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Keywords:

  • benefit-cost analysis;
  • environmental economics;
  • regulation;
  • risk analysis

Abstract

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

We know relatively little about the economic effects of “insignificant” rules because they are not typically analyzed. Yet, these rules could be cumulatively important. We provide an economic analysis of one proposed rule to control hazardous air pollutants, which is not considered to be economically significant. This rule is of particular interest because it is one of the first in a long series of rules that Environmental Protection Agency (EPA) will consider for limiting hazardous air pollutant emissions. Our analysis suggests that the proposed controls that EPA has considered are not likely to pass a benefit–cost test. We recommend that an agency base its decision to allocate additional resources to benefit–cost analysis on the expected value of the improved information. In addition, agencies should consider applying a rule of thumb that would specify a threshold level of risk reduction that needs to be achieved before some kinds of regulation are considered.


1. Introduction

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

Scholars know relatively little about the economic impacts of “minor” or “insignificant” rules because they are not typically analyzed.1 Each of these rules costs less than $100m annually, but at least some of them could be important. To illustrate, we provide an economic analysis of one proposed rule to control hazardous air pollutants that is not considered to be economically significant.

Part of the US Clean Air Act deals with the regulation of hazardous air pollutants. The laws governing the regulation of these pollutants require the application of maximum available control technology standards. In addition, the Act requires that the US Environmental Protection Agency (EPA) address the “residual risk” that remains after the implementation of these standards. EPA’s task is twofold: to provide “an ample margin of safety to protect public health” and to prevent, considering costs and other factors, an adverse environmental effect.

To ensure an ample margin of safety, the EPA has recently proposed two ways of addressing residual risk for the synthetic organic chemical manufacturing industry (EPA 2006). The first is to maintain the status quo and the second is to introduce three additional control measures. The EPA’s proposal is not considered to be economically significant, one which, as defined by Executive Order 12866, could have an annual effect on the economy of $100m or more. This means that the preparation of a full regulatory impact analysis that weighs the costs and benefits of the proposed rule was not required.

If the current maximum available control technology standards are effective at reducing the large risks, there may only be very small remaining risk reductions that can be achieved with residual risk rules, and their likely costs may outweigh their likely benefits.2 Indeed, some earlier scholarship questions whether the initial efforts to regulate hazardous air pollutants under the Clean Air Act were likely to be worth the cost (Portney 1990). A closer look at one of these rules could illustrate their potentially excessive costs and thereby help inform future legislative and regulatory decisions.

The potential cumulative effect of minor rules could be important. In 2005, the Office of Information and Regulatory Affairs (OIRA) – which is the office within the US Office of Management and Budget (OMB) responsible for reviewing rules – reviewed over 528 minor rules, of which 209 were final rules (RegInfo.gov 2005). The rules reviewed by OIRA probably are only a small percentage of the total number of minor rules written and passed by agencies each year.3 Even if each rule has a small impact, say in the tens of millions of dollars, such rules may be important in the aggregate. Furthermore, if these rules are important from an economic and social standpoint, it raises at least the possibility that they deserve closer scrutiny. In contrast, some scholars have pointed out that doing more economic analysis need not result in better outcomes (Lave 1996). This paper will address this issue, providing what we believe is the most sensible approach to the analysis of minor rules.

One attempt to examine the relative impact of major and minor rules was carried out by OMB (2004) for a select group of agencies that were more likely to estimate costs and benefits for minor rules.4 OMB found that a high percentage of the costs were because of the major rules, which might imply that the cumulative impact of minor rules is small. OMB’s analysis excluded EPA, the agency whose major rules were responsible for most of the costs and benefits generated by the US federal regulation in the last 10 years (OMB 2006). By closely examining an EPA minor rule, and providing one of the first benefit–cost analyses of such a rule, this research note illustrates that EPA minor rules may have more substantial effects than previously thought.

We have three objectives: first, to provide a brief economic analysis of EPA’s proposal; second, to consider how both analysis of and regulation by minor rules could be improved; and third, to consider the issue of whether “insignificant” rules are worth studying on a larger scale.

We use estimates presented by EPA in the Federal Register and rely on some simplifying assumptions regarding benefits and costs. Our purpose here is not to provide a definitive benefit–cost analysis of EPA’s proposed rule, but rather to illustrate how the agency’s analysis of such a minor rule could be improved. We conclude that with a little more effort, the analysis of the rule we examine could be improved significantly, and we illustrate how that might be done. Furthermore, we argue that “insignificant” rules are in general worth investigating in more detail to examine their broader economic implications.

