The severity of financial impacts to firms from a rule can range from no impact ( if all costs are recovered through price increases, for example) to a modest reduction in profits, closure of a production line or plant, to bankruptcy of the firm. Criteria for assessing the degree of financial distress and for predicting when a production line or plant would be shut down are not clear cut. 41 If detailed financial profiles can be developed, including revenues, costs, income statements, and balance sheets, a variety of financial tests can be used to assess the likelihood of financial distress or closure. These tests address the following issues:

153 Chapter 9: Distributional Analyses 38 Analysis of impacts on profitability and plant closures are discussed later in this section.

39 Some surviving plants could experience increases in production, capacity utilization, and profits even though subjected to regulatory requirements, if their competitors face even greater cost increases.

40 Sources of financial data are listed in Exhibit 9 3.

41 This section assumes a perfectly competitive market, which in practice does not always correctly characterize the market structure being analyzed. In these cases, this section should be adapted to the relevant market structure. Do the costs of the regulation result in a negative discounted after tax cash flow? 42 Does the facility or firm's profitability fall below acceptable levels?

Is the facility or firm's ability to finance its operations and pay its obligations jeopardized?

Establishments that fail the first test are potentially at risk for closure. 43 Closure Decisions A variety of considerations affect a firm's decision to close a production line or a plant.

The profitability of the plant itself provides insight into whether the operation will be contined if the plant represents a stand alone business. This also assumes that it is possible to construct a financial profile of that business.

The role the plant plays in a larger operation may influence closure decisions. For example, some plants may be part of a vertically or horizontally integrated operation. Such plants might not be viable as a stand alone operation but may continue to operate based on its contribution to the business line as a whole. In general, however, the analysis should assume that an operation will be closed if compliance with the rule would increase costs to the point where continued operation is no longer profitable.

A negative discounted cash flow indicates that returns are below the rate of return required to provide the required return on equity and payment of interest. Closures in the short run are likely to occur if earnings do not cover variable costs plus the cost of compliance. Disinvestment and closures will occur over the longer term if earnings are not sufficient to justify investment in plant and equipment as well. Where closures and reduced production are likely for some but not all plants, firms may face complex decisions about which plants to close. These decisions reflect relative operating costs, age of equipment, tax and other incentives offered by local communities and states to retain business, and logistical considerations. Analyses of plant closures should include caveats stating that the analysis identifies candidates for closure, rather than providing reliable predictions of which specific plants will close. The available information on plant level operating costs and contributions to earnings is generally too uncertain to allow more precise prediction of plant closures.

Financial Distress Short of Closure Short of closure, financial distress may occur. Financial distress measures a continuum from mild to severe financial weakness and may result in difficulties obtaining financing and attracting capital. 44 Although in practice, analysts may use a variety of measures of financial distress use of specific financial ratios has the advantage that it mirrors analyses that investment and lending institutions perform to evaluate industries and businesses. Particular measures include:

Measures of impacts on profitability, e. g., pre tax return on assets ( net operating income divided by total assets) or return on equity. These measures reflect the profit performance of a firm's capital assets. If returns are reduced to unacceptable levels when compliance costs are included, the firm may have difficulty financing new investment or attracting capital even if it is not earning negative returns.

Measures of impacts on liquidity, e. g., interest coverage ratio ( cash operating income divided by interest expense), times interest earned ( earnings before interest and taxes divided by interest expense), and the current ratio ( current assets divided by current liabilities.) These measures reflect the firm's 154 Chapter 9: Distributional Analyses 42 If after tax cash flow is negative under baseline conditions ( before considering compliance costs), the facility is a likely candidate for closure even in the absence of additional compliance costs. These closures should not be attributed to the rule, but rather should be classified as baseline closures.

43 If it is possible to estimate plant liquidation values, another test can be added to assess the likelihood of closure. Plants may be predicted to close if the value of continuing to operate is less than the liquidation value.

44 Researchers have developed various composite measures that are designed to assess the potential for bankruptcy. The most commonly cited is the ZETA model or " Z score" developed by Altman et al. ( 1993). This model uses a weighted average of five variables to predict potential for bankruptcy. The ratios include working capital/ total assets, retained earnings/ total assets, earnings before interest and taxes ( EBIT)/ total assets, market value of equity/ par value of debt, and sales/ total assets. The model includes levels for this composite score that represent clear potential for bankruptcy low or no potential for bankruptcy, and an uncertain grey area. ability to meet its financial obligations out of current, on going operations. If operating cash flow does not comfortably exceed its payment obligations, the firm may have to use resources required for on going operations to pay contractual obligations and its creditworthiness will suffer.

9.2.10 Impacts on Related Industries and Consumers The economic and financial impacts of regulatory actions propagate to industries and communities that are linked to the regulated industries, resulting in indirect business impacts. These indirect impacts may include employment and income losses, as well as changes in the competitiveness and efficiency of related markets. Compliance related industries, on the other hand, may yield offsetting gains in employment and income when a regulated industry purchases equipment, facilities or labor in order to comply with a regulation.

Although, in principle, every economic entity can be thought of as having a connection with every other entity, practical considerations usually require an analysis of indirect impacts to be performed or presented for a manageable subset of economic entities that are most strongly linked to the regulated entity. In addition to considering major customers and specialized suppliers of the affected industry, it is also important to consider less obvious but potentially significant links, for example, basic suppliers such as electricity generators.

For this reason, the analysis of linkages should use a framework that thoroughly measures indirect as well as direct linkages. Whatever the approach, the goal of the analysis is to measure   given a certain amount of employment and income change in a regulated market   how employment and income will likely change in related entities. 9.2.11 Impacts on Innovation, Productivity, and Economic Growth While regulatory interventions can theoretically lead to macroeconomic impacts, such as growth and technical efficiency, such impacts may be impossible to measure or observe. 45 In some cases, however, it may be feasible to use macroeconomic models to evaluate the regulatory impact on gross national product ( i. e., including trade effects and plant location decisions), factor payments, inflation, and aggregate employment.

For programs or rules that are expected to have significant impacts in a particular region, use of regional models   either general equilibrium or more limited models   may be valuable.

Some macroeconomic regulatory effects are beyond the capacity of the typical regulatory impact analysis to quantify For example, price changes induced by a regulation can lead to technical inefficiency because firms are not choosing the production techniques that minimize the use of labor and other resources in the long run. Instead, firms will tend to overuse resources whose prices are artificially depressed by the regulation compared to the resources' true cost to society.

Additional anecdotal, theoretical and limited empirical literature are available that point to possible macroeconomic impacts. 46 9.2.12 Impacts on Industry Competitiveness Regulatory actions that substantially change the structure or conduct of firms can produce indirect impacts by changing the competitiveness of the regulated industry, as well as that of linked industries. An analysis of impacts on competitiveness begins by examining barriers to entry and market concentration and by answering two key questions.

155 Chapter 9: Distributional Analyses 45 OMB states that macroeconomic effects are likely to be measurable only if the impact of the regulation exceeds 0.25 to 0.5 percent of GDP. See OMB ( 1995).

46 See Jaffe et al. ( 1995) and Gray and Shadbegian ( 1997). Will the regulation erect entry barriers that might reduce innovation by impeding new entrants into the market? High sunk costs associated with capital costs of compliance or compliance determination and familiarization would be an entry barrier attributable to the regulation. Sunk costs are fixed costs that cannot be recovered in liquidation; they can be calculated by subtracting the liquidation value of assets from the acquisition cost of assets facing a new entrant, on an after tax basis. 47 Lack of access to debt or equity markets to finance fixed costs of entering the market can also present entry barriers even if none of the fixed costs are sunk costs. However, if financing is available and fixed costs are recoverable in liquidation, the magnitude of fixed costs alone should not present any barrier to entry.

Will the regulation tend to create or enhance market power and reduce the economic efficiency of the market? The tools presented in the section describing how to create an economic profile also address this question. The most important of these tools include measures of horizontal and vertical integration ( i. e., concentration), among both buyers and sellers, in the baseline compared to post compliance cases. Closely related to concentration, product differentiation may occasionally be either increased or decreased by a regulatory action. For a hypothetical example, certain labeling restrictions might reduce the ability of firms to segment their market by differentiating an essentially uniform product with packaging In such a hypothetical baseline, firms might enjoy effectively higher concentration ratios and less competition after imposition of a uniform labeling policy.

9.2.13 Impacts on Government Entities and Not for Profit Organizations Section 9.2.9 of this chapter discussed ways of measuring the impact of regulations and requirements on private entities, such as firms and manufacturing facilities. When dealing with private entities, the primary focus is on measures that assess changes in profits. This section describes impact measures for situations where profits and profitability are not relevant   where the regulations affect government entities and/ or not for profit organizations. Many of the same questions, however, apply:

Which entities are affected and what are their characteristics

How much will the regulation increase operating costs?

What impact will the regulation have on operating procedures?

Will this change the amount and/ or quality of the goods and services provided?

Can the entity raise the necessary capital and will this change its ability to raise capital for other projects?

The major difference is that instead of ultimately measuring the regulation's impact on profit levels, when government entities are involved, the ultimate measure is the ability of its citizens to pay for the requirements. Likewise, in the case of a not for profit, the measure is the reduction in the organization's ability to provide its goods and services.

<IP_ADDRESS> Measures of Government Impacts EPA regulations can affect governments in at least three ways. They can directly impose requirements on the governmental entity, such as water pollution requirements for publicly owned wastewater treatment works ( POTWs) or air pollution restrictions that affect municipal bus systems or power plants. Second, they can involve costs for governments to implement and enforce regulations imposed on other parties. Finally, they can impose indirect costs on government entities, such as increased unemployment in a community because an EPA regulation has resulted in reduced production ( or even closure) at a factory in the community. Keep in mind that some of the impacts may reduce the community's financial resources and thus its ability to pay for the requirements. For example, the 156 Chapter 9: Distributional Analyses 47 Sunk costs are sometimes referred to as exit barriers. Without exit barriers, there can be no entry barriers, as long as there are no liquidity constraints. closure of a facility may increase the drain on social services at the same time that tax revenues are declining.

Impacts of Programs That Directly Affect Government and Not for Profit Entities The direct impact measures can be divided into two categories ( 1) those that measure the impact itself in terms of the relative size of the costs and the burden they place on citizens and ( 2) those that measure the economic and financial conditions of the entity that affect its ability to pay for the requirements. For each category, there are several types of measures that can be used either as alternatives, or jointly, to illuminate various aspects of the question.

Measuring the relative cost and burden of the regulations There are three commonly used approaches to measuring the burden of the rule; all involve calculating the annualized costs of complying with the regulation. For government entities, the three approaches are:

Annualized compliance costs as a percentage of annual costs for the service included: This measure tries to define the impact as narrowly as possible and is particularly appropriate when the service or activity to be regulated is provided by a single purpose entity. For example, if the regulated activity is sewage treatment, the POTW may not be able to draw on general government revenues to cover its increased cost. Thus the appropriate comparison would be to estimate the resulting increase in its costs. Even if the affected entities are not able to draw on general government revenues, it is useful to know how the rule affects the cost of the activity in question. In practice, EPA has often used the condition that if compliance costs are less than one percent of the current annual costs of the activity, it is usually assumed that the compliance costs are placing a small burden on the entity.

