Clean Air Act
Observations on EPA's Cost-Benefit Analysis of Its Mercury Control Options Gao ID: GAO-05-252 February 28, 2005Mercury is a toxic element that can cause neurological disorders in children. In January 2004, the Environmental Protection Agency (EPA) proposed two options for limiting mercury from power plants, and plans to finalize a rule in March 2005. The first would require each plant to meet emissions standards reflecting the application of control technology (the technology-based option), while the second would enable plants to either reduce emissions or buy excess credits from other plants (the cap-and-trade option). EPA received over 680,000 written comments on the proposal. EPA is directed by statute and executive order to analyze the costs and benefits of proposed rules, and the agency summarized its analysis underlying the two options in the proposal. In this context, GAO was asked to assess the usefulness of EPA's economic analysis for decision making. In doing so, GAO neither independently estimated the options' costs and benefits nor evaluated the process for developing the options or their consistency with the Clean Air Act, as amended.
GAO identified four major shortcomings in the economic analysis underlying EPA's proposed mercury control options that limit its usefulness for informing decision makers about the economic trade-offs of the different policy options. First, while Office of Management and Budget (OMB) guidance directs agencies to identify a policy that produces the greatest net benefits, EPA's analysis is of limited use in doing so because the agency did not consistently analyze the options or provide an estimate of the total costs and benefits of each option. For example, EPA analyzed the effects of the technology-based option by itself, but analyzed the effects of the cap-and-trade option alongside those of another proposed rule affecting power plants, the Clean Air Interstate Rule (the interstate rule), without separately identifying the effects of the cap-and-trade option. As a result, EPA's estimates are not comparable and are of limited use for assessing economic trade-offs. EPA officials said they analyzed the cap-and-trade option alongside the interstate rule because the agency views the two proposed rules as complementary. Nonetheless, to provide comparable estimates, EPA would have to analyze each option alone and in combination with the interstate rule. Second, EPA did not document some of its analysis or provide information on how changes in the proposed level of mercury control would affect the cost-and-benefit estimates for the technology-based option, as it did for the cap-and-trade option. Third, EPA did not estimate the value of the health benefits directly related to decreased mercury emissions and instead estimated only some secondary benefits, such as decreased exposure to harmful fine particles. However, EPA has asked for comments on a methodology to estimate the benefits directly related to mercury. Fourth, EPA did not analyze some of the key uncertainties underlying its cost-and-benefit estimates.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-252, Clean Air Act: Observations on EPA's Cost-Benefit Analysis of Its Mercury Control Options
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Report to Congressional Requesters:
February 2005:
Clean Air Act:
Observations on EPA's Cost-Benefit Analysis of Its Mercury Control
Options:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-252]:
GAO Highlights:
Highlights of GAO-05-252, a report to congressional requesters:
Why GAO Did This Study:
Mercury is a toxic element that can cause neurological disorders in
children. In January 2004, the Environmental Protection Agency (EPA)
proposed two options for limiting mercury from power plants, and plans
to finalize a rule in March 2005. The first would require each plant to
meet emissions standards reflecting the application of control
technology (the technology-based option), while the second would enable
plants to either reduce emissions or buy excess credits from other
plants (the cap-and-trade option). EPA received over 680,000 written
comments on the proposal. EPA is directed by statute and executive
order to analyze the costs and benefits of proposed rules, and the
agency summarized its analysis underlying the two options in the
proposal. In this context, GAO was asked to assess the usefulness of
EPA‘s economic analysis for decision making. In doing so, GAO neither
independently estimated the options‘ costs and benefits nor evaluated
the process for developing the options or their consistency with the
Clean Air Act, as amended.
What GAO Found:
GAO identified four major shortcomings in the economic analysis
underlying EPA‘s proposed mercury control options that limit its
usefulness for informing decision makers about the economic trade-offs
of the different policy options. First, while Office of Management and
Budget (OMB) guidance directs agencies to identify a policy that
produces the greatest net benefits, EPA‘s analysis is of limited use in
doing so because the agency did not consistently analyze the options or
provide an estimate of the total costs and benefits of each option. For
example, as seen in the table, EPA analyzed the effects of the
technology-based option by itself, but analyzed the effects of the cap-
and-trade option alongside those of another proposed rule affecting
power plants, the Clean Air Interstate Rule (the interstate rule),
without separately identifying the effects of the cap-and-trade option.
As a result, EPA‘s estimates are not comparable and are of limited use
for assessing economic trade-offs. EPA officials said they analyzed the
cap-and-trade option alongside the interstate rule because the agency
views the two proposed rules as complementary. Nonetheless, to provide
comparable estimates, EPA would have to analyze each option alone and
in combination with the interstate rule.
