as benefits.
---------------------------------------------------------------------------
Examples of transfer payments include the following:
[sbull] Scarcity rents and monopoly profits.
[sbull] Insurance payments.
[sbull] Indirect taxes and subsidies.
[sbull] Distribution expenses.
3. Alternative Assumptions
If benefit or cost estimates depend heavily on certain
assumptions, you should make those assumptions explicit and carry
out sensitivity analyses using plausible alternative assumptions. If
the value of net benefits changes from positive to negative (or vice
versa) or if the relative ranking of regulatory options changes with
alternative plausible assumptions, you should conduct further
analysis to determine which of the alternative assumptions is more
appropriate. Because different estimation methods may have hidden
assumptions, you should analyze estimation methods carefully to make
any hidden assumptions explicit.
V. Specialized Analytical Requirements
In preparing analytical support for your rulemaking, you should
be aware that there are a variety of analytic requirements imposed
by law and Executive order. In addition to the regulatory impact
analysis requirements of E.O. 12866, you should also consider
whether your rule will need specialized analysis of any of the
following issues.
A. Impact on Small Businesses and Other Small Entities
Under the Regulatory Flexibility Act (5 U.S.C. chapter 6),
agencies must prepare a proposed and final ``regulatory flexibility
analysis'' (RFA) if the rulemaking could ``have a significant impact
on a substantial number of small entities.'' Your agency should have
guidelines on how to prepare an RFA and you are encouraged to
consult with the Chief Counsel for Advocacy of the Small Business
Administration on expectations concerning what is an adequate RFA.
Executive Order 13272 (67 FR 53461, August 16, 2002) requires you to
notify the Chief Counsel for Advocacy of any draft rules that might
have a significant economic impact on a substantial number of small
entities. E.O. 13272 also directs agencies to give every appropriate
consideration to any comments provided by the Advocacy Office.
B. Analysis of Unfunded Mandates
Under the Unfunded Mandates Act (2 U.S.C. 1532), you must
prepare a written statement about costs and benefits prior to
issuing a proposed or final rule (for which
[[Page 5525]]
your agency published a proposed rule) that may result in
expenditure by State, local, and tribal governments, in the
aggregate, or by the private sector, of $100,000,000 or more in any
one year (adjusted annually for inflation). Your analytical
requirements under Executive Order 12866 are similar to the
analytical requirements under this Act, and thus the same analysis
may permit you to comply with both analytical requirements.
C. Information Collection, Paperwork and Recordkeeping Burdens
Under the Paperwork Reduction Act (44 U.S.C. chapter 35), you
will need to consider whether your rulemaking (or other actions)
will create any additional information collection, paperwork or
recordkeeping burdens. These burdens are permissible only if you can
justify the practical utility of the information for the
implementation of your rule. OMB approval will be required of any
new requirements for a collection of information imposed on 10 or
more persons and a valid OMB control number must be obtained for any
covered paperwork. Your agency's CIO should be able to assist you in
complying with the Paperwork Reduction Act.
D. Information Quality Guidelines
Under the Information Quality Law, agency guidelines, in
conformance with the OMB government-wide guidelines (67 FR 8452,
February 22, 2002), have established basic quality performance goals
for all information disseminated by agencies, including information
disseminated in support of proposed and final rules. The data and
analysis that you use to support your rule must meet these agency
and OMB quality standards. Your agency's CIO should be able to
assist you in assessing information quality. The Statistical and
Science Policy Branch of OMB's Office of Information and Regulatory
Affairs can provide you assistance.
E. Environmental Impact Statements
The National Environmental Policy Act (42 U.S.C. 4321-4347) and
related statutes and executive orders require agencies to consider
the environmental impacts of agency decisions, including
rulemakings. An environmental impact statement must be prepared for
``major federal actions significantly affecting the quality of the
human environment.'' You must complete NEPA documentation before
issuing a final rule. The White House Council on Environmental
Quality has issued regulations (40 CFR 1500-1508) and associated
guidance for implementation of NEPA, available through CEQ's Web
site (see NEPANet).
F. Impacts on Children
Under Executive Order 13045, ``Protection of Children from
Environmental Health Risks and Safety Risks,'' each agency must,
with respect to its rules, ``to the extent permitted by law and
appropriate, and consistent with the agency's mission,'' each agency
must ``address disproportionate risks to children that result from
environmental health risks or safety risks.'' For any substantive
rulemaking action that ``is likely to result in'' an economically
significant rule that concerns ``an environmental health risk or
safety risk that an agency has reason to believe may
disproportionately affect children,'' the agency must provide OMB/
OIRA ``an evaluation of the environmental health or safety effects
of the planned regulation on children,'' as well as ``an explanation
of why the planned regulation is preferable to other potentially and
reasonably feasible alternatives considered by the agency.''
G. Energy Impacts
Under Executive Order 13211 (66 FR 28355, May 22, 2001),
agencies are required to prepare and submit to OMB a Statement of
Energy Effects for significant energy actions, to the extent
permitted by law. This Statement is to include a detailed statement
of ``any adverse effects on energy supply, distribution, or use
(including a shortfall in supply, price increases, and increased use
of foreign supplies)'' for the action and reasonable alternatives
and their effects. You need to publish the Statement or a summary in
the related NPRM and final rule. For further ``Guidance on
Implementing E.O. 13211,'' see OMB Memorandum 01-27 (July 13, 2001),
available on OMB's Web site.