Annualized compliance costs as a percentage of annual revenues of the governmental unit: The second measure corresponds to the commonly used private sector measure of annualized compliance costs as a percentage of sales. Referred to as the " Revenue Test," it is one of the measures suggested in EPA Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as amended by the Small Business Regulatory Enforcement Fairness Act ( EPA, 1999). 48 This differs from the prior measure in that it compares annualized compliance costs to the total revenues of the entity ( which usually is multi purpose in nature). If compliance costs are less than one percent of revenues, then the requirements are usually considered to be affordable. Compliance costs in the range of one to three percent of government revenues are less easily interpreted. If all affected communities fall in this range, then further thought should be given to lowering annual compliance costs, if only a small percentage of communities fall into this range and the rest fall below one percent, then the requirements can probably be considered affordable. Compliance cost to revenue ratios of greater than three percent indicate that the requirements are placing a heavy burden on the community.

Per household ( or per capita) annualized compliance costs as a percentage of median household ( or per capita) income: The third measure compares the annualized costs to the ability of residents to pay for the cost increase. Commonly referred to as the " Income Test," it is described in the Revised Interim Guidance ( EPA, 1999) and EPA's Office of Water Interim Economic Guidance for Water Quality Standards. Workbook ( EPA, 1995a). 49 Costs can be compared to either median household or median per capita income. In calculating the per household or per person costs, the actual allocation of costs needs to be considered. If the costs are entirely paid through property taxes, and the community is predominately residential, then an average per household cost is probably appropriate. If, however, some or all of the costs are allocated to users ( e. g., fares paid by bus riders or fees paid by users for sewer, water, or electricity supplied by municipal utilities then this needs to be taken into account. In addition, if some of the costs are borne by local firms,

157 Chapter 9: Distributional Analyses 48 See Section 9.3 for a discussion of the analytic and procedural requirements under SBREFA.

49 For example, materials presented in the water guidance and other EPA Office of Water analyses are: less than one percent indicates little impact, over two percent indicates a large impact, with the range from one to two percent being a gray area of indeterminate impact. then that portion of the costs needs to be handled separately.

Two commonly used impact measures for not for profit entities are: ( 1) annualized compliance costs as a percentage of annual operating costs and ( 2) annualized compliance costs as a percentage of total assets. The first is equivalent to the first of the impact measures described for government entities, measuring the percentage increase in costs that would result from the regulation being analyzed. The second is a more severe test, measuring the impacts if the annualized costs were paid for out of the assets of the institution. As presented in EPA's Revised Interim Guidelines, the guidelines for annualized compliance costs as a percentage of annual operating costs are: annualized compliance costs less than 1 percent of operating costs indicate that the rule does not represent a burden annualized compliance costs between one and three percent of operating costs indicates that the rule may impose a burden, and annualized compliance costs that are more than three percent of operating costs indicates that the rule may impose a heavy burden.

Measuring the economic and financial health of the community: This second category of impact measures looks at the economic and financial health of the community involved, since these will affect its ability to finance expenditures required by a program or rule. A given cost may place a much heavier burden on a poor community than on a wealthy one of the same size. As with the impact measures described above, there are three categories of economic and financial condition measures:

Indicators of the community's debt situation: Debt indicators are important because they measure both the ability of the community to absorb additional debt ( to pay for any capital requirements of the rule) and the general financial condition of the community. While several indicators have been developed and used, this section describes two. One measure is the governmental entity's bond rating. Awarded by companies such as Moody's and Standard & Poor's, bond ratings summarize their assessment of a community's credit capacity and thus reflect the current financial conditions of the governmental body. A second frequently used measure is the ratio of overall net debt ( the debt to be repaid by property taxes) to the full market value of taxable property in the community. Overall net debt should include the debt of overlapping districts. For example, a household may be part of a town, a regional school district, and a county sewer and water district, all of which have debt that the household is helping to pay off. 50 See Exhibit 9 4 for interpretations of the values for these measures. Neither of these two debt measures will always be appropriate. Some communities, especially small ones, may not have a bond rating. This does not necessarily mean that they are not creditworthy, it may only mean that they have not had an occasion recently to borrow money in the bond market. Second, if the government entity does not rely on property taxes, as may be the case for a state government or an enterprise district, then the ratio of debt to full market value may not be relevant. Information on debt and assessed property values are available from the financial statement of each community. The state's auditor's office is likely to have this information for all communities within the state.

Indicators of the economic/ financial condition of the households in the community: There are a wide variety of household economic and financial indicators. Two commonly used ones are: the unemployment rate and median household income. Both measure the financial well being of households. Unemployment rates are available from the U. S. Bureau of Labor Statistics. Median household income is available from the U. S. Census and some states maintain more up to date databases on income levels. Benchmark values for these two measures are presented in Exhibit 9 4.

Financial management indicators: This category consists of indicators measuring the general financial health of the community as an entity, as opposed to the general financial health of the residents. Since 158 Chapter 9: Distributional Analyses 50 An alternative to the net debt as percent of full market value of taxable property is the net debt per capita. Commonly used benchmarks for this measure are: Net debt per capita: less than $ 1,000 = strong financial condition Net debt per capita: $ 1,000 and $ 3,000 = mid range or gray area Net debt per capita: greater than $ 3,000 = weak financial condition most local communities rely on the property tax as their major source of revenues, two indicators of property tax health are presented here. One measures the burden property taxes are placing on the community in terms of property tax revenues as a percent of full market value of taxable property. The second indicator measures the efficiency with which the community's finances are managed, and indirectly whether the tax burden may already be excessive, in terms of the property tax collection rate. As the property tax burden on tax payers increases, they are more likely to not pay their taxes or pay them late.

Measuring the financial strength of not for profit entities includes assessing ( 1) how much reserve the entity has, ( 2) how much debt the entity already has and how its annual debt service compares to its annual revenues, and ( 3) how the entity's fees or user charges compare with the fees and user charges of similar institutions. Again, this part of the analysis is meant to judge whether the entity is in a strong or weak financial position to absorb additional costs. Impacts of Programs That Place Administrative and Enforcement Burdens on Governments Many EPA programs require effort on the part of different levels of government for administration and/ or enforcement These costs must be considered to comply with UMRA and to calculate the full social costs of a program or rule. EPA is currently investigating methods for estimating and evaluating the impacts of such costs. Revisions to this guidance document will be made in the future to incorporate the results of that work.

Impacts of Programs That Indirectly Affect Government Entities The previous section describes how to measure the impact of regulations that directly affect the provision of goods or services by government or not for profit entities. This section addresses the indirect or induced impacts on government entities. For example, a manufacturing facility may reduce or suspend production in response to an EPA regulation thus reducing the income levels of its employees. In turn, these reductions will propagate through the economy by means of changes in household expenditures. These induced impacts include the familiar multiplier 159 Chapter 9: Distributional Analyses Indicator Weak Mid Range Strong Below BBB ( S& P) BBB ( S& P) Above BBB ( S& P) Below Baa ( Moody's) Baa ( Moody's) Above Baa ( Moody's)

Overall Net Debt as Percent of Full Market Above 5% 2% to 5% Below 2% Value of Taxable Property More than 1 percentage Within 1 percentage More than 1 percentage Unemployment Rate point above national point of national point below national average average average Median Household More than 10% Within 10% of the More than 10% Income below the state median state median above the state median Property Tax as Percent of Full Market Value of Above 4% 2% to 4% Below 2% Taxable Property Property Tax Collection Rate Less than 94% 94% to 98% More than 98% Bond Rating Exhibit 9 4 Indicators of Economic and Financial Well Being of Government Entities effect, in which loss of income in one household results in less spending by that household and, therefore, less income in households and firms associated with goods previously purchased by the first household. Unlike production based linkages, income based linkages tend to be more geographically localized, with the strength of the linkage typically decreasing as geographic distance increases ( although the number of linked economic entities increases with distance).

Decreased household and business income can affect the government sector by reducing tax revenues and increasing expenditures on income security programs ( the automatic stabilizer effect), employment training, food and housing subsidies, and other fiscal line items. Due to wide variation in these programs and in tax structures, estimating public sector impacts for a large number of government jurisdictions can be prohibitively difficult.

On the other hand, compliance expenditures increase income for businesses and employees that provide compliance related goods and services. These income gains also have a multiplier effect, offsetting some of the induced losses in tax revenue and increases in government expenditures identified above.

9.3 Equity Assessment 9.3.1 Introduction In the context of an EPA economic analysis, an equity assessment is an important type of distribution analysis. An equity assessment examines the accrual of a regulation's net costs, net benefits, or other economic impacts to a specific sub population( s) and/ or examines the distribution of these costs, benefits, and impacts among sub population s). This examination includes the possibility of analyzing a regulation's impact on the distribution of national income or wealth.

Generally, cost bearers and beneficiaries belong to one of four populations: individuals, businesses, not for profit organizations, or governments. Within each of these populations are sub populations whose particular circumstances EPA wishes to better understand, either because the sub population is more physically susceptible to environmental contamination, is less than fully capable of representing its own interests, or is economically disadvantaged or vulnerable. For many of these sub populations, the EPA has been directed by statute, executive order, or agency policy to examine the effects of its rules when they are expected to have a " disproportionate," " significant and substantial," or other such impact on a particular subpopulation An equity assessment gives rule makers a better understanding of the economic effects of the EPA's rules on these sub populations and, for comparison or other purposes, on other specific sub populations as well. An equity assessment examines the magnitude as well as the distribution of effects on sub populations.

There are several considerations to keep in mind when performing an equity assessment. Each of these points will be detailed in this chapter.

There are specific equity dimensions that must always be considered, but there are none that must always be analyzed when assessing the impact of environmental regulations. Generally speaking, the regulation under review, and the specific issues associated with it, will determine which equity dimensions are relevant and in need of an equity assessment.

The methods used by a regulation's BCA and EIA should guide the methodology used by an equity assessment. Neither this chapter nor OMB's Best Practices and OMB Guidelines outline a specific methodology for conducting an equity assessment. However, the models and assumptions developed for these other two analyses should not conflict with those used by an equity assessment.

An equity assessment may draw on the information compiled for its corresponding BCA as well as include measures of impact similar to those in its corresponding EIA. An early step in an equity assessment is to identify sub populations likely to be affected by a regulation Once identified, if data permits, the social costs and benefits estimated for the BCA can be disaggregated and net benefits examined for the sub population s). An equity assessment also examines other economic impacts, such as increases in rates of unemployment or other traditional impact measures, for the identified sub populations( s).

160 Chapter 9: Distributional Analyses An equity assessment is not an independent form of economic analysis, but is a reflection of decisions made on many of the other analytic issues arising in the benefit, cost, and economic impact sections of this guidance. For example, the analysis of distributions over long time horizons can be greatly affected by the analyst's treatment of uncertainty or choice of a discount rate. Baseline issues are important in the determination of net benefits expected to accrue to specific sub populations. When making decisions on these and other relevant issues, the analyst should keep in mind the ramifications borne by the equity assessment.

