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3.2 Economic Analysis in Regulatory Development

ISEG's primary role in the regulatory development process is to conduct the various analyses categorized as economic and to report the results of the analyses to regulatory decisionmakers. Each of those roles is described in more detail below.

   3.2.1    Overview of Analysis Activity

Figure 3-2 presents an overview of the flow of analytical information in the regulatory development process, with an emphasis on economic information. Because proposed regulatory actions differ in scope, not all the activities presented in this figure may be performed by ISEG for each regulation. However, this figure does reflect the primary components of an economic analysis and illustrates the basic relationships between input data, analysis, and results. The majority of the ISEG analysts’ efforts are focused on developing the industry profile, the economic impact analysis, and the benefits analysis. These activities are summarized below.

 

3 Regulatory
  Development

 3.0 Intro

 3.1 EPA Regulatory
   Development Process

 3.2 Economic Analysis in
   Regulatory Development

 3.3 Specific ISEG Tasks    in the Regulatory
   Development Process
  
Figure 3-2
Industry profiles provide detailed information on the affected industry, entities, and markets. Data are typically obtained from a combination of sources, including information gathered by EPA and summarized in previous regulatory support documents; data from publicly available sources; and data from stakeholders. The information is used to identify affected commodities; characterize baseline conditions in affected markets, including prices and quantities, market structure, and international trade; identify and locate producers and consumers of affected commodities; identify and characterize the firms owning the affected facilities; and characterize baseline conditions in the communities where affected producers are located (the populations who will affected by the regulation). Section 4 provides details on the development of these industry profiles.

Economic impact analysis involves estimating the reallocation of society’s resources and the social costs associated with the proposed regulatory action. The industry profile provides the baseline characterization of market conditions from which the impacts of the regulation are estimated. Frequently an analysis involves developing an analytical approach and computer model to simulate the behavioral responses of the affected entities to the regulation in a market context. The approach is designed to be consistent with economic theory and to produce integrated estimates of the responses of affected facilities, firms, and markets. Also included are impact estimates for selected location and company size categories to support impact analysis for small entities and minority and low-income populations. The analyst should refer to EPA (1997e) for more detailed discussion of the engineering inputs to the economic analysis. Section 5 provides details on the development of EIAs for ISEG, while Section 6 provides specifics on the supplemental impact analyses that are required by EO or statute.

Benefits analysis involves analyzing all the categories of benefits by first identifying then quantifying and, where possible, monetizing the benefits. The benefits of pollution controls are defined as the increases in human welfare that result from improvements in environmental quality. Assessing the benefits of air pollution controls requires a conceptual framework that specifically links reductions in air pollutant emissions to human welfare enhancements. Such a framework distinguishes the essential components of benefits and ensures that all relevant benefits are accounted for and not double counted. Section 7 provides details on the development of benefits analyses for ISEG.

   3.2.2    A Note on Cost/Control Strategy Analysis for NAAQS

Economic analyses performed in ISEG often address industry or source-specific control strategies (e.g., MACT standards). In those cases, compliance strategies and their costs are fairly well-defined in the engineering analysis prior to economic analysis. However, the setting is different for the analysis of national ambient air quality standards (NAAQS), in which case compliance strategies and associated costs are not necessarily well-defined prior to economic analysis. Important features of cost analysis unique to NAAQS rulemakings are highlighted here.

Under CAA section 110, EPA sets NAAQS for criteria pollutants. The CAA does not authorize the Agency to consider the cost of achieving a NAAQS in establishing the level of the standard; however, since most new or revised NAAQS met the definition of "significant" actions defined in Executive Order 12866, a NAAQS rulemaking package must be accompanied by an assessment of the potential cost and benefits of the standard. Unlike other federal rules that specify both the sources that must control, and the technologies or specific emission limits that must be met, NAAQS only establish an ambient air quality goal. Under the CAA, state and local governments (hereafter, states) and their designated air quality departments are responsible for developing the specific pollution control strategies that will enable an area designated out of attainment with a NAAQS to met the ambient air quality goal.

A benefit-cost assessment is more uncertain in this context because the specific pollution control strategies that states will use to attain the standard are not necessarily known. To simulate the possible costs and benefits associated with a new or revised NAAQS, EPA may construct one or more hypothetical implementation scenarios. In these scenarios, EPA attempts to model the potential control measures of other control strategies that states might adopt to meet the standard. For some NAAQS, only a few select areas of the country may not meet the standard, which indicates that smaller scale analyses are appropriate. However, for other NAAQS, many areas of the country may not meet the standard, which calls for an essentially nationwide analysis. In either case, EPA collects data on the emissions sources believed to be contributing to the air pollution problem, and develops control measures to estimate the costs and emissions reductions that can potentially be achieved.