Estimated Annual Economic Impacts of EPA‘s Proposed Mercury Policy
Options in 2010 (1999 dollars, in billions):
Policy option: Technology-based option;
Annual costs: 2;
Annual benefits[A]: 15 or more;
Annual net benefits: 13 or more.
Policy option: Cap-and-trade option;
Annual costs: Not estimated;
Annual benefits[A]: Not estimated;
Annual net benefits: Not estimated.
Policy option: Technology-based option and the interstate rule;
Annual costs: Not estimated;
Annual benefits[A]: Not estimated;
Annual net benefits: Not estimated.
Policy option: Cap-and-trade option and the interstate rule;
Annual costs: 3 to 5 or more[B];
Annual benefits[A]: 58 to 73 or more[B];
Annual net benefits: 55 to 68 or more[B].
Source: EPA.
[End of table]
Second, EPA did not document some of its analysis or provide
information on how changes in the proposed level of mercury control
would affect the cost-and-benefit estimates for the technology-based
option, as it did for the cap-and-trade option. Third, EPA did not
estimate the value of the health benefits directly related to decreased
mercury emissions and instead estimated only some secondary benefits,
such as decreased exposure to harmful fine particles. However, EPA has
asked for comments on a methodology to estimate the benefits directly
related to mercury. Fourth, EPA did not analyze some of the key
uncertainties underlying its cost-and-benefit estimates.
What GAO Recommends:
GAO recommends that, prior to finalizing a rule, EPA take steps to
address shortcomings in its cost-benefit analysis to increase the
usefulness of the analysis for decision making. In commenting on the
report, EPA said that it plans to largely address GAO‘s
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-05-252.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John Stephenson at (202)
512-3841 or stephensonj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
EPA's Economic Analysis Is of Limited Use for Informing Decision Makers
about the Economic Trade-offs of Different Policy Options:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Environmental Protection Agency:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Table:
Table 1: Estimated Annual Economic Impacts of EPA's Proposed Mercury
Policy Options in 2010:
Abbreviations:
CAA: Clean Air Act:
EPA: Environmental Protection Agency:
FDA: Food and Drug Administration:
IPM: Integrated Planning Model:
MACT: Maximum Achievable Control Technology:
OMB: Office of Management and Budget:
UMRA: Unfunded Mandates Reform Act:
Letter February 28, 2005:
Congressional Requesters:
Mercury is a toxic element that poses human health threats, especially
to fetuses and children. For example, children of women exposed to
mercury during pregnancy--typically from contaminated fish--may face
increased risk of neurological disorders, including delays in learning
ability. According to the Centers for Disease Control, 6 percent of
women of childbearing age have mercury blood levels that exceed safe
levels. Mercury enters the environment through natural and human
activities, such as volcanic eruptions and fuel combustion. In January
2004, the Environmental Protection Agency (EPA) issued a proposed rule
under the Clean Air Act to regulate mercury emissions from the nation's
largest unregulated industrial source: coal-fired power plants. The
proposed rule laid out two policy options, one of which EPA plans to
choose and finalize in a March 2005 rule. The first, the "technology-
based" option, would require coal-fired power plants to meet specific
mercury emissions standards reflecting the application of control
technology.[Footnote 1] The second option would set a national cap on
mercury emissions and allow power plants flexibility either to achieve
reductions or to purchase credits from plants that achieved excess
reductions (the "cap-and-trade" option).[Footnote 2] The proposed rule
has become a contentious environmental policy issue, with EPA receiving
over 680,000 written public comments on the proposal.
Much of the debate over the proposed rule centers on the relative
merits of the two policy options, such as the potential costs to
industry and the expected human health benefits. Federal agencies are
required by statute and executive order to analyze the impacts of
economically significant rules--those that would affect the economy by
$100 million or more each year--unless otherwise prohibited by
law.[Footnote 3] Further, the Office of Management and Budget (OMB) has
developed guidance and best practices under Executive Order 12866 that,
among other things, direct agencies to explore alternative regulatory
approaches, taking into consideration different levels of stringency,
and identify the policy that would maximize net benefits (total
benefits minus total costs), unless another approach is required by
statute.[Footnote 4] OMB guidance states that identifying the policy
option with the greatest net benefits is useful information for
decision makers and the public, even when maximizing net benefits is
not the only or overriding policy objective. In addition, OMB guidance
directs agencies to conduct their economic analyses in accordance with
the principles of full disclosure and transparency. Furthermore, in
cases such as the final mercury rule, where expected economic impacts
would exceed $1 billion annually, OMB guidance directs agencies to
identify and quantitatively analyze key uncertainties in their economic
analysis.[Footnote 5] EPA analyzed the economic effects of its proposed
mercury rule and found that a rule based on either option would impose
billions of dollars in emissions control costs but would also generate
human health benefits of even greater value. EPA summarized the results
of its economic analysis in the January 2004 proposed rule and plans to
conduct additional analysis to support a final rule.