Many of the instructions offered in the preceding sections on estimating economic impacts will be directly applicable to an equity assessment. The difference will be extending the analysis or presentation of results to describe sub population s) for which impacts are estimated. Whereas an EIA focuses on traditional classifications of affected populations ( like industrial classifications), an equity assessment often focuses on " disadvantaged or vulnerable" subpopulations ( like low income households) but, for comparison or other purposes, can also focus on other relevant sub populations ( like upper income households). In this section, we outline a general framework for conducting an equity assessment but refer the reader to Sections 5, 6, and 9.2 for approaches used to estimate specific impacts. As is true for an EIA, generally speaking, an equity assessment is more concerned with sub populations experiencing net costs or other negative impacts than those experiencing net benefits or positive impacts.

The following parts of this section accomplish three objectives First, the existing environmental and administrative statutes, executive orders, and agency policies which direct analysts to consider specific sub populations when assessing the economic effects of EPA's regulations are reviewed. The statutes and policies are enumerated, the relevant sub populations are identified, and definitions are established for these sub populations. Second, a broad framework for conducting an equity assessment is outlined. This section concludes with a review of general sources of data for assessing equity impacts.

9.3.2 Statutes and Policies Requiring Equity Assessment and Definitions of Sub Populations Equity issues are at the heart of two existing statutes   The Regulatory Flexibility Act of 1980 ( RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 ( SBREFA), and The Unfunded Mandates Reform Act of 1995 ( UMRA) 51   and two executive orders   EO 12898, " Federal Actions to Address Environmental Justice in Minority Populations and Low Income Populations" and EO 13045, " Protection of Children From Environmental Health Risks and Safety Risks,"   all of which require agencies to consider a regulation's distributional impact on various entities or sub populations. 52 These administrative laws or orders suggest several equity dimensions; in particular entity size, minority status, income level, and childhood status. Exhibit 9 5 lists these equity dimensions and links each to the relevant statute or order, to a population, and to at least one established definition of sub populations.

A second executive order   EO 12866, " Regulatory Planning and Review" has multiple objectives regarding regulatory planning and review, many that have nothing to do with improvements in equity. It does, however, include a specific directive for agencies to consider distributive impacts and equity when designing regulations. Thus, Exhibit 9 5 lists the equity dimensions suggested by the OMB's Best Practices for EO 12866 and noted in its OMB Guidelines for economic analyses. The equity dimensions are discussed in more detail below.

9.3.3 Entity Size The RFA as amended by SBREFA and UMRA require agencies to consider economic effects on small entities   specifically, small businesses, small governmental 161 Chapter 9: Distributional Analyses 51 EO 13132, Federalism and EO 13084, Consultation and Coordination With Indian Tribal Governments, both support some objectives in UMRA.

52 The Office of Regulatory Management and Information's Rule and Policy Information Development System ( RAPIDS) http:// intranet. epa. gov/ rapids ( accessed 4/ 05/ 2000, internal EPA document) is a resource for those who wish to read relevant statutes, executive orders or Agency policy documents in their entirety or to acquire copies. Chapter 9: Distributional Analyses 162 Equity Dimension Administrative Law Population Definitions of Sub Populations or Order Entity Size RFA; UMRA; OMB Guidance Businesses, to EO 12866 Governmental Jurisdictions, Not for Profit Organizations Minority Status E. O. 12898; OMB Individuals or Guidance to EO Households 12866; EO 13084 for Indian tribal communities only Income Level EO 12898; OMB Individuals or Guidance to EO 12866 Households The RFA references the Small Business Act definition of small business which defines small business using SIC codes. Definitions sometimes depend on number of employees and other times depend on annual receipts. The RFA defines small governmental jurisdiction as the government of a city, county, town, school district, or special district with a population of less than 50,000. The RFA defines a small not for profit organization as an enterprise which is independently owned and operated and is not dominant in its field. 54 UMRA defines small government jurisdiction, similar to the RFA, as the government of a city, county, town, school district, or special district with a population of less than 50,000, and any tribal government.

Minority population of the affected area exceeds 50 percent or minority population percentage of the affected area is meaningfully greater than the minority population percentage in the general population or other appropriate unit of geographic analysis.

( Minorities are those individuals classified by OMB Directive No. 15 as Black/ African American, Hispanic, Asian and Pacific Islander, American Indian, Eskimo, Aleut, and other non white persons.)

" Indian tribe" means an Indian or Alaska Native tribe, band, nation, pueblo, village, or community that the Secretary of the Interior acknowledges to exist as an Indian tribe pursuant to the Federally Recognized Indian Tribe List Act of 1994, 25 U. S. C. 479a. ( See EO 13084.)

53 Some environmental statutes may also identify sub populations that merit additional consideration, but this document is limited to those with broad coverage.

54 The RFA also allows agencies to establish an alternative definition of small entity after notice and comment, and for small businesses only, after consultation with the Small Business Administration ( SBA). Annual statistical poverty thresholds from the U. S. Bureau of the Census' Current Population Reports, Series P 60 on Income and Poverty. Consumers grouped according to consumption expenditures ( e. g., into deciles). Exhibit 9 5 Equity Dimensions Potentially Relevant to Environmental Policy Analyses53 jurisdictions, and/ or small not for profit organizations. Definitions of " small" for each of these entities are considered below. For guidance as to when it will be necessary to examine the economic effects of a regulation under the RFA, analysts should consult EPA guidelines on these administrative laws. 55 These guidelines include the types of economic effects that must be considered and establishment of the baseline for purposes of determining if a rule may have a significant economic impact on a substantial number of small entities. Further, these guidelines explain the requirements in the event the rule is found to have a significant economic impact on a substantial number of small entities. Note that the RFA only applies to rules for which notice and comment rulemaking is required. <IP_ADDRESS> Small Business The RFA requires agencies to begin with the definition of small business that is contained in the SBA's small business size standard regulations. 56 The SBA defines small business by category of business using SIC codes, and in the case of manufacturing, generally defines small business as a business having 500 or fewer employees. For some types of manufacturing, however, the SBA's size standards define small business as a business having up to 750, 1000, or 1500 employees, depending on the particular type of business. In the case of agriculture, mining, and electric, gas, and sanitary services, the SBA size standards generally define small business with respect to annual receipts ( from $ 0.5 million for crops to $ 25 million for certain types of pipelines).

163 Chapter 9: Distributional Analyses Equity Dimension Administrative Law Population Definitions of Sub Populations or Order Childhood Status, EO 13045, OMB Individuals or Age Guidance to EO 12866 Households Gender OMB Guidance to Individuals Male/ Female EO 12866 Time OMB Guidance to Individuals or Current/ Future Generations EO 12866 Households Physical Sensitivity OMB Guidance to Individuals or EO 12866 Households EPA's Office of Children's Health Protection does not adhere to a single definition of " child." It suggests that the definition will vary depending upon the issue( s) of concern.

U. S. Bureau of the Census reports statistics by age in five year age groups and for the following special age categories: 16 years and over; 18 years and over; 15 to 44 years; 65 years and over; 85 years and over.

Varies according to the rule under review. For example, a rule that controls an air pollutant might define a physically sensitive sub population as individuals with asthma.

55 U. S. Environmental Protection Agency, Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as Amended by the Small Business Regulatory Enforcement Fairness Act, dated March 29, 1999.

56 5 U. S. C. § 601; see also the SBA's " Small Business Size Regulations" are contained in the Code of Federal Regulations at 13 CFR 121 and in the Federal Acquisition Regulation 46 CFR 19. The SBA reviews and reissues the size standards every year. The current version can be viewed at: http:// www. sbaonline. sba. gov/ gopher/ Financial Assistance/ Size Standards/ ( accessed on 8/ 28/ 2000). Exhibit 9 5 Equity Dimensions Potentially Relevant to Environmental Policy Analyses ( Continued) The RFA also authorizes any agency to adopt and apply an alternative definition of small business " where appropriate to the activities of the agency" after consulting with the Chief Counsel for Advocacy of the SBA and after opportunity for public comment. The agency must publish any alternative definition in the Federal Register. 57 <IP_ADDRESS> Small Governmental Jurisdiction The RFA defines a small governmental jurisdiction as the government of a city, county, town, school district, or special district with a population of less than 50,000. Similar to the definition of small business, the RFA authorizes agencies to establish alternative definitions of small government after opportunity for public comment ( consultation with the SBA is not required). Any alternative definition must be " appropriate to the activity of the agency" and " based on such factors as location in rural or sparsely populated areas or limited revenues due to the population of such jurisdiction." Any alternative definition must be published in the Federal Register. 58 Section 202 of UMRA directs agencies to obtain meaningful input from state, local, and tribal governments for each proposed and final rule " containing significant federal intergovernmental mandates." More specifically, this requirement is for rules that include federal mandates " which may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector of $ 100 million or more in any one year." 59 Section 203 of UMRA requires that agencies assess whether its rules " might significantly or uniquely affect small governments so as to consider the need for a compliance plan. Small governments are defined in the paragraph immediately above. The phrase " small towns" refers to very small governments with populations of under 2,500 citizens. As part of the " Small Government Agency Plan" required under UMRA, EPA evaluates such factors as whether small governments will experience higher per capita costs due to economies of scale, whether they would need to hire professional staff or consultants for implementation, or if they would be required to purchase and operate expensive or sophisticated equipment. 60 <IP_ADDRESS> Small Not for Profit Organization The RFA defines a small not for profit organization as an " enterprise which is independently owned and operated and is not dominant in its field." Examples might include private hospitals or educational institutions. Here again, agencies are authorized to establish alternative definitions " appropriate to the activities of the agency" after providing an opportunity for public comment ( consultation with the SBA is not required). Any alternative definition must be published in the Federal Register. 61 9.3.4 Minority Status and Income Level Executive Order 12898, " Federal Actions to Address Environmental Justice in Minority Populations and Low Income Populations" and its accompanying memorandum have the primary purpose of ensuring that " each federal agency shall make achieving environmental justice part of its mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of its programs, policies, and activities on minority populations and low income populations... ."

164 Chapter 9: Distributional Analyses 57 U. S. Environmental Protection Agency, Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as Amended by the Small Business Regulatory Enforcement Fairness Act, dated March 29, 1999.

58 Ibid.

59 U. S. Environmental Protection Agency, Interim Guidance an the Unfunded Mandates Reform Act of 1995, memorandum from Office of General Counsel, March 23, 1995b.

60 Ibid. p. 4.

61 U. S. Environmental Protection Agency, Revised Interim Guidance for EPA Rulewriters: Regulatory Flexibility Act as Amended by the Small Business Regulatory Enforcement Fairness Act, dated March 29, 1999. The Executive Order also explicitly calls for the application of equal consideration for Native American programs. 62 EPA's Interim Final Guidance for Incorporating Environmental Justice Concerns in EPA's NEPA Compliance Analyses ( EPA, 1998), discusses the meaning of key terms and phrases contained in EO 12898. Their conclusions regarding four key phrases: " minority population " low income population," " disproportionately high and adverse human health effects," and " disproportionately high and adverse environmental effects" are summarized below.

