| According to OMBs guidance for conducting
EAs, the baseline should be the best assessment of the way the world
would look absent the proposed regulation ( OMB, 1996). Developing
such an assessment has many components, including
Each of these components is discussed in more detail below.
- forecasting economic activity in the absence of the regulation;
- assessing the rate of compliance with existing regulations;
- anticipating future regulatory actions by other Federal agencies,
by other offices within the Agency, and by State, local, and
- anticipating the effects of nonregulatory programs; and
- developing a starting point for the baseline.
Typically, for OAQPS regulations, forecasting economic
activity centers on predicting the levels of production and consumption
of the regulated product in a world without the regulation. To generate
accurate cost and benefit estimates, it is necessary to incorporate changes
in production expected during the period of analysis into the baseline
| 8.2.1 Forecasting
Economic Activity in the Absence of the Regulation
Analysts use three basic approaches to specify
- Project changes in production over timeObtaining or developing
very specific estimates of changes in production levels over
time may be possible. Alternatively, it may be possible
to apply constant rates of change to current production estimates
(e.g., current production totals 1 million units and is expected
to grow at 3 percent annually). However, this approach
can impose significant computational burden on the analyst and
may not yield a great deal of information.
- Estimate current production and hold constantIn
many cases, changes in production are difficult to predict or
do not have much impact on the conclusions of the analysis.
For example, if both benefits and costs for all options
are directly proportional to the level of production, the level
of production will influence the magnitude of the cost and benefit
estimates but will have no impact on the ranking of options
or on the determination of whether they offer positive net benefits.
In such cases, forecasting changes in production should
not be necessary.
- Estimate representative-year production and
hold constantEven if the level of production is expected
to change over time, it may be possible to develop an estimate
for a single year that represents some weighted average of the
level of production over the entire period of analysis. Alternatively,
it may be reasonable to project production levels for up to
5 years into the future and use the fifth-year estimate as the
expected level of production in the remaining periods. This
approach combines the advantages of the first two approaches.
In particular, it will account for changes in production
over time and therefore approximate the correct magnitude of
benefits and costs without the need for separate year-by-year
Often a planned regulatory action is intended to modify
an existing Agency rule. In such cases, the baseline must incorporate
some assumption regarding the rate of compliance with existing rules.
The determination of a baseline must also include some assessment
of expected future compliance with existing rules. The primary reason
for establishing current compliance is to better gauge the likely effectiveness
(benefits) of the proposed regulation as well as the costs.
| 8.2.2 Assessing
the Rate of Compliance with Existing Regulations
Although there is no stated Agency policy regarding
the treatment of current compliance in establishing the baseline, most
EAs assume full compliance with existing regulations. In reality,
overcompliance and noncompliance exist. For example, in certain
industries air pollutant emissions are below the maximum level allowed
by existing emissions standards. In other cases, plants may be out
of compliance with emissions standards, and their noncompliance is undetected
because of variability in enforcement efforts across states. The
question the analyst must consider in developing a baseline is simply
whether the full-compliance assumption makes sense for this analysis.
For example, when the purpose of a rule is to clarify enforcement
or monitoring procedures, assuming full compliance with existing regulations
may understate the benefits of the regulation if its primary purpose is
to improve compliance with existing regulations. Likewise, if the
purpose of the rule is to strengthen existing requirements in an industry
that is performing better than the current rule requires, assuming compliance
with the current standards would overstate both benefits and costs.
Realizing that the full-compliance assumption
simplifies an analysis and that determining actual levels of compliance
can often be costly, a 1997 EPA policy briefing on selecting a baseline
for analysis recommends using actual compliance estimates when establishing
a baseline for the following types of regulations:
- procedural, enforcement, and monitoring rules;
- rules strengthening current standards when noncompliance is
common among regulated entities;
- rules loosening current standards (deregulation) when noncompliance
is common among regulated entities; and
- any rulemaking undertaken when the performance of regulated
entities exceeds current requirements ( EPA, 1997i).