VI. Accounting Statement
You need to provide an accounting statement with tables
reporting benefit and cost estimates for each major final rule for
your agency. You should use the guidance outlined above to report
these estimates. We have included a suggested format for your
consideration.
Categories of Benefits and Costs
To the extent feasible, you should quantify all potential
incremental benefits and costs. You should report benefit and cost
estimates within the following three categories:
[sbull] Monetized
[sbull] Quantified, but not monetized; and
[sbull] Qualitative, but not quantified.
These categories are mutually exclusive and exhaustive.
Throughout the process of listing preliminary estimates of costs and
benefits, agencies should avoid double-counting. This problem may
arise if more than one way exists to express the same change in
social welfare.
Quantifying and Monetizing Benefits and Costs
Yes, you should develop quantitative estimate and covert them to
dollar amounts if possible. In many cases, quantified estimates are
readily convertible, with a little effort, into dollar equivalents.
Treatment of Benefits and Costs Over Time
You should monetize and quantify effects as real, undiscounted
streams of estimates for each year over the entire period for which
you have estimated them. You should also annualize these same
effects using real discount rates of 3 and 7 percent. The stream of
annualized estimates should begin in the year the final rule is
published even if the rule does not take effect immediately. Please
report all monetized effects in 2000 dollars. You may convert
dollars expressed in different years to 2000 dollars using the GDP
deflator.
Treatment of Risk and Uncertainty
You should provide central tendency or primary estimates as well
as distributions about the estimates, where such information exists.
When you provide only upper and lower bounds (in addition to best
estimates), you should, if possible, use the 95 and 5 percent
confidence bounds. Although we encourage you to develop estimates
that capture the distribution of plausible outcomes for a particular
alternative, detailed reporting of such distributions is not
required.
The principles of full disclosure and transparency apply to the
treatment of uncertainty. Where there is significant uncertainty and
the resulting inferences and/or assumptions have a critical effect
on the benefit and cost estimates, you should describe the benefits
and costs under plausible alternative assumptions. You may add
footnotes to the table as needed to provide documentation and
references, or to express important warnings.
In our discussion in Section I above, we identified some of the
issues associated with developing estimates of the value of
reductions in premature mortality risk. Based on this discussion,
you should present alternative primary estimates where you use
alternative estimates for valuing reductions in premature mortality
risk.
Precision of Estimates
Reported estimates should reflect, to the extent feasible, the
precision in the analysis. For example, an estimate of $220 million
implies rounding to the nearest $10 million and thus a precision of
+/-$5 million; similarly, an estimate of $222 million implies
rounding to the nearest $1 million and thus, a precision of +/-$0.5
million.
Separate Reporting of Transfers
You should report transfers separately and avoid the
misclassification of transfer payments as costs or benefits.
Transfers occur when wealth or income is redistributed without any
direct change in aggregate social welfare. To the extent that
regulatory outputs reflects transfers rather than welfare gains to
society, you should identify them as transfers rather than costs or
benefits. You should also distinguish transfers caused by Federal
budget actions--such as those stemming from a rule affecting Social
Security payments--from those that involve transfers between non-
governmental parties--such as monopoly rents a rule may confer on a
private party. You should use as many categories as necessary to
describe the major redistributive effects of a regulatory action. If
transfers have significant effects in addition to distributional
effects, you should evaluate them also.
Effects on State, Local, and Tribal Governments, Small Business,
Wages and Economic Growth
You need to identity the portions of benefits, cost, and
transfers received by State, local, and tribal governments. To the
extent feasible, you also should identify the effects of the rule or
program on small businesses, wages, and economic growth. Note that
rules with annual costs that are less than one
[[Page 5526]]
billion dollars are likely to have minimal effect on economic
growth.
[GRAPHIC] [TIFF OMITTED] TN03FE03.017
BILLING CODE 3110-01-C
[[Page 5527]]
References
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Drummond MF, O'Brien B, Stoddert GL, Torrance GW, Methods for
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Gold MR, Siegel JE, Russell LB, Weinstein MC (eds), Cost-
Effectiveness in Health and Medicine, Oxford University Press, New
York, 1996.
Kopp RJ, Pommerehne WW, Schwarz N (eds), Determining the Value
of Non-Marketed Goods, Kluwer, Boston, MA, 1997.
Mishan EJ, Cost-Benefit Analysis, 4th Edition, Routledge, New
York, 1994.
Morgan MG, Henrion M, Uncertainty: A Guide to Dealing with
Uncertainty in Quantitative Risk and Policy Analysis, Cambridge
University Press, New York, 1990.
Nord E, Cost-Value Analysis in Health Care: Making Sense of
QALYs, Cambridge University Press, Cambridge, UK, 1999.
Petitti DB, Meta-Analysis, Decision Analysis and Cost-
Effectiveness Analysis, Oxford University Press, New York, 1994.
Portney PR, Weyant JP (eds), Discounting and Intergenerational
Equity, Resources for the Future, Washington, DC, 1999.
Tolley G, Kenkel D, Fabian R (eds), Valuing Health for Policy:
An Economic Approach, University of Chicago Press, Chicago, IL,
1994.
Tresch, RW, Public Finance: A Normative Theory, Second Edition,
Academic Press, San Diego, CA, 2002.
Viscusi WK, Fatal Tradeoffs: Public and Private Responsibilities
for Risk, Oxford University Press, New York, 1992.
[FR Doc. 03-2542 Filed 1-31-03; 8:45 am]
BILLING CODE 3110-01-P