<IP_ADDRESS> Minority Population Minority individuals are those classified by Office of Management and Budget Directive No. 15 as Black/ African American, Hispanic, Asian and Pacific Islander, American Indian, Eskimo, Aleut, and other non white persons. A minority population should be identified where either ( 1) the minority population of the affected area exceeds 50 percent or ( 2) the minority population percentage of the affected area is meaningfully greater than its corresponding percentage in the general population ( or other appropriate unit of geographic analysis). A minority population also exists if there is more than one minority group present and the percentage calculated by aggregating all minority persons meets one of these thresholds. In identifying minority communities, the Agency may consider as a community either: ( 1) a group of individuals living in geographic proximity to one another or ( 2) a geographically dispersed/ transient set of individuals ( such as migrant workers or American Indians), where either type of group experiences common conditions of environmental exposure or effect. The selection of the appropriate unit of geographic analysis may be a governing body's jurisdiction, a neighborhood, census tract, or other similar unit that is to be chosen so as to not artificially dilute or inflate the affected minority population. The selection of the appropriate unit of geographic analysis may also be influenced by the accuracy and precision of environmental quality models.

<IP_ADDRESS> Low Income Population Low income populations in an affected area can be identified with the annual statistical poverty thresholds from the U. S. Bureau of the Census' Current Population Reports, Series P 60 on Income and Poverty. In conjunction with census data, the analysis should also consider state and regional low income and poverty definitions as appropriate In identifying low income populations, the Agency may consider as a community either a group of individuals living in geographic proximity to one another or a geographically dispersed/ transient set of individuals ( such as migrant workers or American Indians), where either type of group experiences common conditions of environmental exposure or effects. 63 One alternative to measuring annual incomes is to examine expected lifetime incomes. Generally, consumption is better than annual income at tracking households' expected lifetime incomes. For example, an analyst might divide the population by consumption deciles and see how the lowest deciles fare. These data will be harder to access as the Census does not contain consumption data.

<IP_ADDRESS> Disproportionately High and Adverse Human Health Effects When determining whether human health effects are disproportionately high and adverse, the Agency is to consider the following three factors to the extent practicable:

Whether the health effects, which may be measured in risks and rates, are significant, unacceptable, or above generally accepted norms. Adverse health 165 Chapter 9: Distributional Analyses 62 In addition, EO 13084, Consultation and Coordination with Indian Tribal Governments, requires regulations that " significantly or uniquely" affect the communities of Indian tribal governments and that impose substantial direct compliance costs on such communities to either refund the direct costs incurred or to consult with elected officials and other representatives of the Indian tribal governments and to provide a description of the consultation and/ or communication to the Office of Management and Budget.

63 Two additional tests available for identifying low income populations in an affected area are: ( 1) the U. S. Department of Health and Human Services poverty guidelines or ( 2) the U. S. Department of Housing and Urban Development statutory definition for very low income for the purposes of housing benefits programs. Information on these and other tests can be found in the CEQ report Environmental Justice: Guidelines for National Environmental Policy Act ( CEQ, 1997) and the Interim Final Guidance for Incorporating Environmental Justice Concerns in EPA's NEPA Compliance ( EPA, 1998). effects may include bodily impairment, infirmity, illness or death; 64 and Whether the risk or rate of hazard exposure by a minority population or low income population to an environmental hazard is significant and appreciably exceeds or is likely to appreciably exceed the risk or rate to the general population or other appropriate comparison group; 65 and Whether health effects occur in a minority or lowincome population affected by cumulative or multiple adverse exposures from environmental hazards.

<IP_ADDRESS> Disproportionately High and Adverse Environmental Effects When determining whether environmental effects are adverse and disproportionately high, the Agency is to consider the following three factors to the extent practicable:

Whether there is or will be an impact on the natural or physical environment that significantly and adversely affects a minority or low income population. Such effects may include ecological, cultural, human health, economic, or social impacts on minority communities or low income communities, when those impacts are interrelated with impacts on the natural or physical environment; and Whether environmental effects are significant and are or may be having an adverse impact on minority populations or low income populations that appreciably exceeds, or is likely to appreciably exceed, those on the general population or other appropriate comparison group; and Whether the environmental effects occur or would occur in a minority population or low income population affected by cumulative or multiple adverse exposures from environmental hazards.

9.3.5 Childhood Status EO 13045, Protection of Children From Environmental Health Risks and Safety Risks states that:

" A growing body of scientific knowledge demonstrates that children may suffer disproportionately from environmental health risks and safety risks. . . . Therefore, to the extent permitted by law and appropriate, and consistent with the agency's mission, each Federal agency: ( a) shall make it a high priority to identify and assess environmental health risks and safety risks that may disproportionately affect children; and ( b) shall ensure that its policies, programs, activities, and standards address disproportionate risks to children that result from environmental health risks or safety risks." 66 The order also states that each " covered regulatory action" 67 submitted to OMB, unless prohibited by law, should be accompanied by "... an evaluation of the environmental health or safety effects of the planned regulation on children." 68 The term " children" is not defined. EPA's Office of Children's Health Protection, established in response to this order, does not use a single definition of " child." They suggest that the definition will vary depending upon the issue( s) of concern. See Exhibit 9 5 for age classifications reported by the U. S. Bureau of the Census. EPA is currently developing a practical guide for valuing children's health effects.

166 Chapter 9: Distributional Analyses 64 The definition of adverse health effects contained in specific environmental statues, under whose authority a regulation is being developed may also guide the consideration of adverse health effects in conducting equity assessments.

65 The definition of risk or rate of hazard exposure contained in specific environmental statues under whose authority a regulation is being developed may also guide the consideration of risk or rate of hazard exposure in conducting equity assessments.

66 EO 13045, Protection of Children From Environmental Health Risks and Safety Risks effective April 21, 1997.

67 A " covered regulatory action" is any substantive action in a rule making that is likely to result in a rule that may ( a) be economically significant ( have an annual effect on the economy of $ 100 million or more or would adversely affect in a material way the economy, a sector of the economy the environment, and so on) and ( b) concern an environmental health risk that an agency has reason to believe may disproportionately affect children.

68 EO 13045. 9.3.6 Case Specific Equity Dimensions EO 12866, Regulatory Planning and Review has several requirements that contribute to the preparation of economic information, including a specific directive for agencies to consider distributive impacts and equity when designing regulations. The OMB Guidelines ( OMB, 2000) also makes note of several specific equity dimensions. But, unlike the laws and orders mentioned above, it does not suggest that analysts must always consider these dimensions. Rather, the suggestion is that the regulation under review should determine which equity dimensions are relevant.

" Those who bear the costs of a regulation and those who enjoy its benefits often are not the same people. Regulations have ' distributional effects' that affect different segments of the population and economy in various ways: by income groups, race, sex, industrial sector, and others. Regulations often distribute benefits and costs unevenly over time, perhaps spanning several generations... . If these distributive effects are important, you should describe the effects of various regulatory alternatives quantitatively to the extent possible, including their magnitude, likelihood and incidence of effects on particular groups. You should carefully analyze regulations that significantly affect outcomes for different groups." 69 OMB seems to be offering a general directive to study distributive effects on any grouping of sub populations when those effects are expected to be significant, without requiring agencies to always consider a predetermined set of equity dimensions.

<IP_ADDRESS> Additional Equity Dimensions In its general directive, OMB specifically mentions gender as a way to divide effects. Certain regulations may be found to have differential impacts on males and females. Thus, we add gender to the equity dimensions in Exhibit 9 5. Later in the OMB Guidelines it states, " The economic analysis should also present information on the streams of benefits and costs over time in order to provide a basis for judging intertemporal distributional consequences, particularly where intergenerational effects are concerned." 70 This leans more towards being a directive and suggests that time is an important equity dimension. The OMB Guidelines give some suggestions for conducting an intergenerational analysis including:

" Special approaches may also be appropriate when comparing benefits and costs across generations One approach is to follow the discounting method discussed above, and address the intergenerational equity and fairness issues explicitly, instead of modifying the discount rate."

" One alternative approach is based on the perspective that this generation is concerned about the welfare of future generations and, in fact, is willing to defer consumption and invest or preserve resources for future use at a discount rate that is less than the discount rate used in making decisions within a generation. For this purpose, you could use as a discount rate a special rate of time preference based on the growth of per capita consumption. Again, check with us if you plan to use such an approach." 71 Both OMB and EPA recognize that inter generational equity issues are potentially addressed by applying a discounting procedure. In the quotation above, OMB offers some analytical approaches to inter generational discounting. Chapter 6 of this document provides information on alternative methods of discounting in this context and discusses when such discounting is, and is not, appropriate.

When discussing risk assessment, the Best Practices mentions that,

" Exposures and sensitivities to risks may vary considerably across the affected population. These difficulties can lead; for example, to a range of quantitative estimates of risk in health and ecological risk assessments that can span 167 Chapter 9: Distributional Analyses 69 OMB Guidelines, p. 16.

70 Ibid., p. 8.

71 Ibid., p. 8. several orders of magnitude... . All of these concerns should be reflected in the uncertainties about outcomes that should be incorporated in the analysis." 72 Hence, we include physical sensitivity as an important equity dimension. The definition of who precisely is physically sensitive will vary according to the rule being developed For example, a rule that controls an air pollutant might have a large impact on individuals with asthma. Or, a rule that diminishes the quantity of a hazardous substance that winds up in soils near residential areas, might have a large impact on children with pica ( a disorder that results in an urge to eat non food substances such as dirt).

The Best Practices is not the only source directing attention to physical sensitivity. There are sections of environmental statutes which require EPA to address sensitive populations, analyze effects, and take actions to avert or mitigate adverse impacts. For example, the Clean Air Act section 108( f)( 1)( C) requires the Administrator to publish and make available " information on other measures which may be employed to reduce the impact on public health or protect the health of sensitive or susceptible individuals or groups... ."

Finally, the Best Practices mentions that economic analyses might need to consider different age categories.

" The literature identifies certain attributes of risk that affect value. These attributes include the baseline risk, the extent to which the risk is voluntarily or involuntarily assumed, and features ( such as age) of the population exposed to risk. For regulations affecting some segments of the population ( e. g., infants) more than those groups which have served as the basis for most of the information used to estimates ( sic.) values of a statistical life ( e. g., working age adults), the use of values of a statistical life from the literature may not be appropriate." 73 Age is clearly the issue in EO 13045, though its specific focus is on childhood status. Thus, Exhibit 9 5 lists childhood status and age as two aspects of a single equity dimension and cites the Best Practices and OMB Guidelines, as well as EO 13045. The next three entries of Exhibit 9 5 list the other equity dimensions suggested by the Best Practices and OMB Guidelines and links each to a population and at least one established definition of subpopulations

While directing agencies to consider the differential impact of a regulation on relevant sub populations, the OMB Guidelines state that an economic analysis should focus on the distribution of the costs and benefits of complying with a regulation rather than on the financial well being of regulated entities.

