Cost-Benefit Analysis Can Be Useful in Assessing Environmental Regulations, Despite Limitations

RCED-84-62: Published: Apr 6, 1984. Publicly Released: Apr 6, 1984.

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GAO reported on the Environmental Protection Agency's (EPA) major efforts to prepare cost-benefit analyses to support regulatory decisions, as required under Executive Order 12291. In addition, it discussed the Office of Management and Budget's (OMB) review of those analyses and identified many problems that affect the potential usefulness of cost-benefit analyses for assessing environmental regulations.

GAO found large gaps in the underlying scientific information which EPA uses to estimate the environmental benefits of its regulatory alternatives. EPA has also had difficulty determining how much people are willing to pay for health and environmental improvements. However, a cost-benefit analysis can still provide useful information to regulatory decisionmakers if EPA presents a range of dollar values which reflect the uncertainty of the estimates. Some environmental laws place more emphasis on the level of cleanup to be achieved than on the costs involved, and they may prohibit or limit the use of cost-benefit analyses in setting standards and regulations. In addition, cost-benefit analyses are not transmitted to Congress. Executive Order 12291 generally requires EPA and other federal agencies to provide a detailed cost-benefit analysis for any major regulation. However, the Order allows for a great deal of flexibility in establishing the estimated costs of proposed regulations, and EPA has not always considered all important compliance costs to determine whether a proposed rule is a major regulation. In addition, GAO found that EPA failed to consider all possibilities in determining which alternative would yield a higher net benefit. GAO also found that EPA cost-benefit analyses generally highlighted only single-dollar estimates in summary form, while ranges of estimates for other categories were available but not used. Despite these problems, OMB has generally accepted the EPA analyses.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: This recommendation was intended for Congress to consider over the next several years as it reauthorizes such legislation as the Clean Air Act and the Clean Water Act. As Congress has yet to reauthorize these acts, this recommendation has not been implemented. It would not be realistic to expect Congress to implement it in the near future.

    Matter: Congress may wish to reexamine the need for restrictions which prohibit or limit cost-benefit analyses results from being used in environmental rulemaking in laws such as the Clean Air and Clean Water Acts, in light of subsequent improvements in environmental protection, and consider easing or eliminating such restrictions on a case-by-case basis.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: An accomplishment report was approved on September 11, 1984.

    Recommendation: The Administrator, EPA, should require that all elements of costs be considered and consistently applied when determining whether regulations are major or minor.

    Agency Affected: Environmental Protection Agency

  2. Status: Closed - Implemented

    Comments: In August 1987, EPA released a report that discussed the statutory restrictions that limited EPA use of cost-benefit analysis. EPA identified 9 of 15 regulations where legal restrictions precluded use of all, or a portion of, the analyses.

    Recommendation: The Administrator, EPA, should transmit to the cognizant oversight committees in Congress, in executive summary form, those cost-benefit analyses that cannot be used in environmental rulemaking because of legal restrictions.

    Agency Affected: Environmental Protection Agency

  3. Status: Closed - Implemented

    Comments: The August 1987 EPA report entitled "EPA's Use of Cost-Benefit Analysis: 1981-1986" describes the environmental and economic research needs of EPA. The report also discusses procedures that EPA offices should follow to identify those data gaps that need to be addressed.

    Recommendation: The Administrator, EPA, should direct the Budget Office to highlight, in its annual budget submission to Congress, the priorities it has assigned to address the most critical data gaps affecting the precision of cost-benefit analyses and the measures planned to narrow those gaps.

    Agency Affected: Environmental Protection Agency

  4. Status: Closed - Implemented

    Comments: In August 1987, EPA released a report entitled "EPA's Use of Cost-Benefit Analysis: 1981-1986." The report discusses, among other things, the uncertainty issue and outlines steps that EPA has taken, or plans to take, to strengthen its analytic capabilities and focus its research efforts.

    Recommendation: The Administrator, EPA, should direct the program offices performing cost-benefit analyses to use special techniques for analyzing uncertainty so that the most likely estimates of key regulatory effects can be isolated.

    Agency Affected: Environmental Protection Agency

  5. Status: Closed - Implemented

    Comments: EPA completed only one regulatory analysis since the issuance of this report. That analysis did discuss alternatives considered, and highlighted in its executive summary information on these alternatives, costs and benefits considered, and ranges of uncertainties.

    Recommendation: The Administrator, EPA, should prominently document, for inclusion in the public record, and transmit to OMB, a thorough explanation of the regulatory alternatives considered prior to the EPA decision to perform or not perform a cost-benefit analysis. This documentation should include a clear explanation as to why a particular alternative was considered and others were not so that decisionmakers and reviewing officials will have a complete understanding of the process. In addition, the Administrator should require that future cost-benefit analyses prominently include, in the executive summary: (1) a clear recognition of all costs and benefits, even those that cannot be quantified; (2) the range of uncertainties associated with those cost and benefit figures, as well as the sources of uncertainty; and (3) a comparison of all feasible alternatives.

    Agency Affected: Environmental Protection Agency

 

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