2016 Conference - Session 1

Session 1 - Thursday, March 17, 9:00 - 10:30am

A.1: EPA Implementation of Water Pollution Controls and the Role of Cost-Effectiveness

Chair: Sofie Miller, GW Regulatory Studies Center

Discussant: Art Fraas, Resources for the Future

Presentations:

1.     Three Decades of EPA Implementation of Technology-Based Water Pollution Controls Under the Clean Water Act (1981- 2015) and the Role of Cost-Effectiveness, Kevin Bromberg,* US Small Business Administration

The Clean Water Act requires all significant industrial dischargers to adopt a variety of technology- based controls, considering both the costs and effluent reductions. These provisions were intended to achieve “reasonable further progress toward the national goal of eliminating the discharge of all pollutant [and] require the elimination of discharges if… such elimination is technologically and economically feasible.” The Congress specifically required the adoption of best practicable technology (BPT) and best available technology economically achievable (BAT) for existing industrial plants. The Regulatory Flexibility Act also requires consideration of alternatives BAT and BPT standards, and the cost-effectiveness of these alternatives. Analyses under the RFA nicely fit within the structure of the relevant Clean Water Act provisions. EPA developed a metric called “toxic weighted pound equivalents” in 1981, which assigns a toxicity weight for each controlled toxic pollutant. This metric has been used by EPA to measure the cost-effectiveness of the different levels of treatment technologies in different ELGs. The cost/TWPE has universally been held below $100/TWPE for all but a very few industrial ELGs over the history of ELGs. Several have commented on the implementation of this effluent guidelines programs and the role of cost-effectiveness. This study will review those commentaries, and will focus on the role of cost-effectiveness in the EPA determinations for the final rules, including the recent aberrant Steam Electric ELG. The study will also address the common pattern of EPA policy makers to exaggerate the benefits in the proposal, and then reduce those benefits in the final rule, and correspondingly, reduce the stringency of the final rule. As a participant in the EO Executive Order review process, I have observed about one dozen ELG rulemakings, giving me a unique perspective on this topic.

2.     Evaluation of EPA’s Calculation of Cost-Effectiveness of Water Pollution Controls – Is There an Incentive to Inflate Pollution Benefits? Jack Waggener,* AECOM

Since 1980, Jack Waggener, PE, has been involved in critiquing the cost-effectiveness of over 30 EPA Industrial Effluent Limitation Guidelines (ELG). As a result of this work, several ELGs have been significantly altered between the proposal and final rules. The presentation will provide examples of this work, along with highlights of the issues. The Clean Water Act required the adoption of best practicable technology (BPT) and best available technology economically achievable (BAT) for existing industrial plants. To help accomplish this, EPA evaluates the cost effectiveness of different treatment technological alternatives when developing the ELGs. In 1981, EPA established a procedure to determine the effectiveness of pollutant removal by different technologies. All the different pollutants in the waste stream are assigned relative toxicity weights to develop the total “toxic weighted pound equivalents” (TWPE) that are projected to be removed by various treatment technologies. EPA estimates the annualized cost of the treatment technologies and calculates the cost per TWPE. Almost every industrial ELG that has been promulgated has had a cost effectiveness below $100/TWPE; only one was as high as $400/TWPE for direct dischargers. This level has become a benchmark as to which technology option has been selected by EPA. We often have found that EPA very significantly over estimates the TWPE and highly underestimates the cost, therefore artificially lowering the cost per TWPE. As a result, EPA has proposed treatment options that are very costly and that have a severe impact on industry. Frequently, this is corrected in the final rule, such as in the ELGs of Metal Products and Machinery, Transportation Equipment Cleaning, and others. However, the November 2015 Steam Electric Power ELG unfortunately failed to make the needed corrections.

3.     Case Law Regarding Cost-Benefit Analyses under the Clean Water Act, Jeffrey Longsworth,* Barnes and Thornburg LLP

The Clean Water Act requires all significant industrial dischargers to adopt a variety of technology-based controls, considering both the costs and effluent reductions. These provisions were intended to achieve “reasonable further progress toward the national goal of eliminating the discharge of all pollutant [and] require the elimination of discharges if… such elimination is technologically and economically feasible.” The Congress specifically required the adoption of best practicable technology (BPT) and best available technology economically achievable (BAT) for existing industrial plants. The extent to which EPA must use economic and cost considerations when establishing the different Clean Water Act technology standards to control effluent, varies. Sometimes Congress explicitly directed EPA to consider cost; sometimes Congress provided that cost was a factor EPA may consider; sometimes Congress said nothing at all about cost. In other words, while the Clean Water Act does not specifically define the various technology standards, it generally (but not always) enumerates specific factors EPA must consider in setting effluent limitation guidelines—and sometimes these include cost. In practice, EPA has taken different approaches to cost-benefit analyses under different mandates and technology standards, depending on the rulemaking at issue. EPA’s cost-benefit approaches have been challenged in various court cases, both in terms of being too limited in the Agency’s approach, as well as circumstances in which the Agency has reached arguably too far afield in assessing either costs or benefits. The presentation will include analysis of the important federal cases that have opined on EPA’s statutory obligations to address, and how it addresses, cost-benefit analyses in water pollution cases, including application of the section 304(b) and 316(b) criteria. In 2009, the Supreme Court addressed the issue directly in Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208. Focus on that case will set the foundation for additional legal analyses.