" Since generally accepted principles do not exist for determining when one distribution of net benefits is more equitable than another, you should describe distributional effects without judging their fairness. You should describe these effects broadly, focusing on large groups with small effects per capita, as well as on small groups experiencing large effects per capita. You should also note any equity issues not related to the distribution of policy effects if they are important and describe them quantitatively to the extent you can." 74 OMB cautions analysts conducting distributional analyses to recognize that transfer payments will become relevant; to avoid double counting even when mixing monetized and physical effects and to describe distributional effects without judging their fairness.

9.3.7 A Framework for Equity Assessment What follows is a very general three step framework to guide analysts conducting equity assessments. Instructions for estimating particular impacts on sub populations are given above in the section on EIA. Whether disaggregating benefits and costs or estimating economic impacts, the primary purpose of an equity assessment is 168 Chapter 9: Distributional Analyses 72 Best Practices, p. 15.

73 Ibid., p. 29.

74 OMB Guidelines, p. 16. to examine regulatory consequences for specific sub populations of concern. Thus, the framework developed here offers an approach on how to identify a sub population to be analyzed.

For each step, choosing to measure the equity related consequences of a regulation involves balancing costs of data acquisition and analysis against the value of improved accuracy. The framework attempts to conserve resources by screening out situations for which any of the variety of equity impacts probably will not occur. This permits more extensive analytical and empirical efforts to focus on circumstances with a higher probability of creating significant equity related effects. The three steps should not be viewed as necessarily sequential. Instead, at the outset of a particular regulatory analysis, all aspects of the suggested approach should be considered. This will help to ensure that the data gathered and the analyses performed will be well suited to measuring the equity impacts of concern.

<IP_ADDRESS> Step 1: Equity Scoping Analysis This first step consists of several tasks described here in sequential order.

Determine which populations listed in Exhibit 9 5 are within the scope of the analysis or exist relevant markets. In certain cases, some of the populations might not be connected closely enough to the regulation to be meaningfully affected. For example governmental entities might not be involved in the activities that would be affected by a regulation. If so, then no further analysis is necessary for these populations. It will be useful to make this determination early so that resources may be used in the most effective manner possible.

Determine whether the rule or regulatory alternative imposes costs, offers benefits, or results in other economic effects too small to warrant further analysis. When considering the cost side of the analysis, it might be possible to argue that incremental unemployment and plant or firm closures resulting from even small regulatory costs cannot be distinguished from changes that would probably be triggered by the underlying economic viability of these activities. This step also applies when a regulation imposes one burden on an entity, but reduces another on the same entity, so that the net effect is small. Although some equity impacts might be dismissed on this basis, others will probably require further analysis beyond this initial de minimis screen.

Identify which equity dimensions from Exhibit 9 5 are relevant if further analysis is required. Negative impacts on small entities, low income populations minority populations, and children are important to consider in all cases because of statutory and other mandates ( see Section 9.3.2). For example rules requiring additional safeguards against contamination of groundwater by landfills clearly benefit communities where landfills are sited. There is a long standing concern among the environmental justice movement that locally unwanted facilities, including landfills, are sited disproportionately in poor and/ or minority neighborhoods. Thus, for regulations affecting siting and management of landfills, wealth and race are equity dimensions of concern. Rules requiring additional safeguards are likely to have a positive impact on neighborhoods hosting landfills. This positive impact should be noted and possibly estimated. For other rules, it is likely that concern for other equity dimensions will naturally arise.

In addition to those equity dimensions that must always be considered for distributional analysis, the other dimensions listed by Exhibit 9 5 should be considered as part of the effort to identify which are relevant In attempting to decide for a particular case whether some of the less obvious dimensions matter, analysts should collect readily accessible information on the characteristics of affected entities and populations Attention should be paid to who is expected to receive the benefits of the regulation as well as who will pay the costs. Negative net benefits or net costs are ultimately what should trigger concern. Financial, health, and other non monetary benefits and costs should be included.

Prioritize relevant equity dimensions. Assuming there is more than one relevant equity dimension, they should be prioritized according to which dimension seems to warrant greatest concern. The level of concern should be determined by how strongly analysts expect a regulation to affect a particular sub population.

169 Chapter 9: Distributional Analyses <IP_ADDRESS> Step 2: Define Distributional Variables for the Equity Dimensions of Concern The next step is to define distributional variables associated with the equity dimensions from Step 1. For example, if one were concerned about a regulation's potential impact on poor neighborhoods, then a classification system for " poor" versus " not poor" neighborhoods should be developed. The established definitions reviewed in Section 9.3.2 above could be used or alternatives developed. Referring again to the landfill example where one of the relevant equity dimensions is race, analysts would need to establish a rule for defining what qualifies as an African American neighborhood or a minority neighborhood. In this case, one could rely on the established definitions presented in Section 9.3.2.

<IP_ADDRESS> Step 3: Measure Equity Consequences The next step is to begin to measure specific economic effects across the distributional variables. In some cases, estimating the equity related effects of a regulation will involve disaggregating existing costs and benefits and tabulating or otherwise accounting for their distribution across the distributional variables defined in Step 2. This process would subject the equity assessment to the same set of assumptions applied to the benefit cost analysis.

In other cases, an equity assessment will examine other impacts, such as increases in unemployment, for identified sub populations. The section above on EIA reviews these other impacts and outlines how to estimate them. Any assumptions, for example those concerning elasticities of demand, used in the EIA, should also be applied to the Equity Assessment unless there are specific reasons for why the assumptions are inappropriate for the identified sub population( s).

A thorough equity assessment, when resources permit, might include a disaggregation of benefits and costs from the BCA as well as an examination of economic impacts for the identified sub population( s). 9.3.8 Data for Conducting Equity Assessments The discussion in the preceding sections suggests several types of data that would be useful for estimating the distribution of impacts of environmental policy options. This section presents some of the data sources for each category of data needed. This is not an exhaustive list of data sources, but is presented to provide initial guidance for this information.

<IP_ADDRESS> Data on Businesses, Governments, and Not For Profit Organizations Two specific Internet sites provide access to some of the most commonly needed data. The first is the SBA's Office of Advocacy website. 75 Data provided on this website include the number of firms, number of establishments, employment, annual payroll, and estimated receipts. The data are available by employment size categories. Data may be viewed and downloaded for the U. S., by state or by metropolitan statistical area. A second website that analysts may find useful is the home page of the U. S. Bureau of the Census, Office of Statistics. 76 Here a variety of relevant data may be accessed including information published in the County Business Patterns and other published data series on population characteristics, including income and age distributions.

<IP_ADDRESS> Demographic Data The U. S. Bureau of the Census collects household data and aggregates them in forms that may be useful for environmental justice matters. Data are available on population distributions by race and household income at the state, county, metropolitan statistical area, or census tract level. An additional, Census website allows one to view a map of any part of the U. S., at the desired scale, that shows data on population distributions by family income or a specified race ( e. g., percent white or percent black). 77 In addition, income data collected by the Internal Revenue Service and 170 Chapter 9: Distributional Analyses 75 The address for this site is http:// www. sba. gov/ ADVO/ stats/ ( accessed 8/ 28/ 2000, internal EPA document).

76 The address for this site is http:// www. census. gov ( accessed 8/ 28/ 2000).

77 The address for this site is http:// www. census. gov/ geo/ www/ tiger/ index. html ( accessed 8/ 28/ 2000). made available in aggregated form on the Internet may be useful for some analyses. 78 <IP_ADDRESS> Other Potentially Useful Data Sources There is a range of other sources that may provide useful data on other factors potentially relevant to equity analyses For example, import and export data are available from the Bureau of the Census publication, The U. S. Merchandise Trade: Exports, General Imports, and Imports for Consumption. The U. S. Department of Commerce may also have data that would be useful for estimating changes in demand as a result of regulatory costs, or the turnover rate for capital equipment in various industrial sectors.

171 Chapter 9: Distributional Analyses 78 The address of the website providing these data is http:// trac. syr. edu/ tracirs/. Note that a user ID and password are necessary to access the data. Registration is available at http:// trac. syr. edu/ register/ registration. html ( accessed 8/ 28/ 2000). 9.4 References Altman, E. I. et al. 1993. Corporate Financial Distress and Bankruptcy, 2nd Ed., New York: John Wiley and Sons.

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174 Chapter 9: Distributional Analyses 10.1 Introduction This chapter provides some general rules for presenting analytical results to policy makers and others interested in environmental policy development. As emphasized several times in these EA Guidelines, especially by the flowchart and discussion of equity assessments in Chapter 9, economic analyses play an important role throughout the policy development process. From the initial, preliminary evaluation of potential options and their consequences through the preparation of the final economic analysis document, economic analysts participate in an interactive process with policy makers. The fundamental goal of this process is to refine the information available for making policy choices.

Hence, this guidance for presenting inputs, analyses, and results applies at all stages of this process, not only for the final document embodying the completed economic analysis. In particular, reporting ranges of uncertainty, critical assumptions, and key unquantified effects to decision makers as they weigh various options and alternatives is as critical as including these in a final economic analysis document at the conclusion of the policy development process.

This chapter first reviews some important features of economic analyses of environmental policies to include or describe in all presentations of analyses and results. Following this is some general guidance on what types of results are most useful to report and useful formats for presenting them. Some brief comments on the relationship between economic analyses and environmental policy making conclude the chapter. All of the recommendations in this chapter are, of course, subject to resource availability and statutory prohibitions. 10.2 Communicating Assumptions and Methods All economic analyses of environmental policies must balance the goals of accuracy and completeness against the costs of data acquisition, detailed modeling, and valuation of consequences. Hence, the results of applied economic analyses inevitably contain uncertainties in particular areas, assumptions in the place of data that are not available, and effects that cannot be quantified or monetized. Analysts should highlight these limitations when presenting the inputs, modeling, and results of economic analyses.

Some general guidelines for communicating these considerations include the following:

Clarity and transparency: Presentations of economic analyses should strive for maximum clarity and transparency of all aspects of the assessments. An analysis whose conclusions can withstand close scrutiny of all of its facets is more likely to provide policy makers with the information they need to develop the best environmental policies. In addition, if a rule is later challenged, the more clear, transparent and thorough analysis is, the easier it is to defend the agency's regulatory approach.

Delineation of data and assumptions: Economic analyses should clearly describe all important data sources and references used, as well as key assumptions and their justifications. All of these inputs should be available to policy makers, and other researchers and policy analysts to the extent that these data are not 175 Chapter 10 Chapter 10: Using Economic Analyses in Decision Making confidential business information or some other form of private data.

Exposition of modeling techniques: Although modeling frameworks for many economic analyses can be complex, it is important to convey at least the basic framework used for modeling a policy's consequences The presentation should highlight the key elements or drivers that dominate the framework and its results.