In the United States, regulatory authority is shared not
only by a number of agencies within the Federal government, but also among
State, local, and tribal governments. Sometimes the regulatory programs
of these entities overlap. For example, emissions from pesticide
production facilities may be regulated under the CAA, but the pesticide
products themselves are regulated under the Federal Insecticide, Fungicide,
and Rodenticide Act (FIFRA), as chemical substances under TSCA, and as
food additives under the Food, Drug, and Cosmetic Act (FDCA). Therefore,
any forecast of future conditions ideally considers the potential regulatory
actions of other agencies or levels of government.
| 8.2.3 Anticipating
Future Regulatory Actions by Other Federal Agencies, by Other Offices within
the Agency, and by State, Local, and Tribal Governments
In establishing a baseline, it is reasonable to
assume that previously promulgated regulations and regulations that will
be promulgated prior to the effective date of the rule being analyzed
are in full effect at the time of the analysis. The potential impacts
of rules in earlier stages of development are more difficult to assess.
The two most practical methods for addressing these potential actions
are to discuss rules that may affect the baseline qualitatively and to
assume that the effective dates required by statute or listed in the Unified
Regulatory Agenda will be met and incorporate the expected impacts
of these rules in the baseline.
Over time, both industrial and household behavior
may change in a way that affects output and pollution levels for reasons
completely independent of any regulatory requirement. For example,
firms may also modify their behavior and resulting pollutant loadings
to avoid litigation. As judicial decisions clarify or redefine property
rights, polluting firms may adjust their behavior to reduce emissions;
reduce exposure; or increase safety for their workers, their consumers,
or the surrounding community. One factor causing changes in behavior
may be the Agencys nonregulatory initiatives. For example,
information provided by EPAs Design for the Environment program
may result in firms choosing EPA-recommended equipment over other alternatives
that would result in higher pollutant emissions.
The effects of nonregulatory factors are often
ignored in developing a baseline for EAs usually because of limited time
and resources available for conducting an EA. Ideally, however,
these effects should be included, to the extent feasible, in the baseline.
At a minimum, nonregulatory factors that could reasonably be expected
to influence the baseline should be discussed qualitatively.
a Starting Point for the Baseline
Once the fact that an agency is considering a
regulatory action becomes public, households and firms may begin to adjust
their behavior in anticipation of the rule. As a result of such
preemptive actions, the state of the world may change prior to promulgation
of the rule. The question then becomes whether these changes should
be included in the baseline or considered an effect of the rule.
Whether actions taken by potentially regulated
entities after a pending rule becomes known, but prior to rule promulgation,
should be considered part of the baseline depends on the answer to a hypothetical
question. If these actions would not likely continue if, for some
reason, the rule is not promulgated, then the actions themselves are viewed
as being caused by the rule and should therefore should not be
included in the baseline. If, instead, these actions would likely
persist even in the absence of a final rulemaking, then these changes
cannot easily be attributed to the rule itself and should be considered
part of the baseline. If an activity is included in the baseline,
then its costs and its benefits should not be attributed to the rule in
If the analyst believes that behavioral changes induced by knowledge of the regulatory action should be considered an effect of the rulemaking, the baseline should begin at the date corresponding to the first public notice of the rulemaking. In the case of a regulatory action required by statute, this would be the date the legislative action requiring the rule becomes law. When a regulation is a result of an Agency initiative, independent of a statutory deadline, knowledge of the proposed action typically becomes public by official notice (e.g., ANPR or NPRM) in the FR or through the rules inclusion in the Unified Regulatory Agenda.
If, instead, the analyst believes that actions taken in anticipation
of the rule should not be considered a direct result of the rulemaking,
then these anticipatory actions should be included in the baseline.
Then the baseline should begin either at the date of promulgation
or the effective date of the rule.
|1 Although production and
consumption can differ by changes
in the stock of inventories, it is assumed for the purpose
of this discussion that production equals consumption
and the change in inventories is zero.