Section 2 of this paper presents an economic analysis of the two regulatory options proposed by EPA to regulate hazardous air pollutants from synthetic organic chemical manufacturing, as well as an analysis of each control measure separately. Section 3 analyzes EPA’s actions, providing recommendations for similar rules that do not rise above the significance threshold. Section 4 outlines a strategy for analyzing insignificant rules and also suggests an alternative method for screening regulations that would rely on a de minimis threshold for risk reductions. Section 5 presents our conclusions and suggests areas for future research.

2. Estimating benefits and costs of EPA’s proposal

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

In a proposal issued in 2006, EPA considered two options for regulating hazardous air pollutants from the synthetic organic chemical manufacturing industry. Option 1 proposed imposing no additional controls. We take this as the baseline and assume that the net benefits of this strategy are zero. Option 2 included three control measures. These measures involved controlling emissions from storage tanks, controlling emissions from process vents, and decreasing the percentage of leaking valves.

The EPA’s residual risk assessment found that the maximum individual lifetime cancer risk exceeds one in one million in many individual manufacturing plants, but is at most 100 in one million for all plants. The EPA did not expect any significant non-cancer health effects. The annual cancer incidence for the entire exposed population was estimated at 0.1 cases per year. The EPA also found that health threats by acute inhalation exposure are “very unlikely.” The EPA estimated that Option 2 would reduce annual cancer incidence by 0.01, or would prevent one cancer case every 100 years for the exposed population by decreasing the tons of hazardous air pollutant emissions.

Table 1 provides information on annualized costs, annualized benefits, and net benefits.5 In addition, it provides estimates of costs, benefits, and net benefits per ton of volatile organic compounds (VOC) removed, of which the hazardous air pollutants are a subset.6 To conduct our benefit–cost analysis, we use the EPA’s estimates from several documents and make many critical assumptions.7 The results for EPA’s proposal are given in Table 1 under the final column labeled “Option 2.” This column also corresponds to the sum of the annualized costs and benefits of the three control measures where appropriate.

Table 1.  Estimates of the costs and benefits of controlling volatile organic compounds on an annual and per ton basis (in thousands of 2003 dollars)
Discount rateStorage tanksProcess ventsLeaking valvesOption 2
  1. Notes: Cost numbers are based on Oommen (2006a–d). Benefit numbers are taken from EPA (1997) and updated using the Consumer Price Index. Net annual benefit values for the three control options will not equal the difference between costs and benefits due to rounding to one significant digit.

3%
Annualized cost2003,00010,00013,200
Annualized benefit
 Low1007001,0001,800
 High6003,0005,0008,600
Net annual benefits
 Low−40−3,000−9,000−12,040
 High400−200−5,000−4,800
Annualized tons of VOC2101,1001,6002,910
Cost/ton0.8365
Benefit/ton
 Low0.60.60.60.6
 High3333
Net benefits per ton
 Low−0.2−2−5−4
 High2−0.2−3−2
5%
Annualized cost2004,00010,00014,200
Annualized benefit
 Low1007001,0001,800
 High6003,0005,0008,600
Net annual benefits
 Low−50−3,000−9,000−12,050
 High400−400−5,000−5,000
Annualized tons of VOC2101,1001,6002,910
Cost/ton0.9365
Benefit/ton
 Low0.60.60.60.6
 High3333
Net benefits per ton
 Low−0.3−3−5−4
 High2−0.4−3−2
7%
Annualized cost2004,00010,00014,200
Annualized benefit
 Low1007001,0001,800
 High6003,0005,0008,600
Net annual benefits
 Low−70−3,000−9,000−12,070
 High400−600−5,000−5,200
Annualized tons of VOC2101,1001,6002,910
Cost/ton0.9365
Benefit/ton
 Low0.60.60.60.6
 High3333
Net benefits per ton
 Low−0.3−3−5−4
 High2−0.5−3−2

We consider three different discount rates – 3, 5, and 7%.8 There are two sets of figures under each discount rate scenario. First, there are total annual costs, benefits, and net benefits (which are computed by subtracting costs from benefits). Second, there are annual costs, benefits, and net benefits on a per ton basis. For all three discount rates, the net benefits per ton are negative, which suggests that Option 2 is not likely to pass a benefit–cost test under the modeling assumptions and data used here.