Ranges for inputs and results: At a minimum, uncertainties should be explored through the use of expected values supplemented by upper and lower bounds for important inputs, assumptions, and results. Sensitivity analyses using these ranges generally enhance the credibility of environmental policy assessments. If key elements for an economic analysis are extremely uncertain, these should be clearly indicated. Analysts should explore how resolving these uncertainties affects the conclusions of the analysis.

Monetizing a policy's effects: To the extent feasible and warranted by their contribution to the results, as many of the effects of a policy as possible should be monetized. This enhances the value of the conclusions to policy makers weighing the many, often disparate consequences of different policy options and alternatives.

Highlighting non monetized and unquantified effects: Economic analyses should present and highlight non? monetized effects when these are important for policy decisions. Reasons why these consequences cannot be valued in monetary terms are important to communicate as well. Unquantified, but potentially significant, consequences of a policy also should be highlighted, especially when these could be important enough in magnitude to affect the broad conclusions of an economic analysis of different policy options and alternatives.

Presenting aggregate and disaggregated results: Finally, the analytic framework should be organized to provide information on the separate economic consequences of important individual programs or component parts identified with the regulation. This can be particularly challenging when the underlying physical science and engineering information needed by the economist to prepare the economic analysis may not be amenable to a simple separation of the individual contributions of pollution control choices ( e. g., installed emission control devices) to changes in risks from pollutants. Further, some economic values used in analyses represent a quantified aggregate value for a set of environmental goods ( e. g., a consumer benefit measure for total improvements to surface water), and it is unknown how to divide the value among the individual attributes that comprise this reported value. Nevertheless, it is valuable to describe disaggregate information on the costs and benefits attributable to individual policies whenever possible, given the frequent necessity to package or link regulatory actions or evaluations together into a single analysis.

10.3 Presenting the Results The results of economic analyses of environmental policies should generally be presented in three clusters:

Results from benefit cost analysis: Estimates of the net social benefits should be presented based on the benefits and costs for which dollar values can be assigned, and a discussion of non monetizable or unquantifiable benefits and costs should be provided;

Results from economic impact analysis and equity assessment: Results of the economic impacts analysis and equity assessments should be reported, including predicted effects on prices, profits, plant closures, employment, and other effects, and findings concerning the distribution of effects for particular groups of concern, such as small entities, governments, and disadvantaged and vulnerable populations.

Results from cost effectiveness analysis: This policy evaluation technique is used when many benefits are not easily monetized and when the statutes or other authorities dictate specific regulatory objectives. Results of these analyses should also be presented when these analyses are conducted.

176 Chapter 10: Decision Making The relative importance of these three clusters will depend upon the policy and statutory context of the decision. Generally, analyses leading to these findings normally should be conducted simultaneously and the results should be presented together as different ways to examine a policy's social consequences. 1 10.3.1 Results from Benefit Cost Analysis The net social benefits of each major alternative is estimated by subtracting the present value of monetary social costs from the present value of monetary social benefits ( as defined in Chapter 6). For this calculation the same baseline must be used in both the benefit and cost analyses Plausible upper and lower bound estimates of net benefits should be provided, the " best" or most likely estimate should be identified and the sensitivity of the net benefits estimate to variations in uncertain parameters should be examined.

Other considerations for presenting and summarizing the results from benefit cost analyses include the following:

Discounting benefits and costs is the preferred method for summarizing benefits and costs that accrue over several years. The conditions for discounting in benefit cost analysis are outlined in Chapter 6. Alternatives to discounting include annualizing costs and benefits, comparing those figures, and accumulating costs and benefits through time to a future year. When both traditional discounting and these alternatives are not feasible or advisable, it is appropriate to display the streams of costs and benefits over time for policy makers to consider.

Present and evaluate non monetized and nonquantified effects. The net social benefit estimate should be carefully evaluated in light of all the effects that have been excluded because they cannot be valued in monetary terms. Thus, immediately following a net benefit calculation, there should be a presentation and evaluation of all benefits and costs that can only be quantified but not valued, as well as all benefits and costs that can be only qualitatively described.

Present the incremental benefits, costs, and net benefits of moving from one regulatory alternative to more stringent ones. This presentation should be done both globally and by sub population. This should include a discussion of incremental changes in quantified and qualitatively described benefits and costs. It is sometimes necessary to evaluate all combinations of options and alternatives when key sources of benefits and costs of a policy are affected by more than one option. In these cases, identifying the combination of alternatives with the highest net social benefits cannot rely only on the incremental benefits and costs of each individual option when added to other pre? existing options.

Discuss other potential costs and benefits that may be by products of the proposed action. These include transfers of the pollutant problem from one exposure medium or program office jurisdiction to another or possible exacerbation of exposures for specific groups ( e. g., sensitive sub populations, maximum exposure groups, or specific types of workers) not captured already in the economic impacts analysis and equity assessment.

10.3.2 Results from Economic Impacts Analysis and Equity Assessment Economic impact analyses and equity assessments focus on distributional outcomes. Therefore, the presentation of these results should focus on disaggregating effects to show impacts separately for the groups and sectors of interest. If costs and/ or benefits vary significantly among the sectors affected by the policy, then both costs and benefits should be shown separately for the different sectors. Presenting results in disaggregated form will provide important information to policy makers that may help them tailor the rule to improve its efficiency and equity outcomes.

177 Chapter 10: Decision Making 1 There are other, more limited types of economic analysis that can inform policy decisions. One example is health health analysis ( sometimes known as risk risk analysis) that assesses the health risks introduced by diverting to regulation resources otherwise available for individual health care. Although limited, health health analysis may be useful in contexts where benefit cost analysis is infeasible. The method has been employed by several researchers ( Viscusi, 1994; Keeney, 1997), but is not without criticism ( Portney and Stavins, 1994). Chapter 10: Decision Making 178 The results of the economic impact analyses should also be reported for important sectors within the affected community   identifying specific segments of industries, regions of the country, or types of firms that may experience significant impacts or plant closures and losses in employment.

Reporting the results of equity assessments may include the distribution of benefits, costs, or both for specific subpopulations including those highlighted in the various mandates. These include minorities, low income populations small businesses, governments, and non profits, and sensitive and vulnerable populations ( including children). Where these mandates specify requirements that depend on the outcomes of the distributional analyses ( such as the Regulatory Flexibility Act), the presentation of the results should conform to the criteria specified by the mandate.

10.3.3 Results from Cost Effectiveness Analysis When many benefits cannot easily be monetized, or when statutes or other authorities set forth a specific policy objective, economic analyses should present the results of a cost effectiveness analysis. This will provide useful information to policy makers and it conforms to the general principle of minimizing the cost of achieving particular policy goals.

The cost effectiveness of a policy option is calculated by dividing the annualized cost of the option by non monetary benefit measures. Such natural units measures range from the amount of the reduction in pollution measured in physical terms, to the ultimate improvements in human health or the environment measured in terms of specific effects and damages avoided.

Cost effectiveness analysis does not necessarily reveal what level of control is reasonable, nor can it be used to directly compare situations with different benefit streams. Moreover, other criteria, such as statutory requirements, enforcement problems, technological feasibility, or quantity and location of total emissions abated, may preclude selecting the least cost solution in a regulatory decision. However, where not prohibited by statute, cost effectiveness analysis can indicate which control measures or policies are inferior options. 10.4 Use of Economic Analyses in Policy Choices The primary purpose of conducting economic analysis is to provide policy makers and others with detailed information on wide variety of consequences of environmental policies. One important element these analyses have traditionally provided to the policy making process is estimates of social benefits and costs   the economic efficiency of a policy. Hence, the EA Guidelines reflect updated information regarding procedures for calculating benefits and costs, monetizing benefits estimates, and selecting particular inputs and assumptions.

Determining which regulatory options are best even on the restrictive terms of economic efficiency, however, often is made difficult by uncertainties in data and by the presence of benefits and costs that can be quantified but not monetized or that can only be qualitatively assessed. Thus, even if the criterion of economic efficiency were the sole guide to policy decisions, social benefit and cost estimates alone would not be sufficient to define the best policies.

A large number of social goals and statutory and judicial mandates motivate and shape environmental policy. For this and other reasons, the EA Guidelines contain information concerning procedures for conducting analyses of other consequences of environmental policies, such as economic impacts and equity effects. This is consistent with the fact that economic efficiency is not the sole criterion for developing good public policies.

Even the most comprehensive economic analyses are but part of a larger policy development process, one in which no individual analytical feature or empirical finding dominates The role of economic analysis is to organize information and comprehensively assess the economic consequences of alternative actions   benefits, costs, economic impacts, and equity effects   and the tradeoffs among them. These results serve as important inputs for this broader policy making process along with other analyses and considerations. 10.5 References Jorgenson, D. W. 1997. Welfare, Volume 2: Measuring Social Welfare. Cambridge, MA: MIT Press.

Keeney, R. L. 1997. Estimating Fatalities Induced by the Economic Costs of Regulations. Journal of Risk and Uncertainty, 14( 1): 5 23.

Portney, P. R. and R. N. Stavins. 1994. Regulatory Review of Environmental Policy: The Potential Role of Health Health Analysis. Journal of Risk and Uncertainty, 8( 1): 11 122.

Viscusi, W. K. 1994. Risk Risk Analysis. Journal of Risk and Uncertainty, 8( 1): 5 17.

179 Chapter 10: Decision Making 180 Chapter 10: Decision Making Appendix A 181 Appendix A: An SAB Report on the EPA Guidelines for Preparing Economic Analysis 182 Appendix A United States Science Advisory EPA SAB EEAC 99 020 Environmental Board ( 1400) September 1999 Protection Agency Washington DC www. epa. gov/ sab AN SAB REPORT ON THE EPA GUIDELINES FOR PREPARING ECONOMIC ANALYSES A Review by the Environmental Economics Advisory Committee UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D. C. 20460 September 30, 1999 OFFICE OF THE ADMINISTRATOR SCIENCE ADVISORY BOARD EPA SAB EEAC 99 020 The Honorable Carol Browner Administrator United States Environmental Protection Agency 401 M Street, SW Washington, DC 20460 Subject: An SAB Report on the EPA Guidelines for Preparing Economic Analyses Dear Ms. Browner:

This Report on the Environmental Protection Agency's ( EPA's) revised Guidelines for Preparing Economic Analyses was developed by the Environmental Economics Advisory Committee ( EEAC) of the Science Advisory Board ( SAB) in response to a charge received from the Deputy Administrator on August 4, 1998 ( attached). The review was carried out in a series of meetings with the Agency's Office of Policy, beginning in August 1998, and ending with a telephone conference on July 27, 1999.

As is described in detail in the full report, the Committee's general conclusion is that the Guidelines succeed in reflecting methods and practices that enjoy widespread acceptance in the environmental economics profession. Although some concerns remain about particular parts of the Guidelines, our overall assessment is that the Guidelines are excellent. It is our hope that the Guidelines demonstrate EPA's commitment to credible and consistent economic analyses in support of the policy process.