Some larger sources are identified individually as “point” sources, while other smaller sources are identified collectively as “area” sources. For point sources, EPA may be able to collect enough source-specific information to develop reasonable study estimates (±30% accuracy) of the cost and emission reductions attributable to a particular control device or control measure. In these cases, total annual compliance costs are generated at the source level similar to the way compliance costs are generated for other source-specific regulations. For area sources, where source-specific information is sparse or nonexistent, EPA may develop more generic “cost-effectiveness” estimates, where total annual compliance costs for a group of sources is generated by multiplying the cost-effectiveness value by the annual emission reduction that is expected from the source group. In these cases, the cost borne by any one source in the group is less certain.

   3.2.3    Structure and Content of ISEG Reports

Although the ISEG analyst is responsible for all written technical support documents related to the economic analysis, the majority of time and effort will be spent preparing the industry profile and the EIA (EA) report. The structure and content of these reports are summarized below.

The industry profile report will typically include the following sections:

  • Introduction. This section provides an overview of the regulated industry and the organization of the industry profile report.
  • Supply. This section details the affected production processes, inputs, associated final products and residuals, and the costs of production.
  • Demand. This section details the characteristics, uses, consumers of the affected commodities, and the substitution possibilities.
  • Industry organization. This section discusses the market structure of the affected industry and provides detailed information on the manufacturing facilities and owning companies.
  • Markets. This section provides historical and projected data on U.S. production, foreign trade, consumption, and market prices.

This profile is often included in the public docket with a summary version also included in the EIA (EA) report.

The technical support document that reports the methods and results of the economic analysis will differ in structure and content between nonsignificant and significant regulatory actions. For nonsignificant regulatory actions, the executive and legislative requirements are less demanding, so the EIA report will typically include the following sections:

  • Executive summary. This section provides an overview of the regulated industry; the proposed regulatory alternatives and costs; the data, methodology, and assumptions of the economic analysis; and the economic impact results.
  • Introduction. This section summarizes the scope and purpose, statutory authority, and the organization of the EIA report.
  • Industry profile. This section provides a summary profile extracted from the industry profile report developed prior to the economic analysis.
  • Compliance cost analysis. This section reviews the proposed regulatory alternatives and associated costs of compliance.
  • Economic impact analysis. This section provides a summary of the analysis inputs and economic methodology for assessing the economic impacts of the proposed regulation and the analysis results, including the impacts on markets, facilities, and industry as well as the social costs.
  • Impacts analysis. This section includes methods and results for the supplemental impact analyses as required by EO and statute. For an EIA, this section usually only includes an assessment of the impact on small entities (businesses, governments, organizations).

Alternatively, the report supporting a full EA for significant regulatory actions must meet additional executive and legislative requirements and should include the following:

  • Executive summary. This section provides an overview of the regulated industry; the proposed regulatory alternatives and costs; the data, methodology, and assumptions of the economic impact and benefits analyses; and the economic impact and benefits results.
  • Introduction. This section summarizes the scope and purpose, statutory authority, and the organization of the EA report.
  • Industry profile. This section provides a summary profile extracted from the industry profile report developed prior to the economic analysis.
  • Need for regulation. This section summarizes the market conditions that necessitate regulatory action, the harmful effects of the air emissions, and the consequences of regulation.
  • Compliance cost analysis. This section reviews the proposed regulatory alternatives and associated costs of compliance.
  • Economic impact analysis. This section provides a summary of the analysis inputs and economic methodology for assessing the economic impacts of the proposed regulation and the analysis results, including the impacts on markets, facilities, and industry as well as the social costs.
  • Impacts analysis. This section includes methods and results for the supplemental impact analyses as required by EO and statute. For an EA report, this section may contain all of the required analyses, including impacts on small entities; minority or low-income populations; and state, local, or tribal governments and reporting and recordkeeping requirements.
  • Benefits analysis. This section describes the analysis inputs and methods used for estimating and valuing the effect of reduced environmental and human exposure to air emissions.
  • Benefit-cost comparison. This section provides a comparison of the social benefits and costs of the proposed regulatory action.

In addition, the EIA (EA) report should include technical appendices that provide the details on input data, assumptions, methods, and sensitivity results that may be of use to certain interested parties.

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3 The "economic analysis," when prepared for major rules, is essentially a compilation of all relevant analytical results described here and does not involve additional substantive analytical work.


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