The EPA presented Option 2 in terms of implementing all three control measures at the same time. In Table 1, we also consider the costs and benefits of the control measures individually. We do this because it allows us to compare the economic impacts of these measures with each other and to consider the effect of using combinations of these control measures.

From Table 1, we see that controlling emissions from storage tanks has a positive net benefit per ton using the high benefit value, but a negative net benefit (i.e. net cost) using the low benefit value. The other two emission controls have net costs under both scenarios. We conclude that two of the control measures are not likely to pass a benefit–cost test, but the controls on storage tanks might pass.

Table 2 presents the analysis in present value terms based on the assumption that the regulation is in place for 30 years. The results suggest that EPA’s Option 2 could result in a present value net cost in the high tens to low hundreds of millions of dollars. For example, using a 5% discount rate yields net costs that range from approximately $80m to $200m.9

Table 2.  Present value estimates of the costs and benefits of controlling volatile organic compounds based on a 30 year regulation (in millions of 2003 dollars)
Net present valueOption 2
  1. Notes: Cost numbers are based on Oommen (2006a–d). Benefit numbers are taken from EPA (1997) and updated using the Consumer Price Index. The length of the model is 30 years. Numbers may not sum to totals due to rounding to one significant digit.

3%
Cost300
Benefit
 Low40
 High200
Net benefit
 Low−200
 High−100
5%
Cost200
Benefit
 Low30
 High100
Net benefit
 Low−200
 High−80
7%
Cost200
Benefit
 Low20
 High100
Net benefit
 Low−100
 High−70

3. A critique of EPA’s analysis

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

We support EPA’s efforts to consider a wide range of control alternatives, but the agency could have done more. For example, because the minimal risk reduction did not warrant the high costs, EPA rejected a possible control measure for processed wastewater streams that had an average cost of $410,000 per ton of reduced hazardous air pollutants. The agency, however, focuses on Option 2 in its presentation of results because that is the only regulatory alternative that affects cancer incidence. We believe that EPA should have at least considered in more detail the benefits and costs of controlling storage tanks alone because these appear to have the possibility of yielding positive net benefits.

The EPA also focused exclusively on command-and-control alternatives. Part of the Clean Air Act calls for recommendations for legislation regarding the remaining risk from hazardous air pollutants. EPA, however, determined that the current legislation provides “a comprehensive and flexible strategy for addressing a variety of air toxics risk concerns” (EPA 1999). In our view, EPA should have considered other alternatives. There could be much to be gained by at least considering market-based alternatives for reducing hazardous air pollutants. If the activity in question involves relatively small changes in risk, and overall risks are being reduced, some kind of trading regime could be appropriate (such as the sulfur dioxide allowance trading program) (Stavins 1998). Such an approach has the potential to reduce hazardous air pollutants at a lower cost than conventional, command-and-control alternatives. For example, one might allow trading of different kinds of pollutants based on a trading ratio that reflected damages. At a minimum, one might consider applying a plantwide bubble for all hazardous air pollutant emissions based on toxicity. That would allow emission sources within a plant to take advantage of differences in marginal costs of pollution control.

Although it may not be worthwhile for EPA to implement an emissions trading regime for the synthetic organic chemical manufacturing industry, it may be desirable to do this on a larger scale, perhaps considering an approach to trading VOC on a regional basis. In the future, Congress should take these alternatives into account when designing new air pollution legislation.

4. Analyzing minor rules

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

Analysis of minor rules serves several purposes. One is to help determine the net benefits of particular options. A second purpose is to highlight other approaches that may be more efficient or equitable. Scholars have debated whether most minor rules are likely to pass a benefit–cost test (see, for example, Parker 2003; Hahn 2004), but that debate has so far lacked much data. Here, we provide some specific recommendations for how to approach the analysis of minor rules, both to improve agency decision-making and advance scholarly research.

All minor rules

The public has a right to know the underlying rationale for a regulation. Thus, a regulatory agency should be required to note the rationale for regulation. This rationale should generally specify the market failure that is being addressed, such as pollution. In addition, an agency should at least qualitatively explain why benefits are likely to be greater than costs (Arrow et al. 1996). To comply with this recommendation, agencies would be required to expend only the most modest resources. It is similar to a new amendment President George W. Bush made to Executive Order 12866, which subjects non-binding agency guidance documents to some of the same standards as federal regulations (Hahn & Litan 2007).