The best analytical tools of environmental economics are constantly changing, as experience with applications of existing tools and as new theoretical and empirical techniques appear in the scholarly literature. As a result, it is important that EPA carry out new reviews of the Guidelines every two to three years to reflect these developments in environmental economics. The Committee looks forward to working with EPA to strengthen this document in the years ahead. 2 The iterative process that the EEAC employed with EPA for this review represents a departure from the end of pipe assessments that are more typical of SAB practice. It was consistent, however, with the Mission Statement of the EEAC prepared by the Deputy Administrator, and was consistent with the SAB Executive Committee's previously expressed aims. Although this approach will not necessarily be appropriate for all SAB reviews, it may be a useful model in selected cases. Therefore, we briefly describe the procedure in the full report.

Finally, Dr. Albert McGartland and his staff in the Office of Economy and Environment should be commended for the professionalism they brought to this process. The excellence of the revised Guidelines is testimony to the dedication of the talented team of Agency economists and analysts who worked on this project. It was, as always, a pleasure for the EEAC to interact with Dr. McGartland and his staff. We anticipate that you and everyone involved will be proud of the quality of the new Guidelines for Preparing Economic Analyses, and we look forward to your questions and your response to our Report.

Sincerely,

/ s/ / s/ Dr. Joan M. Daisey, Chair Dr. Robert N. Stavins Science Advisory Board Environmental Economics Advisory Committee Science Advisory Board i NOTICE This report has been written as part of the activities of the Science Advisory Board, a public advisory group providing extramural scientific information and advice to the Administrator and other officials of the Environmental Protection Agency. The Board is structured to provide balanced, expert assessment of scientific matters related to problems facing the Agency. This report has not been reviewed for approval by the Agency and, hence, the contents of this report do not necessarily represent the views and policies of the Environmental Protection Agency, nor of other agencies in the Executive Branch of the Federal government, nor does mention of trade names or commercial products constitute a recommendation for use.

Distribution and Availability: This Science Advisory Board report is provided to the EPA Administrator, senior Agency management, appropriate program staff, interested members of the public, and is posted on the SAB website ( www. epa. gov/ sab). Information on its availability is also provided in the SAB's monthly newsletter ( Happenings at the Science Advisory Board). Additional copies and further information are available from the SAB staff. ii U. S. Environmental Protection Agency Science Advisory Board Environmental Economics Advisory Committee Panel for Review of the Economic Analysis Guidelines CHAIRMAN Dr. Robert N. Stavins, Albert Pratt Professor of Business and Government, John F. Kennedy School of Government, Harvard University, Cambridge, MA MEMBERS Dr. Nancy E. Bockstael, Professor, Department of Agricultural & Resource Economics, University of Maryland, College Park, MD Dr. Dallas Burtraw, Fellow, Resources for the Future, Washington, DC Dr. Trudy Ann Cameron, Professor, Department of Economics, University of California, Los Angeles, CA Dr. Maureen L. Cropper, Senior Economist, The World Bank, Washington, DC Dr. Herman E. Daly, Senior Research Scholar, School of Public Affairs, University of Maryland, College Park, MD Dr. A. Myrick Freeman, Professor, Department of Economics, Bowdoin College, Brunswick, ME Dr. Dale W. Jorgenson, Frederic Eaton Abbe Professor of Economics, Department of Economics, and JFK School of Government, Harvard University, Cambridge, MA Dr. Paul L. Joskow, Elizabeth and James Killian Professor of Economics, Massachusetts Institute of Technology, Cambridge, MA Dr. Catherine Kling, Professor, Department of Economics, Iowa State University, Ames, IA Dr. Richard L. Revesz, Professor of Law, New York University School of Law, New York, NY Dr. Jason F. Shogren, Stroock Distinguished Professor of Law and Economics, Department of Economics and Finance; University of Wyoming, Laramie, WY.

Dr. Hilary A. Sigman, Assistant Professor, Department of Economics, Rutgers University, New Brunswick, NJ. iii SCIENCE ADVISORY BOARD STAFF Mr. Thomas O. Miller, Designated Federal Officer, Science Advisory Board ( 1400), U. S. Environmental Protection Agency, Washington, DC Mrs. Dorothy M. Clark, Management Assistant, Science Advisory Board ( 1400), U. S. Environmental Protection Agency, Washington, DC iv TABLE OF CONTENTS 1. Executive Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Specific Responses to Charge Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1. Discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2. Quantifying and Valuing Human Fatalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.3. Certainty Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.4. Valuation Approaches for Human Morbidity and Improved Ecological Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.5. Economic Impact and Net Social Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.6. Computable General Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.7. Economic Impacts to the Private Sector, Public Sector, and Households . . . . . . . . 7 3.8. Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.9. Altruism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R 1 Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A 1 1 1. EXECUTIVE SUMMARY AND CONCLUSIONS The Environmental Economics Advisory Committee ( EEAC) of the EPA Science Advisory Board ( SAB) reviewed the Agency's draft Guidelines for Preparing Economic Analyses ( EPA, 1999) during a series of meetings extending from August 1998 to July 1999, in response to a request received from EPA to perform a full and complete review. This is EPA's first major overhaul of these guidelines in more than a decade. Because the Guidelines are to be used by all parts of the Agency for carrying out regulatory analyses, it is important that they reflect " methods and practices that enjoy widespread acceptance in the environmental economics profession," as specified in the charge to the EEAC received from the EPA Deputy Administrator. The draft Guidelines have been revised and improved as a result of the interactions between the Committee and EPA staff in several public meetings over the past year. The EEAC's general conclusion is that the Guidelines reflect best methods and practices that enjoy widespread acceptance in the environmental economics profession, notwithstanding the several EEAC concerns that remain about particular parts of the Guidelines. The Committee hopes that the Guidelines demonstrate EPA's commitment to credible and consistent economic analysis in support of the policy process.

The fundamental ingredients of an economic analysis of a proposed or existing environmental policy or program are well covered in the Guidelines, and key conceptual, analytic, and empirical issues are highlighted. The Guidelines acknowledge the practical limitations facing EPA analysts in terms of time, resources, and expertise, and hence provide flexibility to analysts. The Guidelines are just that   guidelines for analysis, not a rigid ( or simplistic) cook book.

Economics, like any scholarly discipline, is constantly changing. Environmental economics, a relatively young branch of the discipline, has experienced particularly rapid growth. New areas of the literature continue to emerge, and existing areas change and expand. Hence, despite the Committee's generally positive assessment of the revised Guidelines, we urge EPA to carry out new reviews every two to three years. The time investments that will be required for such periodic reviews   both on the part of EPA staff and on the part of the EEAC   will be much less than was required for this first revision in ten years.

The interactive process that the EEAC employed with EPA for this review was something of a departure from the end of pipe assessments that are more typical of SAB practice. It was consistent, however, with the Mission Statement of the EEAC prepared by the Deputy Administrator, and, moreover, was consistent with the SAB Executive Committee's previously expressed interest in early involvement with the Agency on important issues. Although this approach will not necessarily be appropriate for all SAB reviews, it may be a useful model in selected cases. Therefore, we briefly describe the procedure here.

During the past twelve months, the EEAC held three one day meetings in Washington, D. C., devoted primarily to our review of EPA's revised Guidelines for Preparing Economic 2 Analyses, plus a fourth meeting via teleconference. Each of the meetings was attended by Dr. Albert McGartland, Director of the Office of Economy and Environment, and many members of his staff. Intensive and extensive substantive discussions at these meetings provided an effective forum in which EEAC members and the Committee as a whole could pose questions, describe concerns, and express views, and for Agency representatives to explain the thinking behind their drafts. Each of the first three meetings led to a subsequently revised draft, which in every case addressed the general and specific concerns expressed by the EEAC at the previous meeting, and thereby represented a significantly improved draft document. Dr. McGartland and his staff should be commended for the openness, professionalism, and lack of defensiveness which they brought to this process.

2. INTRODUCTION The Environmental Economics Advisory Committee was requested to perform a full and complete review of the Guidelines for Preparing Economic Analyses ( EAGs or the Guidelines). EPA asked for comments on all aspects of the guidance document and written documentation, when applicable, on recommendations from the Committee for alternative methodologies, assumptions and data sources to improve the presentation of issues addressed in the guidance document.

The stated intent of the Guidelines is to:

a) Represent EPA policy on preparing economic analyses under a variety of authorizing statutes and administrative requirements, each of which can influence the conduct and use of analyses by different EPA offices;

b) Demonstrate EPA's commitment to credible/ consistent economic analyses in support of the policy making process;

c) Emphasize the need for analytic efforts commensurate with the value of that information in the EPA policy making process;

d) Reflect mainstream economic science/ methods that are well demonstrated and relatively straightforward to apply to particular environmental issues;

e) Cover a number of principles and practices that virtually all economic analyses should follow and clarify, for a number of identified analytic issues, the process that analysts are to follow as they organize and conduct the analysis;

f) Account for some of the practical limitations on time and resources that EPA analysts must contend with when preparing economic analyses; and 3 g) Provide some flexibility to analysts to permit them to " customize" analyses to conform to administrative and legal procedures.

The document embodying the Guidelines is not intended to be a text on the theory and methods of applying economic analysis to EPA regulations and policies nor do they preclude new or path breaking forms of analysis. EPA intends to regularly and frequently review and revise parts of the Guidelines to reflect and report on significant changes in the literature used to support EPA analyses, as well as changes in administrative and legal requirements that affect the conduct of economics at the EPA.

3. SPECIFIC RESPONSES TO CHARGE QUESTIONS The Committee's specific comments on the Guidelines are organized into nine sections, the first eight of which address, respectively, questions posed in EPA's charge to the Committee. The last section includes the Committee's advice on the topic of altruistic benefits.

3.1 Discounting Charge Question 1. Does the published economic theory and empirical literature support the statements in the guidance document on the treatment of discounting benefits and costs in the following circumstances: a) private and public costs for use in an economic impact analysis, b) social benefits and costs in an intragenerational context; c) social benefits and costs in an intergenerational context; and d) social benefit and cost information that is reported in nonmonetary terms?

The guidance document is consistent with published theoretical and empirical analysis on the use of discounting for ( a) private and public costs in an economic impact analysis, and for ( d) social benefit and cost information expressed in non monetary terms. The current literature also supports the discussion of issue ( b), discounting social benefits and costs in an intragenerational context. In this context, the document should encourage the use of a discount rate in the middle of its recommended range, in addition to the values currently mentioned, to reflect common practice.

The proper application of discounting in an intergenerational context ( issue ( c)) remains controversial in the published literature. The guidance document lays out the positions in this debate clearly. Reflecting the disagreement within the economics profession, there is diversity of opinion within the EEAC on this issue. Some members believe that the guidance document is more critical than the published literature of the view that intergenerational discounting should not differ from other discounting, while other members support the document's current emphasis. The final quantitative recommendations for discount rate values in the intergenerational context are broad enough to be uncontroversial. 4 3.2 Quantifying and Valuing Human Fatalities Charge Question 2. Does the published economic theory and empirical literature support the statements in the guidance document on quantifying and valuing the social benefits of reducing fatal human health risks?