EPA's economic analysis of its mercury control options is complicated
by another proposed rule, the Clean Air Interstate Rule (the interstate
rule), which would reduce emissions of sulfur dioxide and nitrogen
oxides.[Footnote 6] This rule would share some of the costs and
benefits of regulating mercury because the technologies that power
plants would likely install to comply with the rule could also reduce
mercury emissions. EPA had planned to finalize the interstate rule by
the end of 2004, but announced in December 2004 that it would delay a
final decision on the rule until March 2005. Also in December 2004, EPA
issued a public notice providing new data and information relevant to
EPA's economic analysis of the proposed mercury rule and solicited
additional public comment on this information for consideration by the
agency prior to finalizing the rule.
In this context, you asked us to assess the usefulness of the economic
analysis underlying EPA's proposed mercury rule for decision making. To
respond to this objective, we, among other things, reviewed EPA's
analysis of the proposed rule's economic effects using OMB guidance and
standard economic principles, and discussed the analysis with senior
officials within EPA's Office of Air and Radiation, which is
responsible for developing the proposed rule and analyzing its economic
effects. In doing this work, we did not independently estimate the
costs or benefits of either control option, evaluate the process for
developing either option, or assess the options' consistency with the
Clean Air Act, as amended. (See app. I for a more detailed description
of the scope and methodology of our review.) You also asked us to
provide information on the availability and cost of mercury control
technologies, and we surveyed mercury technology vendors, power
companies, and federal and other researchers on these issues.
Subsequent to this report, which we plan to issue before the agency
promulgates a final rule, we will provide information on mercury
control technologies in a separate product. We performed our work
between May 2004 and February 2005 in accordance with generally
accepted government auditing standards.
Results in Brief:
We identified four major shortcomings in the economic analysis
underlying EPA's proposed mercury rule that limit its usefulness for
informing decision makers and the public about the economic trade-offs
of the two policy options. First, because EPA used inconsistent
approaches in analyzing the two proposed policy options, the analysis
did not provide sufficient information to compare the two options and
determine which would provide the greatest net benefits. For example,
EPA analyzed the costs and benefits of the technology-based option by
itself but analyzed the cap-and-trade option in combination with the
proposed interstate rule--combining the costs and benefits of the two
rules without separately identifying those associated with the cap-and-
trade option. EPA officials said they analyzed the effects of the cap-
and-trade option alongside the interstate rule because the agency views
the two proposed policies as complementary. Nonetheless, EPA's December
2004 decision to postpone the interstate rule highlights the need for
consistent analysis of the two mercury policy options on their own
merits, independent of the proposed interstate rule. In addition, the
comparability of EPA's analysis is further limited because the agency
did not provide consistent information on the total costs and benefits
of the two options over the entire implementation period.
Second, EPA did not document some of its analysis or adhere to the
principles of full disclosure and transparency as directed by OMB, and
it did not provide decision makers or the public with consistent
information on how changes in the proposed level of control would
affect its estimates of net economic benefits for each option. Third,
because of time, resource, and technical constraints, EPA did not
quantify the human health benefits specifically related to reductions
in mercury emissions, such as reduced incidence of neurological
disorders. Instead, EPA estimated only some of the health benefits that
would occur as a secondary benefit of regulating mercury--that is,
decreased exposure to fine particles that cause respiratory and heart
ailments. The two options in the proposed rule differed significantly
in their targeted mercury reduction levels and time frames, and we
believe that monetary estimates of the health benefits of mercury
reductions would assist decision makers in comparing the net benefits
of each option. Along these lines, EPA recently solicited public
comment on a proposed methodology for estimating mercury-specific
benefits in the final rule. Fourth, EPA did not analyze some of the key
uncertainties underlying its cost-and-benefit estimates, although the
agency plans to conduct a more formal assessment of these
uncertainties, as directed by OMB guidance, prior to issuing a final
rule. In light of these limitations, we are recommending that the EPA
Administrator improve the agency's economic analysis prior to issuing a
final rule by providing some additional analysis and ensuring that the
analysis supporting the final rule is documented and available to
decision makers and the public. In commenting on a draft of this
report, EPA's Assistant Administrator for Air and Radiation said that,
prior to issuing a final mercury regulation by March 15, 2005, EPA will
conduct additional analysis that will largely address the findings and
recommendations identified in our report. EPA's letter is included as
appendix II.
Background:
Mercury enters the environment through natural and man-made sources,
including volcanoes, chemical manufacturing, and coal combustion, and
poses ecological threats when it enters water bodies, where small
aquatic organisms convert it into its highly toxic form--methylmercury.