B.1: Applying Benefit-Cost Analysis to Risk Regulations

Chair: Stefanie Haeffele-Balch, Mercatus Center at George Mason University

Presentations:

1.     Evaluating Risk-Based Regulations, Laura Stanley,* George Mason University

This paper explores whether the “scientification” of regulatory analysis—the persistent aim for increased quantification of the benefits and costs of regulation—leads to better regulatory outcomes. We argue that the gains from relying on these empirical methods to value risk-based regulations are minimal, due to the limitations of assessing the benefits and costs of risk-based regulations. Regulators face practical and theoretical limitations when assessing the degree to which a regulatory intervention will reduce the likelihood of, and mitigate the losses associated with, the negative health outcomes they aim to alter. We examine these limitations and use case studies to further highlight these constraints. We argue that regulators stand to see the most gains from conducting simple analyses early in the regulatory process, rather than conducting complex analyses for regulatory review.

2.     Risk-Benefit-Cost Analysis of Interventions with Highly Uncertain Consequences, Tony Cox,* Cox Associates

Suppose that a costly proposed regulation is being evaluated for potential adoption, but most of its benefits are projected to occur in the future. How these benefits will be evaluated in the future is uncertain, perhaps because of uncertainties about: (a) consequences that the regulation will cause (e.g., reductions that it will actually achieve in real and perceived risks to health, safety, or the environment); (b) future preferences and values for recipients of these benefits; (c) actions of future regulators; (d) the future state of the world (e.g., sizes of future populations affected by the regulation), or (e) a confluence of such uncertainties. If uncertainties about future benefits are large enough so that the proposed regulation may be either desirable (benefits exceed costs) or undesirable (costs exceed benefits), depending on how present uncertainties are resolved, then how should it be evaluated? We argue that no single-number summary (e.g., risk-adjusted net present value or certainty-equivalent for net benefits) provides enough information to improve decisions if risk attitudes of the BCA recipients are unknown. Classical BCA results such as the Arrow-Lind theorem do not hold in such situations. Probabilistic risk assessment provides sufficient information to improve the decisions of a single decision-maker (e.g., a benevolent dictator) but leaves crucial collective choice issues (and intergenerational justice issues) unresolved. We advocate adaptive decision processes that assign value to future information and flexibility and that recognize the opportunity costs of irreversible commitments. These adaptive processes will often provide recommendations that are Pareto-superior to any one-shot decision procedure based on current assessments of probable future consequences. We illustrate these conclusions in the practical context of current and proposed air pollution regulations.

3.     On Objective Risk, Dima Yazji Shamoun,* Mercatus Center at George Mason University, and Edward J. Calabrese

Objectivity in the science of risk plays a monumental role in in the projection of the benefits from health and safety regulations, which themselves constitute the majority of the total reported benefits of all federal regulations. Claims concerning the accuracy of regulatory risk assessments have been untestable so far in that they focus on whether the risk assessment over- or under-estimates the risk of exposure to certain hazards; yet, such claims imply that a true level of risk is known. We propose to move the debate from the realm of the untestable to the realm of the testable through study of the process objectivity of the science of risk. Consistency in adhering to a process that is meant to produce objectivity should yield objective results. In this paper, we consolidate the existing body of guidelines and recommendations produced by the federal government and scientific bodies on sound risk assessment practices. We propose that, in order to test the process objectivity of the science of risk as applied by the regulatory agencies, a third party chosen from outside the agencies themselves should conduct a systematic assessment of major regulatory risk assessments, according to the consolidated principles outlined in this paper. We show that our proposed process is testable, objective, and, if adhered to consistently, has the potential of shedding light on the accuracy of the benefits calculus of major federal regulations.

