Audit, Compliance and Risk Blog

EPA revises benefit-cost analyses for air rules

Posted by Jon Elliott on Tue, Jan 12, 2021


During President Trump’s term, the Environmental Protection Agency (EPA) has taken a number of steps to narrow benefit-cost analyses (BCAs), reversing expansive approaches used during the Obama Administration and thereby reducing the calculated benefits of environmental and health regulations. EPA announced what will probably be the last such step on December 4, by adopting a new Part 83 in Title 40 of the Code of Federal Regulations (CFR) entitled “Increasing Consistency and Transparency in Considering Benefits and Costs in Clean Air Act Rulemaking Process.” (I wrote about less formal guidance in a May 2019 memorandum from EPA Administrator Wheeler to his Assistant Administrators HERE.)

How does EPA define benefit-cost analyses?

Most statutory provisions require, or at least allow, EPA to consider costs and benefits when setting regulatory standards, but statutory terminology and the extent and methodological prescriptions vary. EPA’s stated rationale for these rules is to provide consistency, and to do so before-the-fact to provide clearer public expectations about how the agency will perform its benefit-cost analyses. The new rules provide requirements for rules under CAA, including the following definition (40 CFR 83.1):

Benefit-cost analysis (BCA) means an evaluation of the social benefits and social costs of a policy action and other policy alternatives. The social benefits of a policy are measured by society’s willingness-to-pay for the policy outcome. The social costs are measured by the opportunity costs of adopting the policy. BCA addresses the question of whether the benefits for those who gain from the action are sufficient to, in principle, compensate those burdened by costs such that everyone would be at least as well off as before the policy. The calculation of net benefits (benefits minus costs) answers this question and helps ascertain the economic efficiency of the policy. Where all regulation attributable benefits and costs can be quantified and expressed in monetary units, BCA provides decision makers with a clear indication of the most economically efficient alternative, that is, the alternative that generates the largest net benefits to society (ignoring distributional effects).

This definition may appear value-neutral on first reading, but it isn’t. People who’ve actually worked with benefit-cost analysis will note that the determination to focus on net benefits disregarding distributional effects actually has important policy implications. In environmental and public health regulation, for example, costs tend to be short-term capital costs and reasonably quantifiable operations costs, while benefits are in harder-to-quantify values for reductions in illness or mortality for humans, and to enhancements to environmental values.

Which rulemakings does new 40 CFR part 83 cover?

Applying the definition quoted above, part 83 requires EPA to prepare a BCA for all “significant” proposed and final regulations (40 CFR 83.2). “Significant” is defined by reference to Executive Order 12866 (enacted by President Clinton in 1983), as one that may:

“(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities;

(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;

(3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or

(4) Raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order.”

What requirements does part 83 provide?

Each BCA for a significant rule must meet standards set forth in section 83.3. These require that BCAs be developed “in accordance with best available scientific information and best practices from the economic, engineering, physical, and biological sciences….” They must include:

• a “statement of need provides a clear description of the problem being addressed, the reasons for and significance of any failure of private markets or public institutions causing this problem, and the compelling need for federal government intervention in the market to correct the problem.”

• an analysis of regulatory options, including a proposed/final option, at least one more stringent option and one less stringent option. This may also include a continuum of options, presumed by this rule to reflect rising costs and benefits.

• a baseline of the status quo and “how the world would evolve absent the regulation,” based on “transparent and reasonable assumptions.” These include consideration of changing economic circumstances, consumer and producer behaviors, other regulations, and expected degrees of compliance by regulated entities.

• quantification of expected benefits, monetization of benefits following established principles and methods, and qualification of any additional benefits that cannot be quantified or monetized.

• scientifically sound analyses of applicable “human health benefit endpoints.”

What’s next?

The rules are effective December 23, 2020, for rules that are proposed on or after that date. EPA describes these rules as structured means to make the agency’s BCAs more consistent and appropriate. Environmental and health advocates have raised strenuous objections, pointing out that the distinctions among quantified, monetized, and qualitative estimates of benefits can be used to devalue “qualitative” measures.

These objections respond to the Trump EPA’s efforts to narrow the scopes of benefit-cost reviews in ways that tend to identify fewer benefits and more costs than the Obama EPA’s approach. For example, EPA has been working to narrow analyses underlying the Obama EPA’s Mercury and Air Toxics Standard, in ways that reduce requirements to cut emissions. EPA has also rolled back adopted tightening of motor vehicle emission standards (see HERE). 

But now we know that there will soon be a Biden EPA, which can be expected to return to tighter environmental requirements (I wrote about his environmental promises HERE). My reading of these new rules is that Biden’s EPA can apply the rules in ways that conform to the new Administration’s policy preferences. Therefore, whether these BCA rules remain in force or are revised or withdrawn, I don’t see them restricting EPA environmental initiatives.

Self-Evaluation Checklist

Does the organization conduct activities that are subject to EPA rules under CAA?

If so, has EPA conducted and reported cost-benefit analyses for these rules, consistent with its statutory responsibilities under each provision?

If so, might the results of BCAs lead to changes in applicable regulatory provisions?

Where Can I Go For More information?

Like What You've Read? Subscribe to Our Blog Now

About the Author

Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years. 

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at:

Image by Dimitris Vetsikas from Pixabay

Tags: EPA, CAA, Environment, BCA