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2.2 Statutory and Administrative Requirements for
Economic Analysis of Regulations

Regulatory agencies conduct economic analyses of potential regulatory actions to inform decisionmakers about the effects of the regulation on society’s current and future well-being.  In addition to informing decisionmakers within the Agency, economic analyses are conducted to meet the statutory and administrative requirements imposed by Congress and the Executive Office. The statutes and EOs requiring economic analyses are listed in Table 2-1.   For the purposes of this discussion, we distinguish between analyses in which both benefits and costs are estimated and compared (“benefit-cost analysis”) and analyses that focus on the size and distribution of economic impacts among specific groups in society (“impact analysis”).  

2 Regulatory
  Background

 2.0 Intro

 2.1 OAQPS's Regulatory
   Authority

 2.2 Statutory and Admin-
   istrative Requirements
   for Economic Analysis
   of Regulations

 2.3 Summary
  
Table 2-1
Statutory requirements for economic analysis are often included in the language of the statute granting the Agency regulatory authority in a particular area. For example, the CAA requires EPA to perform a benefit-cost analysis of the entire CAA program on a periodic basis. In addition, the White House, through EO 12866, requires Executive Branch agencies to perform benefit-cost analyses of all rules it deems to be "significant" and to submit these analyses to the OMB for review.

In addition to benefit-cost analysis, impact analyses are required in certain circumstances by both statutes and EOs. Of key importance for ISEG, the CAA requires that the cost and economic impacts (though not necessarily benefits) be estimated for specific regulations and standards proposed under the authority of the Act. This is the core purpose of the EIA reports described in Section 1. In addition, the Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), requires EPA to give special consideration to the effect of Federal regulations on small entities and to consider regulatory options that might mitigate any such impacts. EO 12875 (Enhancing the Intergovernmental Partnership) and the Unfunded Mandates Reform Act (UMRA) of 1995 require agencies to evaluate the impact of their regulatory actions on State, local, and tribal governments.

The analytical requirements are now discussed in more detail and in correspondence with the underlying statutory or administrative authority.

   2.2.1    Clean Air Act

Section 312 of the CAA requires the EPA Administrator to conduct a "comprehensive analysis of the impact of the [CAA] on the public health, economy, and environment of the United States. In performing such analysis, the Administrator should consider the costs, benefits, and other factors associated with compliance ." This provision requires periodic assessment of the overall contribution of the CAA to society’s welfare. However, Section 317 of the CAA requires that an EIA be performed for individual rulemakings under the Act’s authority. For each proposed standard or regulation, the EIA will, to the extent practicable, include an analysis of the following impacts:

  • costs of compliance,
  • potential inflationary or recessionary effects,
  • effects on competition with respect to small businesses,
  • effects on consumer costs, and
  • effects on energy use.

Notably absent from the list is an assessment of benefits or comparison of benefits and costs.  Moreover, CAA Section 317 clearly states that the EIA shall not “ be construed to alter the basis on which a standard or regulation is promulgated ... preclude the Administrator from carrying out his responsibility ... to protect public health and welfare, or ... require any judicial review” (CAA §312[e]).   Thus, an EIA is used to inform the regulatory process, but its findings are not strictly binding on the actions the Agency can take.

   2.2.2    Executive Order 12866

In support of a rulemaking under EO 12866, regulatory agencies such as EPA must conduct an analysis of the benefits and costs of a proposed significant regulatory action. The analysis should organize information in a way that allows comparison of the benefits and costs of alternative regulatory approaches. As indicated in Section 1, this report is referred to here as an economic analysis (EA).

In various forms, EAs have been prepared in support of agency rulemakings for many years. It was not until 1981, however, when President Reagan signed EO 12291, that the Executive Office sought to determine the cumulative effect of the increasing amount of regulation being promulgated by various regulatory agencies under a growing number of statutory authorities. With the signing of EO 12291 the use and importance of economic assessments of the consequences of regulation increased. EO 12291 defined rules as either "major" or "nonmajor," based on their potential economic impacts. To assess these impacts, agencies were required to prepare analyses showing the implications of their regulations. For major rules, EO 12291 required the agencies to submit an RIA to OMB for review.