This form of mercury may then migrate up the food chain as predator
species consume the smaller organisms. Through a process known as bio-
accumulation, predator species may develop high mercury concentrations
in their tissue as they take in more mercury than they can metabolize
or excrete.
Fish contaminated with methylmercury may pose health threats to those
that rely on fish as part of their diet. According to EPA, mercury
harms fetuses and can cause neurological disorders in children,
including poor performance on behavioral tests, such as those measuring
attention, motor and language skills, and visual-spatial abilities
(such as drawing). In addition, populations that consume larger amounts
of fish than the general population--including subsistence fishers, as
well as certain Native Americans and Southeast Asian Americans--may
face higher risk of exposure to contaminated fish, according to EPA.
The Food and Drug Administration (FDA) and EPA recommend that expectant
mothers, young children, and those nursing children avoid eating
swordfish, king mackerel, shark, and tilefish and limit consumption of
other potentially contaminated fish, such as tuna. These agencies also
recommend checking local advisories for recreationally caught
freshwater and saltwater fish. According to EPA, 45 states issued
mercury advisories in 2003 (the most recent data available).
Because mercury released to the atmosphere can circulate for long
periods of time and be transported thousands of miles before it gets
deposited, it is difficult to link mercury accumulation in the food
chain with sources of mercury emissions. EPA estimates that about half
of the mercury deposited in the United States is emitted by sources
within this country. In 1999, the most recent year for which data were
available, EPA estimated that man-made sources within the United States
emitted about 115 tons of mercury. Of these emissions, the agency
estimates that about 48 tons, 42 percent of the total, came from coal-
fired power plants. While power plants are not required to limit their
mercury emissions, EPA estimates that the plants currently capture
about 27 tons of mercury each year, primarily through the use of
controls for other pollutants, such as those used to control nitrogen
oxides, particles, and sulfur dioxide. EPA estimates that power plants
would otherwise emit about 75 tons of mercury per year.
The Clean Air Act (CAA) Amendments of 1990 required EPA to study the
environmental and health effects of hazardous air pollutants from coal-
fired power plants and determine whether it was "appropriate and
necessary" to regulate these pollutants. In 2000, EPA determined that
mercury was a hazardous air pollutant and that it was appropriate and
necessary to regulate mercury using the technology-based option. Under
this section of the act, the emissions limit had to be at least as
strict as the average emissions of the facilities with the best-
controlled emissions.[Footnote 7] Because power plants did not already
use controls specifically intended to control mercury, EPA analyzed the
effectiveness of controls for other pollutants that capture mercury as
a side benefit.[Footnote 8]
This effort culminated in EPA's January 2004 proposal for a technology-
based option that would reduce mercury emissions from a current level
of 48 tons per year to a projected 34 tons per year (a 29 percent
reduction) by 2008. At the same time, however, EPA proposed an
alternate policy option that would limit mercury emissions in two
phases: to 15 tons in 2018 (a 69 percent reduction from current
levels), preceded by an as-yet-unspecified interim cap starting in
2010. The alternate policy option, which would rely on a cap-and-trade
system similar to that currently used to control emissions that cause
acid rain, differs from the technology-based option in that it would
not require each facility to meet emission standards based on control
technology.[Footnote 9] Instead, EPA would set a nationwide "cap" for
mercury emissions from coal-fired power plants and then distribute
tradable emissions allowances that represent a certain amount of the
total cap. At the end of each year, each power plant would have to hold
sufficient allowances for the mercury it emitted that year. Plants that
reduced their emissions below the levels represented by their
allowances could sell their extra allowances to other plants.
In addition to its proposed mercury rule, EPA has proposed another rule
for power plants, the Clean Air Interstate Rule, which is intended to
reduce emissions of nitrogen oxides and sulfur dioxide beginning in
2010. EPA expects that this proposed rule would result in the
installation of pollution controls that capture mercury as a side
benefit, and thereby decrease mercury emissions to 34 tons per year by
2010, the same level of reduction as the technology-based option. Under
the cap-and-trade option, EPA has indicated that it may establish a
mercury cap for 2010 equal to the control level expected through the
interstate rule. EPA postponed its decision on finalizing the
interstate rule until March 2005 while the agency awaits congressional
action on pending legislation, known as the Clear Skies Act, that would
establish emissions caps and an allowance system similar to those in
the interstate rule and the cap-and-trade mercury control
option.[Footnote 10] EPA has stated a preference for achieving
reductions of mercury, nitrogen oxides, and sulfur dioxide
simultaneously through legislation rather than regulations.