4.     Historical Trends in Regulatory Impact Analysis at the United States Department of Agriculture, Linda Abbott,* and Robert Johansson, U.S. Department of Agriculture

The Office of the Chief Economist and the Office of Risk Assessment and Cost-Benefit Analysis were created in 1994 to review the economic impact of all significant regulations proposed by the Department of Agriculture and to ensure that the regulatory impact analysis includes a risk assessment for major rules regulating issues of human health, human safety or the environment. This paper examines trends in the use of risk assessment by Departmental agencies to support regulatory actions and the incorporation of risk relevant information into the benefit cost assessments for regulations concerning human health, human safety or the environment. Trends in the composition of agencies putting regulatory impact analysis into Departmental and OMB review are also discussed, as well as changes in the types of regulatory actions promulgated by the agencies. Comparisons are made between the use of risk assessments in the benefit cost analyses conducted for regulatory actions classified as economically significant, significant or economically significant and major under the Federal Crop Insurance and Department of Agriculture Reorganization Act of 1994.

C.1: Decision Rules for Benefit-Cost Analysis

Chair: Ronald Bird, US Chamber of Commerce

Discussant: Jim Laity, Office of Management and Budget

Presentations:

1.     Why the Net Present Value Criteria is Superior to the Potential Compensation Test for Benefit-Cost Analysis, Richard Zerbe,* University of Washington

This paper explains why the Net Present Value rule (NPV), as defined here, is superior to the Potential Compensation Test (PCT). The PCT is unnecessary, unreliable and morally suspect as a justification for project acceptance using benefit cost analysis. It relies on a hypothetical, rather than actual, compensation and is subject to Scitovsky reversals. The NPV rule, by contrast, does not suffer from these defects and is consistent with standard welfare criteria. The NPV rule accepts projects for which sum of the compensating variations is positive. It allows the considerations of the willingness to pay for gains and the willingness to accept payment for losses and the realization of moral or ethical concerns for which there is a willingness to pay are legitimate economic goods. The NPV rule that a project with the largest NPV is superior to alternatives is consistent with economic welfare. The moral justification for the NPV rule is the Pareto rule considered across all projects. This is called the consent justification.

2.     Investment Decision in Situation of Risk, Emile Quinet,* Paris School of Economics and Bernard Lapeyre

This presentation links two research fields. The first field is cost-benefit analysis (CBA) of investment projects and, more precisely, prioritization rules: how to use NPV to choose among several alternatives or to decide when to implement a project. The second field is the inclusion of risk in economic calculus; important insights have been given to the way of reckoning

the average expectation of NPV of a project, but this field of research has almost not addressed the above-mentioned practical issue of the rules of decision for a project. This study aims to fill this gap and attempt to assess decision rules about when, and whether, to implement a project in the presence of systematic risk. Using methods of stochastic calculus in finance, we find that, in the case of Brownian stochastic processes, the decision rule can be expressed as a threshold value of the First Year Advantage/Cost ratio, and that this threshold value is dependent on each of the parameters appearing in the relations defining those Brownian processes. This threshold can be expressed in a closed form including the means, standard deviations and correlations of the stochastic variables. Simulations with sensible current values of these parameters show that the most important ones are the three standard values of the processes, and especially the parameter of the construction cost of the project. Some extensions are explored. Others are suggested for further research.

3.     Using Cost Benefit Analysis to Inform and Estimate the Economic Effects of Decisions in Financial Regulation, Sharon Brown-Hruska* and Trevor Wagener, NERA Economic Consulting

This article evaluates the Dodd Frank Wall Street Reform and Consumer Protection Act legislation requiring significant users of over-the-counter derivatives markets to register as swap dealers (SDs) or major swaps participants (MSPs). As part of the implementation of that law, the Commodity Futures Trading Commission, Federal Reserve Board, and other prudential regulators proposed joint rules establishing minimum margin and capital requirements for uncleared swaps, which would have increased the cost and collateral required to enter into these transactions with the stated regulatory intent of managing systemic risk allegedly resulting from uncleared swaps. Despite Congressional intent to the contrary, these costs would not have been limited to financial entities, but would likely have been passed on to end-users and market participants in the energy and power sectors.

In their 2014 study, Brown-Hruska and Wagener conducted a cost-benefit analysis of the proposed rules, and submitted a report (the “Brown-Hruska and Wagener Report”) to the prudential regulators detailing their quantitative analysis and outlining the results of their study with suggested adjustments to specific requirements to mitigate costs and reduce unintended pro-cyclical consequences of the rules as proposed. In late 2015, the prudential regulators published final rules incorporating many of the recommendations of the 2014 Brown-Hruska and Wagener Report, often referring to the Brown-Hruska and Wagener Report as a major factor contributing to the policy adjustments. In this article, we find that incorporating these recommendations significantly reduced the estimated costs of the final rule relative to the proposed rule. In order to quantify the impact of these changes to the final rule, we conduct a follow-up cost-benefit analysis tracking both their independent quantitative analysis of the costs of the proposed and final rules and the CFTC’s cost analysis for the rule. This report’s findings suggest that annual aggregate compliance costs of the proposed rule were expected to reach into the hundreds of millions of dollars while pro-cyclical features of the proposed rule may have actually accentuated systemic risk, while the incorporation of many of the 2014 Brown-Hruska and Wagener Report’s recommendations reduced total annual compliance costs by tens of millions of dollars and reduced unintended systemic risks resulting from pro-cyclical provisions substantially.