On September 30, 1993, the Clinton Administration rescinded EO 12291 and replaced it with EO 12866. Similar to EO 12291, EO 12866 requires centralized review of regulations by OMB; however, it changed many of the criteria on which regulatory review was based. In particular, EO 12866 does not categorize rules as major and nonmajor, but rather as significant and nonsignificant. The effect of this change in terminology is to expand the range of rules that require some level of economic analysis subject to OMB review. In particular, EO 12291 considered any rule major if it was likely to have a substantial economic impact. EO 12866, however, includes not only economic impact criteria in determining which rules are significant, but also any Federal regulatory action that may interfere with State, local, or tribal governments; any regulation that may interfere with regulatory actions being undertaken by another Federal agency; and any rulemaking that raises a novel legal or policy issue. As a result of the scope of this definition, OMB has broad powers to review and request revisions to all regulatory proposals to ensure their consistency with the regulatory principles contained in the Order.

EO 12866 also changed the fundamental basis on which Agency rulemakings are evaluated.  In particular, EO 12291 required that “regulatory action shall not be undertaken unless the potential benefits to society for the regulation outweigh (emphasis added) the potential costs to society,” thereby requiring a strict benefit-cost approach to evaluating regulations (EO 12291 Section 2[b]).  In contrast, EO 12866 requires that the Agency “shall...propose or adopt a regulation only upon reasoned determination that the benefits of the intended regulation justify (emphasis added) its costs,” thereby including benefit-cost analysis among a number of inputs to the regulatory decisionmaking process (EO 12866, Section 1[b][c]).  The difference between these two statements indicates a recognition by the Clinton Administration that sound regulatory decisions involve a wide range of considerations and that not all benefits and costs resulting from a regulatory action are easily expressed in monetary terms.  Because many of the previous analyses of major (significant) rules performed by ISEG (and its predecessor groups) were based on EO 12291, Table 2-2 compares the economic analysis requirements under EO 12291 and EO 12866.  The purpose is to highlight key differences between the types of information provided in the previous analyses and those now required.

   2.2.3    Statutes and Executive Orders Requiring “Impact Analysis”

"Impact analysis" is a general term used to describe various analyses that are supplemental to the estimates of total benefits and costs. For the purposes of this discussion, these supplemental impacts are separate from the "cost and economic impacts" addressed in an EIA.

  
Table 2-2
Table 2-2 (continued)

Impact analyses are usually concerned with examining the types of costs (e.g., direct compliance costs, administrative costs, and recordkeeping costs) and the distribution of costs and benefits (e.g., among small businesses and individuals of various race, age, and income categories). They go beyond a strict benefit-cost analysis to examine various aspects of the composition and distribution of benefits and costs. While there are many types of impact analysis, the statutes and EOs listed in Table 2-1 provide the best guidance for the specific impacts to be evaluated in developing a regulation.

The first set of impacts to be included in an assessment of a regulation are those specifically cited in EO 12866. Many of these impacts may be addressed in an economic analysis; however, the analyst may find it desirable to address some of these impacts separately, depending on the nature of the regulation under consideration. The impact analysis requirements mentioned in EO 12866 include the impact of the regulation on

  • the efficient functioning of the economy and private markets, including productivity, employment, and competitiveness;
  • distribution of impacts and equity; and
  • discrimination or bias.

While EO 12866 is quite broad in terms of the impacts that should be evaluated, more targeted impact analyses are specifically required by statute or administrative decree. Whether an impact analysis is required will depend on the nature of the regulation. Figure 2-1 illustrates the process of determining the necessary impact analyses.

In general, the goal of impact analyses is to supplement an analysis of benefits and costs and the other information available to decisionmakers on the consequences of selecting a particular regulatory option for proposal or promulgation. These analyses should not be taken on their own to indicate any particular option as a preferred option nor to disqualify any particular option.