Responsibility for analyzing the economic impacts--including costs to
industry and expected public health effects--of air pollution control
policies rests with EPA's Office of Air and Radiation. EPA provided
documentation of its economic analysis for the proposed mercury rule in
three primary documents, some of which refer readers to additional
documentation on the agency's Web site or in the public rule-making
docket.[Footnote 11] According to EPA, the agency did not have time to
assemble its economic assessment of the proposed rule in a single
document prior to issuing the proposed rule. To assist in estimating
costs that air quality regulations will impose on the power industry,
EPA uses the Integrated Planning Model (IPM), which estimates how power
plants would respond to various environmental policies. The assumptions
underlying this model, such as those regarding fuel costs, the costs of
pollution controls, and future electricity demand, can affect the
modeling results, according to EPA officials responsible for the
modeling.
EPA's Economic Analysis Is of Limited Use for Informing Decision Makers
about the Economic Trade-offs of Different Policy Options:
We identified four major shortcomings in the economic analysis
underlying EPA's proposed mercury rule that limit its usefulness for
informing decision makers and the public about the economic trade-offs
of the two options. First, EPA did not consistently analyze each of its
two mercury policy options or provide estimates of the total costs and
benefits of the two options, making it difficult to ascertain which
policy option would provide the greatest net benefits. Second, EPA did
not document some of its analysis or provide consistent information on
the anticipated economic effects of different mercury control levels
under the two options. Third, the agency did not estimate the economic
benefits directly related to decreased mercury emissions. Finally, the
agency did not analyze some of the key uncertainties underlying its
cost-and-benefit estimates.
EPA Did Not Consistently Analyze Each Policy Option or Provide a
Complete Accounting of Costs and Benefits:
EPA's estimates of the costs and benefits of its two proposed policy
options are not comparable because the agency used inconsistent
approaches in analyzing the two options. As shown in table 1, EPA
analyzed the technology-based option alone, while it analyzed the cap-
and-trade option in combination with the interstate rule. In analyzing
the technology-based option by itself, EPA estimated the rule would
cost about $2 billion annually, and achieve benefits of $15 billion or
more annually, yielding net benefits (benefits minus costs) of $13
billion or more annually. In contrast, EPA analyzed the effects of the
cap-and-trade option in combination with the proposed interstate rule
by combining the costs and benefits of the two proposed rules without
separately identifying and documenting those associated with the cap-
and-trade option alone. This analysis found that the two proposed rules
together would impose costs of $3 billion to $5 billion or more
annually, while generating annual benefits of $58 billion to $73
billion or more and annual net benefits of $55 billion to $68 billion
or more.
Table 1: Estimated Annual Economic Impacts of EPA's Proposed Mercury
Policy Options in 2010:
1999 dollars, in billions.
Policy option: Technology-based option;
Annual costs: 2;
Annual benefits[A]: 15 or more;
Annual net benefits: 13 or more.
Policy option: Cap-and-trade option;
Annual costs: Not estimated;
Annual benefits[A]: Not estimated;
Annual net benefits: Not estimated.
Policy option: Technology-based option and the interstate rule;
Annual costs: Not estimated;
Annual benefits[A]: Not estimated;
Annual net benefits: Not estimated.
Policy option: Cap-and-trade option and the interstate rule;
Annual costs: 3 to 5 or more[B];
Annual benefits[A]: 58 to 73 or more[B];
Annual net benefits: 55 to 68 or more[B].
Source: EPA.
[A] As discussed further below, EPA's monetary benefits estimates do
not include the human health benefits specifically related to
reductions in mercury emissions. Instead, EPA monetized some of the
health benefits that would occur as a secondary benefit of regulating
mercury.
[B] According to EPA, the lower end of the range reflects a scenario
involving no additional reductions beyond those achieved by the
interstate rule, while the upper end of the range reflects mercury caps
similar to those in the Clear Skies legislation. EPA estimated that the
interstate rule alone would generate annual benefits of $58 billion or
more while imposing annual costs of about $3 billion.
[End of table]
Because the estimates for the two options are not comparable, however,
it is not clear which option would provide the greatest net benefits.
This is particularly important in light of EPA's decision to delay
finalization of the interstate rule.[Footnote 12] EPA officials
responsible for the rule acknowledged the lack of comparability with
its analysis of the two proposed options. These officials said the
agency analyzed the cap-and-trade option alongside the interstate rule
because it viewed these two proposed policies as complementary. They
also said it would have been useful to analyze the technology-based
option alongside the interstate rule, but the agency did not do so
because of time constraints. Nonetheless, it is important for EPA to
consistently analyze each policy option and provide decision makers
with comparable estimates of net economic benefits.
The comparability of EPA's analysis is further limited because the
agency did not provide consistent information on the total costs and
benefits of the two options over their entire implementation periods.