Minor rules with completed analyses

In general, the agency should provide a benefit–cost analysis similar to the one presented here when doing so would require only a modest additional effort. In this particular case, for example, the EPA had already completed the cost analysis and risk assessment, which is likely to be the most expensive part of the preparation of a full regulatory impact analysis. The fact that an agency is not required to compare costs with benefits should not keep it from conducting a benefit–cost analysis when the agency has already developed the individual components needed for such an analysis.

More generally, the agency may want to consider applying certain rules of thumb to its minor rules, as a way of conducting even a crude benefit–cost analysis. One way of simplifying the analysis is to make rough estimates of the benefits that could result from certain kinds of pollution. Such an analysis could use some simple rules of thumb for benefits or costs (or both), as was done here in the case of benefits. Benefits transfer methodology, or using available information in another context, may be helpful, though it does have its drawbacks as the benefits would not be calibrated for the specific circumstance (Kirchhoff et al. 1997).

Allocating analytical resources to minor rules

Of course, not every minor rule will already have a completed analysis or be linked to relevant benefits through benefits-transfer. Doing an economic analysis from scratch may take significant resources. The Congressional Budget Office (CBO) (1997) found that the average cost of an economic analysis for a major rule is $700,000, ranging from approximately $18,000 to $8m. We therefore recommend that an agency base its decision to allocate additional resources to benefit–cost analysis on the expected value of the improved information. An agency should consider using lower cost and lower quality benefit–cost analyses for problems in which the value of improved information is likely to be lower (Raiffa 1968). In many cases, an analysis from scratch will not be worth it. At the same time, the analysis of a novel problem with implications for future rules could be worthwhile.

The decision on the level of analysis should probably be based on the specific rule and not on an arbitrary cut-off. The current cost threshold of $100m for analysis may or may not prove to be a reasonable rule of thumb. For example, there are some important proposed regulations for which the agency has little flexibility in policy design given statutory constraints. Thus, OIRA may want to devote fewer resources to doing an economic analysis of those regulations and more to other rules where analysis could make a real difference in policy design.

Minor rules with de minimis risk reduction

There is an alternative way of thinking about the regulatory issues raised here that could involve the application of a kind of risk reduction threshold approach. The idea is that if the regulation has only a very small impact on risk, and its primary aim is to reduce that risk, then it probably is not worth considering. In the case of EPA’s hazardous air pollutant proposal, the agency estimated that one cancer case would be prevented every 100 years. Preventing 0.01 cancers each year is unlikely to pass a benefit–cost analysis unless the costs are also very small or there are other significant benefits.

The agency or Congress could consider applying a rule of thumb that would specify a threshold level of risk reduction that needs to be achieved before some kinds of regulation are considered (Adler & Posner 2006). It would then be the agency’s burden to show why that small risk reduction is worth pursuing in the specific circumstance. The basic idea is that when not much is at stake, there may be little reason to regulate.

Similar proposals have been made for dealing with risks that are very small (Sunstein 2002). In particular, some scholars have advocated not regulating risks that are viewed as “de minimis,” or extremely small (Byrd & Lave 1987; Whipple 1987; Wilson 1988; Rosenthal et al. 1992). Our approach is related to the de minimis risk idea, but not the same thing. If the total risk being addressed is tiny, or de minimis, the risk reduction because of a regulation focusing on that category will necessarily be tiny. Thus, the benefits would exceed costs only if the costs were similarly tiny. Tiny risk reductions from a regulation might also occur, however, when the total risk being addressed is larger but the proposed regulation is simply not expected to reduce that risk to any great extent.

Simple rules of thumb like de minimis risk and our proposed de minimis risk reduction threshold are not without their problems. In particular, they may not necessarily maximize net benefits in all cases. In a world in which analysis is not costless and agencies’ budgets are constrained, however, rules of thumb may be a useful way of setting priorities. They would also give agencies an incentive to combine rules or other policy measures so that the overall risk reduction impacts were larger. In the hazardous air pollutants rulemaking we have examined, the EPA was required by Congress to assess the residual risk and promulgate standards if the excess risk rose above one in one million for a maximally exposed person. We believe that such inflexible legislative measures could lead to a misallocation of resources.

5. Conclusion

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

We know relatively little about the economic impacts of minor rules. Yet, these rules could be important, particularly considering the aggregate impacts of a large number of them. Moreover, small rules are only one category of regulation where our knowledge is quite limited. There are a host of other activities, including registration, licensing decisions, and regulatory guidance, where the economic benefits and costs of agency decisions are not well understood.

