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Criticism of EPA's Economic Analysis Sorely Misplaced

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A recent report from the U.S. Government Accountability Office (GAO) suggests that the Environmental Protection Agency (EPA) should improve the way it analyzes regulations. Critics have been quick to trumpet the EPA's "failure," but in reality, the EPA deserves an A (or at least an A-).

Quantifying the effects of regulations is an inexact science, and there is clearly room for the EPA--and all other agencies that conduct this type of analysis--to improve. But this puzzling report offers some flawed criticisms of the EPA, and even its sensible recommendations read like a wish list for the government as a whole rather than for the EPA specifically.

A closer look reveals that the EPA's regulatory analyses are among the most sophisticated of any government agency in the world. Further improvement is clearly desirable, but this will require government resources that Congress seems reluctant to provide.

The GAO report analyzes seven of the EPA's regulatory impact analyses for rules published since 2009. While noting that the EPA generally adhered to Office of Management and Budget (OMB) guidance on regulatory analysis, the report finds fault with a few key aspects of the EPA's approach.

The GAO criticizes the EPA for basing its employment analyses in part on a 2002 study that used "outdated information"--it analyzed the effect of regulations on employment from 1979 through 1991. All studies and economic models have their limitations, but it is not strange for a model to remain relevant for decades. If the EPA believes this study provides the best approach, the date of its publication or analysis period is no reason to ignore it. Within its critique, the GAO does not cite a better model to use. It does, however, reference the EPA's ongoing efforts to explore new approaches for estimating employment effects, which, of course, should be lauded.

The report also notes problems with the EPA's application of the social cost of carbon (the adverse impact of one ton of carbon dioxide emissions) to analyze regulations that reduce greenhouse gas emissions. This critique features prominently in the report's opening section and closing recommendations. But the report finds no fault with EPA specifically. It notes that the agency merely applied the methods recommended by various government guidance documents, such as OMB's Circular A-4, which compiles best practices for regulatory analysis. A White House interagency working group determined that carbon regulations should discount future benefits at a relatively low rate because climate change greatly affects future generations. This decision is consistent with the work of leading economists and with Circular A-4's guidance on intergenerational regulations. The GAO seems to think this guidance could be clarified further, but regardless, the EPA can hardly be blamed for following a presidential directive. The GAO report's framing of this issue can be easily misunderstood as a criticism of the EPA, and it was interpreted as such by several Republican lawmakers when the report was released.

The report does note some worthwhile areas for improvement, which are relevant for all government agencies, not just the EPA. The GAO suggests that the EPA should work harder to maximize net benefits from regulations and use flexible, market-based approaches to lower compliance costs. These aims are clearly economically desirable. But the EPA's discretion is often limited in these areas. The agency could not, for instance, set the renewable fuel standard at a level that maximized net benefits--Congress chose the target. Similarly, national ambient air quality standards are theoretically set without regard to cost. As we've argued elsewhere, this may not be wise, but the EPA is merely following the commands of the Supreme Court of the United States, as it must do.

When the EPA can implement market-based solutions, it often does, even in the face of vehement opposition. Examples include the Cross-State Air Pollution Rule, the recently proposed Clean Power Plan, and the wildly successful acid rain trading program in the 1990s. Interestingly, Sen. David Vitter (R-La.), one of the lawmakers who requested this report, has roundly criticized many of the market-based regulations this report advocates.

Other GAO suggestions should also be taken to heart by the EPA and other agencies, but improvements will require additional government resources. The report recommends monetizing more health benefits to improve regulatory impact analyses. Over the last few decades, a great deal of progress has been made in quantifying and monetizing benefits. But the shift to quantified or monetized status is not random--it generally depends on government-funded research. Many of those in Congress who've been quickest to criticize the EPA after this report have also opposed the research and resources that could improve its regulatory analyses. And it's worth noting that monetizing additional health benefits will likely lead to more stringent regulations.

Skimming this report, or the news stories about it, one might think the EPA has a middling record at best in regulatory analysis. But a closer look shows that the EPA is a global leader in conducting regulatory impact analysis.

Other government agencies have regularly struggled to complete analyses in line with best practices. The Transportation Security Administration has been criticized for failing to conduct any cost-benefit analysis for major programs. A new Food and Drug Administration proposal questionably assumes that the health benefits of tobacco regulations should be discounted by 70 percent, due to lost consumer pleasure from smoking. In contrast, the recent OMB Report to Congress on the Benefits and Costs of Federal Regulations is complimentary of the EPA's analysis and regulatory performance (as other OMB reports have been in recent years).

The EPA has proven itself as a leader in regulatory analysis for decades, under both Republican and Democratic presidents. The agency has been at the forefront of critical advances in the field. Improvements can be made, but the agency's record should not be unfairly and inaccurately disparaged.