Specifically, EPA provided cost-and-benefit estimates for 2010, rather
than estimates of the total costs and benefits over the entire
implementation period.[Footnote 13] This is important because the
economic impact of the policy options could vary from year to year and
because the two options have different implementation timelines. For
example, under the proposed cap-and-trade option, a second level of
mercury reductions would take effect in 2018, which would likely
generate additional costs and benefits at that time. Thus, the
estimates EPA provided for 2010 did not fully account for the expected
costs and benefits over the implementation period for this option. In
contrast, EPA officials said that its estimate of the technology-based
option in 2010 reflects the full implementation cost because its
analysis assumes that power plants would achieve compliance with the
technology-based option by that date. However, without estimates of the
total value of benefits and costs of each option over the entire
implementation period, it is difficult to ascertain which option would
generate the greatest net benefits.
EPA Did Not Document Some of Its Analysis Supporting the Policy Options
or Provide Consistent Information on the Economic Impacts of Different
Control Levels:
The economic analysis underlying the proposed mercury rule does not
consistently reflect OMB's guidance to agencies in terms of adhering to
the principles of full disclosure and transparency when analyzing the
economic effects of regulations. Specifically, we identified two
primary cases where EPA's analysis does not adhere to these principles,
further limiting the usefulness of the agency's analysis in decision
making and diminishing the transparency of the analysis to the public.
First, while EPA provides substantial information on its analysis of
the technology-based option in the documents supporting its economic
analysis of the proposed rule, the agency does not do so for the cap-
and-trade option. For the technology-based option, EPA provides
documents that describe its findings. In contrast, the agency provides
only a summary of its findings for the cap-and-trade option in the
rule's preamble and refers to its findings as "rough estimates" that
are based on consideration of available analysis of the interstate
rule, the technology-based option, and the proposed Clear Skies
legislation. EPA does not describe specifically how the agency used
this analysis of other proposed rules and legislation to estimate the
costs and benefits of the cap-and-trade option, and it does not
identify the key analytical assumptions underlying its cost-and-benefit
estimates. This lack of documentation and transparency leaves decision
makers and the public with limited information on EPA's analysis of the
cap-and-trade option.
Second, EPA officials responsible for the economic analysis told us
that they analyzed two variations of the proposed technology-based
option with more stringent mercury limits than the option included in
the proposal, but the agency did not include this analysis in the
documents supporting its economic analysis or in the public rule-making
docket. This is inconsistent with EPA's analysis of the cap-and-trade
option, in which it provided a range of costs and benefits associated
with different levels of stringency. This omission is also at odds with
OMB guidance directing agencies to conduct their economic analysis in
accordance with the principles of full disclosure and
transparency.[Footnote 14]
With respect to the analysis of the technology-based scenarios that the
agency did not make publicly available, EPA officials said the
additional modeling showed that the more stringent scenarios were not
as cost-effective as the proposed technology-based option. However, EPA
did not estimate the benefits of these two scenarios, thereby
precluding a comparison of the net economic benefits under the proposed
mercury policy options. As a result, it is unclear whether the
reduction levels and implementation timelines under either proposed
option represent the regulatory scenario that would provide the
greatest net benefits.
In January 2005, EPA officials responsible for the mercury rule said
the agency does not have an obligation to analyze and document every
control scenario. We recognize that OMB guidance gives agencies
latitude in determining the number of regulatory alternatives to
consider and that agencies must balance the thoroughness of their
analysis with the practical limits of their ability to carry out
analysis. Nonetheless, providing information on the costs and benefits
of even a limited range of control scenarios under both proposed
options would help decision makers and the public in assessing how
different levels of stringency would affect overall estimates of costs
and benefits. In December 2004, EPA solicited public comment on
additional economic analyses the agency received from commenters on the
January 2004 proposed rule, including some that relied on models,
assumptions, and levels of stringency that were different from the
scenarios EPA analyzed.
EPA Did Not Estimate the Human Health Benefits of Mercury Reductions:
Although EPA's analysis states that a mercury regulation would generate
a variety of benefits, the agency did not estimate in monetary terms
all of the benefits expected from reducing mercury emissions. Most
notably, EPA did not quantify the human health benefits of decreased
exposure to mercury, such as reduced incidence of developmental delays,
learning disabilities, and neurological disorders. Instead, EPA
estimated only some of the health benefits it anticipates would occur
from decreased exposure to fine particles and discussed other impacts
qualitatively.[Footnote 15] Because the two options in the proposed
rule differed significantly in both the amount of mercury emission
reductions and the time frames in which these reductions would occur,
the lack of estimates of the mercury-specific benefits of each policy
option represents a significant limitation of EPA's economic analysis.
That is, to the extent that each proposed option would yield measurable
mercury-specific health benefits, EPA's analysis may underestimate the
total expected benefits of both options. Moreover, because the options
may yield different mercury-related health benefits, the lack of
estimates of these benefits makes it difficult to weigh the relative
merits of the two proposed options.