The guidance document recommends that the mean value of a statistical life ( VSL) based on 26 published studies be used as the default value in Agency analyses. It urges that a qualitative discussion of the appropriateness of this estimate to the population and risks analyzed accompany the use of the central tendency estimate.

The EEAC encourages the use of value of a statistical life ( VSL) estimates in benefit valuation and in providing guidance for policy. Moreover, it believes that the general magnitude of the benefit value suggested in the Guidelines is in a reasonable range for broad population groups. However, these estimates could be refined, particularly when certain segments of the population are affected, such as children or persons over the age of 65.

One refinement that EPA could undertake now is to narrow the set of VSL studies to the most reliable estimates for the U. S. population, rather than taking the mean value from a set of studies of varying quality and with different statistical controls and with populations from various countries.

Hedonic studies based on market tradeoffs give values reflected in actual market decisions. Such studies have focused primarily on the labor market, but some have considered implicit values of life reflected in car safety and in housing price responses to hazardous wastes and pollution. Contingent valuation studies can also prove useful with respect to variations due to age, health status, and other factors not readily estimated using market data.

Care should be taken to avoid conveying the impression that $ 5.8 million ( in 1997 dollars) is always and everywhere the correct figure to use for the value of a statistical life. Footnote 29 in Section <IP_ADDRESS> attaches some important caveats to the $ 5.8 million figure cited in the document. These caveats should be placed more prominently, so that casual readers do not come away with the notion that $ 5.8 million is " the" value of a statistical life. It is, of course, simply the central tendency of a number of estimates of the VSL for some rather narrowly defined subpopulations. The individual study values from which this number is derived range from $ 0.7 million to $ 16.3 million, indicating considerable heterogeneity across different contexts.

In some cases, it may be desirable to use a VSL estimate specific to particular populations. The most prominent possible variation is with respect to age, but characteristics such as gender and income could also be influential. How and whether these differences should affect policy benefit assessment is more controversial. However, as a first step, EPA should show the age distribution of the lives saved, or the quantity of life at risk. In addition, when policies do not affect the entire population equally, a sensitivity analysis can show both the cost per life saved and 5 the cost per discounted life year. Policymakers can then be better able to assess the efficacy of the policy.

Clearly, any re evaluation of the literature will take time. In the interim, if the mean VSL cited in the Guidelines is to be used, the limitations of the estimate should be described. In cases where the estimate is to be applied to populations whose age differs significantly from the average age of the populations in the 26 studies, a quantitative sensitivity analysis should be performed, such as that used in The Benefits and Costs of the Clean Air Act, 1970 1990 ( EPA, 1997).

3.3 Certainty Equivalents Charge Question 3. Does the published economic theory and empirical literature support the statements in the guidance document on the treatment of certainty equivalents in the assessment of social benefits and costs of environmental policies?

The discussion of principles for uncertainty analysis in the Guidelines highlights the important distinction between the analyst's uncertainty and individuals' uncertainty about future outcomes. The latter relates to assessing the effects of environmental changes on individuals' welfare under uncertainty. In this regard, the Guidelines are consistent with mainstream economic theory and the empirical literature in that they recognize the importance of taking account of individual attitudes towards risk and suggest certainty equivalents as one way of incorporating risk aversion into the assessment of social benefits and costs of environmental policies. However, the Guidelines recognize that information on risk attitudes may be difficult to obtain. The Guidelines also recognize that experts' and lay individuals' risk perceptions may differ. Because the latter affect individuals' behavior, it is important for the analyst to consider both types of risk assessments. The Guidelines are also consistent with current literature in recognizing the important role information plays in welfare evaluation in an uncertain world.

3.4 Valuation Approaches for Human Morbidity and Improved Ecological Conditions Charge Question 4. Does the published economic theory and empirical literature support the statements in the guidance document on the merits and limitations of different valuation approaches to the measurement of social benefits from reductions in human morbidity risks and improvements in ecological conditions attributable to environmental policies?

Overall, Chapter 7 does a very good job of explaining the state of the art in the measurement of environmental benefits. This literature continues to evolve, and so frequent updates are likely to be necessary for this chapter. All currently relevant methods appear to be represented and sufficient caveats have generally been offered. Four concerns, however, should be highlighted. 6 First, care should be taken to avoid creating the impression that the benefits or costs associated with a proposed regulation are being misrepresented. Socially efficient policy making is not well served by exaggeration or understatement of the benefits or costs of alternative policy choices. When benefits are uncertain, expected values should be emphasized. However, an assessment should be made concerning the sensitivity of the policy conclusions to the full range of possible benefits estimates.

Second, the claim that averting expenditures can reliably be used as a lower bound on environmental benefits is too strong. The draft overstates the idea that averting behavior is a generic lower bound on ex ante economic value for morbidity and mortality. The theoretical literature reveals that averting behavior need not be a lower bound on value when both private and collective risk reduction strategies are considered. Private actions to reduce risk mixed with collective actions yield ambiguous results. Further discussion is available in Shogren and Crocker ( 1999).

Third, the treatment of altruistic benefits should be clearer. Circumstances wherein altruistic benefits should, and should not, be included as a separate component of total social benefits should be highlighted. It is important to avoid double counting of benefits and costs in assessing proposed policies. This issue is taken up, below, in Section 3.9.

3.5 Economic Impact and Net Social Benefits Charge Question 5. Does the published economic theory and empirical literature support the statements in the guidance document on the relationships and distinctions between the measurement of economic impacts and net social benefits?

The guidance document makes it clear that in order to make informed policy judgements it is important to study a variety of consequences of environmental policies, including impacts on particular industries, regions, and demographic groups ( as well as other impacts whose analyses are mandated by statute) to complement conventional benefit cost analysis. The relationship between conventional benefit cost analysis and the analysis of the broad and diverse distributional impacts of environmental policies are discussed clearly and the relationships between these complementary policy analyses is consistent with the published economics literature.

3.6 Computable General Equilibrium Models Charge Question 6. Does the guidance document contain an objective and reasonable presentation on the published economic theory, empirical literature, and analytic tools associated with computable general equilibrium ( CGE) models, and description of their relevance for economic analyses performed by the EPA?

The use of general equilibrium analysis, both as a conceptual and a numerical tool, is gaining expanded use in economics. The Guidelines provide a useful discussion of the current 7 uses and limitations of computable general equilibrium ( CGE) models in Chapter 8. This is a rapidly developing area in economics, and so for the Guidelines to remain relevant, the Agency will need to commit to ongoing review of new tools and applications that broaden the applicability of CGE models, and that provide new intellectual insights that can guide benefit cost analysis.

One area where new insights are proliferating is the interaction of environmental regulations with pre existing economic distortions ( that is, the deadweight loss due to existing taxes). Of particular relevance in this regard is the role of pre existing taxes. Recent literature in economics indicates that the costs and benefits of regulations can be substantially different than indicated by partial equilibrium analysis. In addition, the relative cost effectiveness of different policy instruments ( technology standards, tradable permits, etc.) can be affected by these interactions.

The Guidelines address the issue of interactions of regulations with pre existing economic distortions in a paragraph near the end of Chapter 5, under the label " Emerging Cross Cutting Issues." This is appropriate because the issue is both rapidly emerging and broadly cross cutting. But the issue is not mentioned in Chapter 8 (" Analyzing Social Costs"), where general equilibrium analysis is discussed in detail. The exclusion of the issue from Chapter 8 is unfortunate: ( a) because of the potential magnitude associated with " interactions" and ( b) because general equilibrium tools provide the method for considering these " interactions." Hence, one of the most compelling reasons to use CGE models is to develop an understanding of, and to estimate the magnitude of, this potential influence. While in most regards, the discussion of CGE models is objective and reasonable, the failure to integrate a discussion of tax interactions undermines the presentation.

3.7 Economic Impacts to the Private Sector, Public Sector, and Households Charge Question 7. Does the guidance document contain an objective and reasonable presentation on the measurement of economic impacts, including approaches suitable to estimate impacts of environmental regulations on the private sector, public sector and households? This includes, for example, the measurement of changes in market prices, profits, facility closure and bankruptcy rates, employment, market structure, innovation and economic growth, regional economies, and foreign trade.

The guidance document provides an objective and reasonable presentation of these topics. 3.8 Equity Charge Question 8. Does the guidance document contain a reasonable presentation and set of recommendations on the selection of economic variables and data sources used to measure the equity dimensions identified as potentially relevant to environmental policy analysis? 8 Conventional, primary dictionary definitions of equity refer to concepts such as fairness, impartiality, and justice. Thus, equity is typically treated as a normative concept in everyday parlance. The Guidelines, in keeping with mainstream practice in economics, however, seek merely to supply statistical measures of the distribution of costs and benefits, leaving it to citizens to judge whether the described distributions are fair or equitable. In this way, the document provides positive information that is relevant to making normative judgments, but offers no explicit discussion of norms. At the same time, however, since market prices and willingness topay criteria are employed in the Guidelines, and because they are based on the existing distributions of income and wealth, those existing distributions are implicitly accorded normative status. Some may object to taking the existing distribution as the norm for equity assessments, especially as that distribution has become more concentrated in recent decades. This issue is noted, but in accord with mainstream practice, is not considered further in the document.

The Guidelines contain a reasonable presentation and set of recommendations on the selection of economic variables and data sources that can be used to measure the distributional consequences of environmental policies, both on the benefit side and the cost side.

3.9 Altruism The Guidelines would benefit from a discussion of when it is appropriate to include altruistic benefits in a benefit cost analysis. Economic theory is quite clear on this point ( Jones Lee, 1991). If I care about my neighbor and respect his preferences, and if my neighbor would have to pay for the program or project being analyzed, then altruistic benefits should not be counted in a benefit cost analysis. The intuition behind this result is that, if I respect my neighbor's preferences, although I value the benefits he will receive from the project, I also care about the costs it will impose on him. It is, therefore, inappropriate to add the value I attach to his benefits without considering the cost implications of doing this. Comparing individual benefits and costs in this case is the appropriate decision rule.

Altruistic benefits may be counted either when my altruism toward my neighbor is paternalistic, or when I will in fact bear the costs of the project but he will not. In the first case ( paternalistic altruism), I care about the benefits my neighbor will enjoy, e. g., from a health or safety project, but not about the costs the project will impose on him. An example of the second case would be a project whose costs are borne entirely by the current generation; i. e., the project imposes no costs on future generations. In this case, altruism toward future generations by the current generation could legitimately be counted as a benefit. R 1 REFERENCES Jones Lee, M. W. ( 1991). " Altruism and the Value of Other People's Safety." Journal of Risk and Uncertainty, 4, pp. 213 219.

Shogren, Jason F., and Thomas D. Crocker ( 1999). " Risk and Its Consequences," Journal of Environmental Economics and Management, 37, 44 51.

U. S. Environmental Protection Agency ( 1997). The Benefits and Costs of the Clean Air Act, 1970 to 1990. Submitted to Congress pursuant to Section 812, Clean Air Act Amendments of 1990. Washington: U. S. EPA Office of Administration and Resources Management/ Office of Policy, Planning, and Evaluation. October, 1997.