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This Congressional Budget Office staff working paper presents a taxonomy of definitions regarding the costs of environmental regulation. These various cost concepts are illustrated with examples based on cost estimates for legislative proposals relating to ozone attainment requirements under the Clean Air Act. The study was prepared in response to requests from the House Committee on Energy and Commerce, the majority and minority staffs of the Senate Environment and Public Works Committee and its Subcommittee on Environmental Protection, and a separate group of 34 Senators.

The paper was prepared in CBO's Natural Resources and Commerce Division under the supervision of Everett M. Ehrlich and Roger C. Dower, who wrote the report together with Douglas Kendall. Computational and analytical support was provided by Thomas Lutton. Valuable comments and assistance were provided by Robert Dennis, Matthew Salomon, Deborah Reis, and Robert Sunshine of CBO, Larry Parker and David Gushee of the Congressional Research Service, Robert Friedman of the Office of Technology Assessment, and Eric A. Hanushek of the University of Rochester. The paper was edited by Francis Pierce and typed by Patricia P. Joy.
 

James L. Blum
Acting Director
May 1988
 
 

SUMMARY

I - COSTS OF ENVIRONMENTAL REGULATION: AN OVERVIEW

• Perspectives on the Cost of Regulation
• Other Costs

II - PRIVATE ECONOMIC COSTS OF OZONE ATTAINMENT

• Overall Estimates of Private-Sector Compliance Costs
• Costs of Specific Provisions
• Industry-Level Costs
• Trade Effects
• Impacts on Consumers
• Macroeconomic Impacts

III - PUBLIC COSTS OF ENVIRONMENTAL REGULATION

• Public-Sector and Private-Sector Cost
• Estimating Public Costs of Environmental Regulation
• Ozone Attainment-A Case Study in Public Costs
• What Is Excluded?

As the Congress moves toward reauthorizing the Clean Air Act, it is increasingly asked to consider explicitly the costs of alternative legislative proposals. In response to members' requests, Congressional support agencies have provided several detailed economic analyses of Senate and House bills to control acid rain, attain national ambient levels of ozone, and address other forms and sources of air pollution. In addition, other federal agencies and private organizations have conducted economic analyses of legislative proposals and made them available to the Congress. Taken together, these studies offer often widely differing definitions and estimates of so-called "costs of environmental regulation."

To assist the Congress in interpreting these estimates, this paper sets out a taxonomy of cost definitions and assesses their meaning and application. To illustrate these different definitions, existing government estimates of Congressional proposals to reduce ozone concentrations (for example, as found in H.R. 3054 and S. 1894) are evaluated. Although these estimates differ in scope and measurement, they all tend to reflect the first-order cost burden of regulation and rarely consider how these cost burdens are translated into the changes in prices and output that ultimately determine the impact of regulation on the overall economy. Previous estimates of the impact of pollution control spending on the macroeconomy have found that a dollar of pollution control spending is expected to result in a one- to three-dollar loss in measured national output. Estimates obtained in this report fall into this range. Thus, a $10 billion annual pollution abatement requirement is likely to reduce real national output by $10 billion to $30 billion yearly.

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