According to EPA, its analysis did not estimate key mercury-related
health benefits because of technical, time, and resource limitations.
Specifically, agency officials responsible for the analysis said the
agency did not have a method for determining the extent to which
mercury reductions from power plants would translate into decreased
incidence of mercury-related health problems. According to EPA,
estimating these benefits involves a number of complex chemical,
physical, and biological processes, as well as a wide variety of human
behaviors, such as fish consumption practices.
Although EPA did not estimate the expected human health and other
benefits of decreased exposure to mercury emissions in the analysis
supporting the proposed rule, the agency did list the various human
health and other benefits it expects would stem from a mercury rule.
Importantly, in December 2004, the agency announced that it was
revising its benefit estimates and solicited public comment on a
proposed method for estimating mercury-specific benefits. According to
EPA, this method would focus on (1) quantifying projected emissions
from coal-fired power plants relative to other sources, (2) modeling
the dispersion and deposition of mercury, (3) modeling the link between
changes in mercury deposition and changes in the methylmercury
concentrations in fish, (4) assessing the methylmercury exposure from
consuming fish, and (5) assessing how reductions in methylmercury
exposure affect human health. According to EPA officials responsible
for analyzing the proposed rule's effects, the agency will consider
public comments on this approach and revise its analysis before
finalizing a rule. In January 2005, EPA officials responsible for the
analysis agreed that providing monetary estimates of mercury-specific
benefits would enhance their analysis, and said that the agency might
have sufficient information to estimate some, but not all, of the
expected human health benefits of reducing mercury emissions.
EPA Did Not Assess Key Analytical Uncertainties That Could Affect Its
Cost-and-Benefit Estimates:
OMB guidance under Executive Order 12866 stipulates that agencies
should analyze and present information on uncertainties with their cost-
and-benefit estimates. According to EPA officials responsible for the
economic analysis, the agency's cost model is generally sensitive to
assumptions about future electricity demand and fuel prices, as well as
the availability, cost, and performance of pollution controls. Because
these assumptions involve long-term projections, they also involve a
substantial amount of uncertainty. EPA conducted a limited uncertainty
analysis of natural gas prices and electricity demand growth on the
cost estimates by examining the impact of alternative projections and
concluded that its cost estimates were not particularly sensitive to
changes in these variables. However, EPA did not assess how the
distribution of estimated benefits and costs would differ given changes
in its assumptions about the availability, cost, and performance of
mercury control technologies, even though the agency believes that
these assumptions could affect its economic modeling.
Furthermore, EPA's December 2004 notice for additional public comment
on the mercury proposal highlighted the uncertainty surrounding the
ability of its computer model to estimate mercury control costs,
primarily because of the power industry's limited experience with
implementing mercury controls.[Footnote 16] This notice solicited
public comment on, among other things, the assumptions in its economic
modeling related to the cost, availability, and performance of mercury
control technologies. According to senior EPA officials responsible for
analyzing the mercury proposal, changes in these assumptions could have
a sizable impact on the agency's cost-and-benefit estimates. This
acknowledgment of key uncertainties in its economic modeling highlights
the need to determine how they could affect the overall cost-and-
benefit estimates for each proposed option.
In addition, EPA did not analyze the key uncertainties surrounding its
benefit estimates. For example, EPA used economic data from its earlier
assessment of the proposed Clear Skies legislation to approximate the
impact of emissions reductions that would be expected under the mercury
rule. According to EPA, the agency used this approach--referred to as a
"benefits-transfer approach"--because time and resource constraints
prevented it from performing new research to measure the value of
health impacts under a mercury rule. OMB's September 2003 guidance,
which applies to economically significant final rules issued after
January 1, 2005, states that although such an approach can provide a
quick and low-cost means of obtaining monetary values, the method may
be characterized by uncertainty and potential biases of unknown
magnitude and should be treated as a last-resort option.[Footnote 17]
Furthermore, EPA's economic analysis states that the benefits analysis
has many sources of uncertainty, including those associated with
emissions data, air quality modeling, and the effect of emissions on
human health. The agency did not, however, formally assess the impact
of these uncertainties.
In January 2005, EPA officials responsible for the proposed mercury
rule acknowledged this limited analysis of key uncertainties and said
that the agency plans to conduct a more formal assessment of these
uncertainties prior to issuing a final rule, as directed by OMB's
September 2003 guidance.[Footnote 18] This guidance directs agencies to
assess the sources of uncertainty in their regulatory analyses and the
way in which cost-and-benefit estimates may be affected under plausible
assumptions. Furthermore, in cases where the annual economic effects
total $1 billion or more, the guidance states that agencies should
provide a formal quantitative assessment of the key uncertainties about
costs and benefits.