 

D.1: Evaluating Security

Chair: Tony Cheesebrough, U.S. Department of Homeland Security

Presentations:

1.     The Impact of the Visa Waiver Program on Tourism and Business Travel to the United States, Charles Baschnagel,* Booz Allen Hamilton; Mary (Katie) Foreman and Bryan Roberts

The Visa Waiver Program (VWP) enables citizens of participating countries to travel to the United States for business or tourism stays of 90 days or less, without first obtaining a visa. This effectively lowers the cost of short term travel to the United States for citizens of participating countries as compared to non-VWP countries, who must take the time and expense of first obtaining a visa. This paper examines the effect of the VWP on tourism and business travel to the United States, using the expansion of the VWP following the Implementing Recommendations of the 9/11 Commission Act of 2007 (P.L.110-53), to estimate the effect of the VWP on tourism and business travel. To do this, I first model the impact of the VWP expansion using a difference-in-differences linear regression. I then model the selection of new VWP countries and use various methods to correct for selection bias in the analysis of the impact of the VWP on the volume of short-term travel to the United States. These methodologies find that the VWP is associated with a 20% to 40% increase in travel to the United States, depending on the analysis method and control group used.

2.     Risk-Return Prioritization Of Global Trade Inspections, Paul Mwebaze,* Dean Paini; and Daniel Heersink, CSIRO; John Nielsen, Department of Agriculture

The spread of invasive species continues to provide significant challenges to those government biosecurity agencies charged with protecting a country’s borders. In an increasingly connected world, these invasive species are potentially able to spread further and more rapidly. Human mediated pathways such as ships and airlines are the most obvious ways in which invasive species can be spread. Direct routes from one port to another are currently monitored, but indirect pathways, in which a ship picks up an invasive species and then travels to a number of different locations before arriving at the final destination, present more challenging scenarios. For the Australian Government Department of Agriculture, one particular concern is for ships arriving into Australia carrying viable eggs of the Asian gypsy moth (Lymantria dispar). We are developing a real time tool that will analyze the pathways for incoming ships and determine the likelihood the ship could be carrying viable eggs. The tool will be combined with queuing theory to analyze optimal ship inspection regimes to target invasive species. This combined model is likely to deliver significant benefits in terms of increased efficiency of port inspections and reduced costs to the Department of Agriculture. In this paper, we will calculate the estimated benefits and costs of the proposed policy. We present some results of early analyses, and discuss the implications and the further work required.

3.     Strategic Benefit-Cost Analysis for the Security Threats, Kerry Krutilla* and Alexander Alexeev, Indiana University

This research studies the economically efficient response of the U.S. government to the regular threat of security breaches to its computing systems. The decision-making context is modeled using game theory, reflecting the reality that cyber security investments by the U.S. will be met by counter measures from foreign governments. The model is based on a contest success function in which the foreign country allocates resources to maximize its expected gain from the cyber-attack, while the U.S. should allocate resources to minimize its expected losses. The model represents asymmetry in the effectiveness of the resource use by the U.S. and the attacking government, different valuations for gains and losses, and departures from the assumption of perfect rationality. A Nash equilibrium investment strategy is derived and used in numerical simulations for the relevant range of the parameters. The study illustrates the logic underlying benefit-cost analysis in a strategic, risky environment, and concludes with policy recommendations.