We provide an economic analysis of one proposed rule that is not economically significant. Though this rule might not be representative of all small rules, it may be representative of residual risk rules. EPA considered two options in this rule: retaining the current set of controls, or adding three additional control measures. On the basis of our preliminary analysis, we would not suggest adding the three additional control measures because they appear to fail a benefit–cost test. However, one of these control measures may pass a benefit–cost test and be appropriate for EPA to require synthetic organics chemical manufacturers to implement.

The EPA and the Congress may want to consider revising the approach to managing residual risks from hazardous air pollutants. If the benefits of reducing these risks are small in comparison to the costs of reducing them, as the preliminary analysis of one rule here suggests, such regulation may not be warranted. If the maximum risk reductions do not exceed a certain threshold, the agency may do best simply by not moving forward with such rules. If Congress, nonetheless, believes a regulation is warranted for other reasons, it should allow or even encourage the agency to consider more flexible market-based alternatives for reducing such risks.

We recommend that regulatory agencies base their decisions to allocate additional resources to benefit–cost analysis on the expected value of the improved information. In the application considered here, this implies using crude estimates of benefits and simplifying the cost calculation. We think that agencies should develop methods and statistics that would make it easier to implement such analyses where appropriate. One example, relevant to the case of residual risks, is to develop a table that provides a dollar value per ton of pollutant reduced.

We believe that it is important for scholars to consider the impact of small rules at all levels of government. One way of addressing the problem would be to choose a list of small rules from a variety of agencies at random and examine their economic consequences. This research could provide insights into the potential economic importance of such rules. It could also provide information on how to use analysis and analytical resources more effectively to improve public policy.

Acknowledgments

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References

Robert Hahn is co-founder and executive director of the AEI-Brookings Joint Center and a scholar at AEI. Caroline Cecot is a research assistant at the AEI-Brookings Joint Center. The views expressed in this paper reflect those of the authors and do not necessarily reflect those of the institutions with which they are affiliated.

The authors would like to thank David Burk, Robert Litan, Al McGartland, Eric Posner, Cass Sunstein, Scott Wallsten, Molly Wells and Jonathan Wiener for helpful comments. They are also grateful to Randy McDonald and Larry Sorrels of the Environmental Protection Agency for answering detailed questions about the proposed rule.

Notes
  • 1

    We use the phrases “minor” and “insignificant” interchangeably.

  • 2

    The EPA is required to assess the residual risk remaining and promulgate standards if the excess individual cancer risk is higher than one in one million.

  • 3

    There is no one database of all minor rules. No agency is required to record all minor rules in their agenda. OIRA reviews only the most important minor rules, those that are “significant” (OMB 2001). This information was confirmed in a telephone conversation between Caroline Cecot and John C. Thomas, Executive Director of the Regulatory Information Service Center, on 9 August 2006.

  • 4

    OMB (2004) looked at three agencies: the Occupational Safety and Health Administration (OSHA), the Food and Drug Administration (FDA), and the National Highway Traffic Safety Administration (NHTSA). Stikkers (2004) also includes minor rules in his study of the process of rulemaking, concluding that they attract on average an order of magnitude fewer comments than major rules.

  • 5

    For simplicity, numbers are generally rounded to one significant digit. All dollar numbers are converted to 2003 dollars using the Consumer Price Index from the Bureau of Labor Statistics to adjust for inflation.

  • 6

    Considering only the cancer risk reductions due to the hazardous air pollutant reductions, the cost per cancer case prevented of Option 2 is more than $1.3bn. This calculation is misleading, however, as it does not consider the additional ozone reduction benefits due to the reduction of total volatile organic compounds.

  • 7

    For details on these assumptions, as well as how we conducted our sensitivity analysis, please see the appendix to this project available on the AEI-Brookings Joint Center website, http://www.aei-brookings.org/admin/authorpdfs/page.php?id=1320/.

  • 8

    The EPA cost numbers were reported using a 7% discount rate. We use 3 and 5% as well to examine how the results might change.

  • 9

    Net costs are calculated as total costs minus total benefits.

References

  1. Top of page
  2. Abstract
  3. 1. Introduction
  4. 2. Estimating benefits and costs of EPA’s proposal
  5. 3. A critique of EPA’s analysis
  6. 4. Analyzing minor rules
  7. 5. Conclusion
  8. Acknowledgments
  9. References
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