   
Figure 2-1

   2.2.3.1  Impacts on State, Local, and Tribal Governments

EO 12875, Enhancing the Intergovernmental Partnership, signed by President Clinton on October 26, 1993, requires that

To the extent feasible and permitted by law, no executive department or agency...shall promulgate any regulation that is not required by statute and that creates a mandate upon a State, local, or tribal government, unless:

  1. funds necessary to pay the direct costs incurred by the State, local, or tribal government in complying with the mandate are provided by the Federal Government; or
  2. the agency, prior to formal promulgation of regulations containing the proposed mandate, provides to the Director of the Office of Management and Budget a description of the extent of the agency's prior consultation with representatives of affected State, local, and tribal governments, the nature of their concerns, any written communications submitted to the agency by such units of government, and the agency’s position supporting the need to issue the regulation containing the mandate. (Section 1(a))

UMRA expands the coverage of EO 12875 to include regulations that affect the private sector.  EO 12875 applies to all regulations affecting State, local, or tribal governments; UMRA applies only to regulations including a “Federal mandate that may result in expenditures by State, local, or tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.”  UMRA directs regulatory agencies to prepare a written statement, including a benefit-cost analysis, for all proposed and final rules including such a mandate.  In particular, the statute requires that the Agency consider a reasonable range of regulatory alternatives and adopt the least costly, most cost-effective, or least burdensome alternative.  Most of these requirements are already addressed under EO 12866.  For additional guidance on conducting an impact analysis under EO 12875 and UMRA, see the EPA draft Unfunded Mandates Guidance of August 11, 1993.

   2.2.3.2  Small Entity Impacts

The RFA, as amended by SBREFA of 1996, requires Federal regulatory agencies to determine whether a proposed or final regulation will have a significant impact on a  substantial number of small entities.,  In particular, the RFA requires that agencies prepare an initial regulatory flexibility analysis (IRFA) for a proposed rule and a final regulatory flexibility analysis (FRFA) for a final rule unless the agency head certifies that the rule will not have a significant impact on a substantial number of small entities.  If the agency makes a “no significant impact” certification, it must support that certification with a factual explanation.

A major provision in the SBREFA amendments to the RFA is a requirement that EPA convene a “Small Business Advocacy Review Panel” for any proposed rule for which the Agency prepares an IRFA.  The purpose of the panel is to solicit the input of small businesses, small governmental jurisdictions, and small nonprofit organizations that are affected by the rule.  EPA’s interim SBREFA guidance recommends that the Agency involve small entities early in the rulemaking process “when their comments and insights can inform the Agency’s thinking about fundamental issues of rule design and scope, as well as more specific issues posed by the particular regulatory program at issue” ( EPA, 1997f, p. 3-1).

Before promulgation, all major rules and any benefit-cost analyses conducted in support of the rule are subject to congressional review.  The definition of a “major rule” under the RFA is identical to the definition of a “major rule” under EO 12291 and therefore potentially more narrow than the definition of a “significant regulatory action” under EO 12866.  Under SBREFA, Agency rulemakings are also subject to judicial review.

Before the enactment of SBREFA, EPA policy on the implementation of the RFA required that a regulatory flexibility analysis be prepared for any rule that would have any impact on small businesses.  According to EPA Interim Guidance for Implementing the Small Business Regulatory Enforcement Fairness Act and Related Provisions of the Regulatory Flexibility Act, current Agency policy is to implement the RFA as written; that is, “regulatory flexibility analyses as specified by the RFA will not be required if the Agency certifies that the rule will not have significant economic impact on a substantial number of small entities.”

   2.2.3.3  Reporting and Recordkeeping Requirements

In many rulemakings, various recordkeeping, reporting, labeling, testing, and other requirements are included to help EPA verify compliance with the rule after it has been promulgated.  Under the Paperwork Reduction Act (PRA), the Agency is required to estimate the “burden hours” associated with the recordkeeping and reporting requirements and to weigh this burden against the “practical utility” of the information collection.  This analysis must be presented to OMB for review in a standardized document known as an Information Collection Request (ICR).

The definition of an information collection was expanded with the 1995 amendments to the PRA.  In particular, 5 CFR 1320, the regulation implementing the provisions of the 1995 PRA, defines a collection of information to include “any requirement or request for persons to obtain, maintain, retain, report, or publicly disclose information” (Section 3(c)).