4.     Can Home Internet Users Be Persuaded to Pay More for Improvements in Cyber Security? Dallas Wood,* RTI International

Home Internet users could benefit greatly from government policies that reduced the risk of identity theft or attacks from malicious software, such as requiring internet service providers to take a more active role in promoting cybersecurity. However, the security improvements generated by such policies might be undervalued since many home Internet users do not fully appreciate the current risks associated with threats to cybersecurity. The goal of this study is to determine whether educational information treatments can be used to persuade home Internet users to pay more for improvements in cybersecurity. To achieve this goal, we recruited 3,635 home Internet users from the comScore, Inc. online panel to participate in a web survey that included a discrete choice experiment. At the beginning of the survey, 3,182 participants were exposed to one of seven information treatments designed to educate them about the dangers of insufficient cybersecurity (453 participants saw no information treatment). The participants were also asked questions about their knowledge of cyber security issues. Next, each participant was asked to choose between hypothetical securities packages that could be offered by their Internet Service Provider. These packages differed both in terms of monthly monetary costs, non-monetary costs (like time associated with installing software), and how much security each package provided. Using the data collected from these questions, we estimated a Random Utility Model and found that home Internet users were willing to pay up to approximately $8 per month for their most preferred internet security package. In addition, we found that users that had a better understanding of cybersecurity issues were willing to pay more for improvements in their cybersecurity. However, we found no evidence that any of the information treatments influenced how much home Internet users were willing to pay for such improvements.

E.1: Key Analytical Methodologies Used in the Canadian Regulatory Context

Chair: Colin Code, Environment and Climate Change Canada



Discussant: Troy Joseph, Immigration, Refugees and Citizenship Canada 

Presentations:

1. The Cost-Benefit Analysis to Support Equivalency Agreement in Canada, Ida Liu,* Environment and Climate Change Canada 

A federal and a provincial / territorial environmental regulation may have equivalent provisions. To minimize the regulatory duplication, the Canadian Environmental Protection Act, 1999 (CEPA) authorizes the Minister of the Environment to enter into an equivalency agreement with the provincial / territorial government, and allows repeal of the federal regulations in the province.  A cost-benefit analysis (CBA) is required to assess the associated incremental economic, environmental and social (e.g. human health) impacts on Canadians, businesses, and governments.  In 2015, an Agreement on the Equivalency of Federal and Nova Scotia Regulations for the Control of Greenhouse Gas Emissions from Electricity Producers in Nova Scotia was published. When conducting the CBA for the repeal of the federal Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity Regulations in Nova Scotia, some analytical challenges were encountered, including the development of the business-as-usual scenario and the analytical timeframe for climate change policy. This presentation describes the uniqueness of Canadian regulatory landscape and focuses on how these challenges were addressed.

2. Canadian Regulatory Analysis in the Context of International Regulatory Alignment, Jarett Cupolo*, Environment and Climate Change Canada

The Government of Canada and the U.S. Environmental Protection Agency continue to have common policy objectives on reducing air emissions. In 2011, the Canada–United States Regulatory Cooperation Council was established to work towards better alignment of regulatory approaches between the two countries in a broad range of sectors, including vehicle emissions. This new approach led to opportunities, challenges and lesson learned associated with the alignment of regulations between the two countries and particularly when developing analyses. This presentation will describe some of the strategies employed to conduct cost benefit analyses, while addressing the regulatory alignment commitments. These strategies include developing preliminary estimates for initial policy guidance; conducting emissions and air quality modelling using the U.S. EPA models (or outputs from the U.S. EPA models) with Canadian data; strategies for estimating Canadian costs and benefits; and sharing economic expertise when reviewing main assumptions and approaches. There are several recent examples of Environment Canada regulations that align with those of the U.S. EPA, of which we will describe the strategies employed and the key CBA alignment methodologies and results. The examples focus on regulatory standards for emissions from vehicles and engines.

3. The One-for-One Rule: Measuring and Limiting the Growth of Administrative Burden Costs on Business in the Canadian Federal Regulatory System, Timothy Folkins,* Treasury Board Of Canada Secretariat

The Government of Canada requires that all federal departments and agencies implement the “One-for-One” Rule (the Rule) to control administrative burden on business arising from regulatory changes. On April 24, 2015, it was announced that the Red Tape Reduction Act received Royal Assent in Canada’s Parliament, enshrining the Rule in law.  This was done after more than three years of experience implementing the Rule through policy as a part of Canada’s Cabinet Directive on Regulatory Management (CDRM). Under the Rule when a new or amended regulation increases the administrative burden on business, regulators are required to offset – from their existing regulations – an equal amount of administrative burden cost on business.  Regulators are required to provide offsets within two years of receiving final approval of regulatory changes that impose new administrative burden on business. The estimate for changes in administrative burden costs caused by federal regulations—as well as the underlying methodology, assumptions, data and their limitations—must be included as a part of cost-benefit analysis which accompany regulatory proposals (where applicable). In this presentation we will review the basic concepts of the Rule in Canada, the methodology (based on the internationally recognized Standard Cost Model) used to measure administrative burden cost changes, and the outcomes under the Rule. This presentation will also demonstrate the Regulatory Costing Calculator, a tool developed by the Treasury Board Secretariat of Canada and recommended to be used by federal departments and agencies in Canada to implement this methodology.