New to the 1995 amendments to the PRA is the inclusion of third-party reporting requirements in the definition of an information collection:

Requirements by an agency for a person to obtain or compile information for the purpose of disclosure to members of the public or the public at large, through posting, notification, labeling or similar disclosure requirements constitute the “collection of information” whenever the same requirement to obtain or compile information would be a “collection of information” if the information were directly provided to the agency. (5 CFR 1320.3 (c)(2))

Determining the burden hours associated with reporting and recordkeeping provisions of Agency regulations is a crucial part of the regulatory development process, particularly when the purpose of the regulation is to codify reporting and recordkeeping requirements. Without OMB approval of the ICR, EPA cannot legally conduct any collection of information included in an Agency rulemaking.

The Agency is responsible for preparing estimates of burden hours associated with recordkeeping and reporting requirements as well as preparing the ICR itself. The group with primary responsibility for this task (ISEG or other groups within OAQPS) will vary by project. Burden hours should be estimated in the course of estimating the costs of any administrative requirements. The burden hour estimates should be clearly summarized in the impact analysis so that they can be easily incorporated into the ICR.

   2.2.3.4  Impacts on Children

On April 21, 1997, President Clinton signed EO 13045, Protection of Children from Environmental Health Risks and Safety Risks. Under this Order, agencies are required to conduct certain analyses if a regulatory action is likely to result in a rule that may

  1. be ‘economically significant’ under Executive Order 12866...; and
  2. concern an environmental health risk or safety risk that an agency has reason to believe may disproportionately affect children. (Section 2)

EO 13045 requires two analyses:

  1. an evaluation of the environmental health or safety effects of the planned regulation on children; and
  2. an explanation of why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the agency. (Section 5)

Although EO 13045 does not explicitly require an analysis of the economic implications of regulatory impacts on children, the analyses outlined above must be submitted to OMB, along with the other analyses outlined in this chapter.

   2.2.3.5  Impacts on Low-Income and Minority Populations

Equity effects analysis involves examining the distribution of gains and losses resulting from a regulation and the magnitude of these gains and losses.  Such an analysis should address any significant issues regarding the distribution of gains (who realizes reduced risk; the firms, industries, or products that have increased sales or profits) and losses (who bears new costs, reduced sales or profits, or increased risks) in industry and in the population at large.  For a general discussion of conducting an analysis of the distributional effects of a regulation, see the “white paper” Evaluating the Equity of Environmental Policy Options Based on the Distribution of Economic Effects: Preliminary Draft ( EPA, 1997g).

EO 12898, Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations, encourages the examination of the equity effects of regulatory actions:

Each Federal agency shall conduct its programs, policies, and activities that substantially affect human health or the environment, in a manner that ensures that such programs, policies, and activities do not have the effect of excluding persons (including populations) from participation in, denying persons (including populations) the benefits of, or subjecting persons (including populations) to discrimination under, such programs, policies, and activities, because of their race, color, or national origin. (Section 2)

In response to EPA’s Environmental Justice Strategy ( EPA, 1995a) dated April 3, 1995, the EPA Office of Federal Activities (OFA) has developed guidance for incorporating environmental justice goals into the Agency’s activities under the National Environmental Policy Act (NEPA) ( EPA, 1997h).  Although the OFA guidance does not specifically address regulatory analysis, it does provide guidance for identifying disproportionately high and adverse effects of alternative actions and recommends specific methods to analyze the effects of a regulatory action on minority and low-income populations.   

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4 According to the RFA, small entities include small businesses, as defined by the Small Business Administration (SBA), small government jurisdictions, and small nonprofit organizations.  For more details on the definitions of small entities, see EPA Interim Guidance on Implementing the Small Business Regulatory Enforcement Fairness Act and Related Provisions of the Regulatory Flexibility Act ( EPA, 1997f).
5 For definitions of “significant impact” and “substantial number of small entities,” see the SBREFA discussion in Section 8 of this guidance document.
6 A certification of “no significant impact” in the proposed rule stage does not preclude a FRFA at the final rule stage, and an IRFA at the proposed rule stage does not preclude a certification of “no significant impact” at the final rule stage, because information provided through notice-and-comment rulemaking and changes to the substance of the rule can change the expected impact of the rule between the proposed and final stages.
7 Under the PRA, burden hour estimates and ICRs are not required for paperwork requirements that affect fewer than ten entities.
8 As of this writing, OMB is finalizing guidance on preparing ICRs.

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