Conclusions:
Because EPA estimates that regulating mercury emissions would have
significant economic impacts totaling billions of dollars per year, it
is important for the agency to have a credible basis for selecting a
policy that will maximize the return on this investment. However, EPA's
initial economic analysis of the two policies it is considering has a
number of shortcomings. Specifically, because EPA did not analyze and
document the economic effects of each policy option by itself--as well
as in combination with the interstate rule--over their varying full
implementation periods, the results cannot be meaningfully compared. In
addition, EPA did not document the analysis supporting the cap-and-
trade option or provide consistent information on the economic impacts
of different mercury control levels for the two options, limiting the
transparency and usefulness of the analysis. Further, without monetary
estimates of the human health benefits of mercury emissions reductions-
-a primary purpose of a mercury regulation--over the full
implementation period of each option or, at a minimum, a qualitative
comparison of these benefits, EPA's analysis does not provide decision
makers with a strong basis for comparing the net benefits under each
option. Finally, because EPA did not analyze some of the key analytical
uncertainties that could affect its estimates of net benefits, the
agency could enhance its economic analysis by further evaluating these
uncertainties and how they could affect its overall findings. Unless
EPA conducts and documents further economic analysis, decision makers
and the public may lack assurance that the agency has evaluated the
economic trade-offs of each option and taken the appropriate steps to
identify which mercury control option would provide the greatest net
benefits.
Recommendations for Executive Action:
To improve the usefulness of the agency's economic analysis for
informing decision makers and the public, and to help ensure
consistency with OMB guidance for economic analysis, we recommend that,
as the agency revises its economic analysis prior to selecting a
mercury control option, the EPA Administrator take the following four
actions:
* Analyze and fully document the economic effects of each policy option
by itself, as well as in combination with the interstate rule, over
their full implementation periods.
* Ensure that the agency documents its analysis supporting the final
rule and consistently analyzes the effect that different levels of
mercury control would have on cost-and-benefit estimates under each
policy option.
* Include monetary estimates, where possible, of the human health
benefits of reductions in mercury emissions from power plants or, at a
minimum, provide qualitative information on how these benefits are
likely to compare under the two options over a consistent time frame,
reflecting full implementation of both options.
* Further analyze uncertainties surrounding estimates of costs and
benefits, as directed by OMB guidance, and evaluate how these
uncertainties could affect overall estimates of the rule's impacts.
Agency Comments:
We provided EPA with a draft of this report for review and comment. In
commenting on the draft report, the Assistant Administrator for Air and
Radiation said that, prior to issuing a final mercury regulation by
March 15, 2005, EPA will conduct additional analysis that will largely
address the findings and recommendations identified in our report.
EPA's letter is included as appendix II.
As agreed with your offices, unless you publicly announce the contents
of this letter earlier, we plan no further distribution until 7 days
from the report date. At that time, we will send copies of the report
to the EPA Administrator and other interested parties. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
If you have any questions about this report, please contact me at (202)
512-3841 or [Hyperlink, stephensonj@gao.gov]. Key contributors to this
report are listed in appendix III.
Signed by:
John B. Stephenson:
Director, Natural Resources and Environment:
List of Congressional Requesters:
The Honorable Barbara Boxer:
United States Senate:
The Honorable Thomas R. Carper:
United States Senate:
The Honorable Hillary Rodham Clinton:
United States Senate:
The Honorable Mark Dayton:
United States Senate:
The Honorable James M. Jeffords:
United States Senate:
The Honorable Frank Lautenberg:
United States Senate:
The Honorable Patrick J. Leahy:
United States Senate:
The Honorable Joseph I. Lieberman:
United States Senate:
The Honorable Olympia J. Snowe:
United States Senate:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Congressional requesters asked us to assess the usefulness of the
economic analysis underlying EPA's proposed mercury rule for decision
making. To respond to this objective, we, among other things, reviewed
EPA's analysis of the proposed rule's economic effects using standard
economic principles, OMB guidance, Executive Order 12866, and the
Unfunded Mandates Reform Act of 1995. We also discussed the analysis
with senior officials within EPA's Office of Air and Radiation
responsible for developing the proposed rule and analyzing its economic
effects. In doing this work, we did not independently estimate the
costs or benefits of the mercury control options, evaluate EPA's
process for developing the options, or assess legal issues surrounding
the extent to which the options comply with the provisions of the Clean
Air Act or its amendments.
We took several steps to assess the validity and reliability of
computer data underlying EPA's estimates of economic impacts discussed
in our findings, including reviewing the documentation and assumptions
underlying EPA's economic model and assessing the agency's process for
ensuring that the model data are sufficient, competent, and relevant.
We also discussed these assumptions and procedures with agency
officials responsible for the modeling data. (For the background
section of this report, we obtained data on mercury emissions. Because
they are used for background purposes only, we did not assess their
reliability.) We assessed compliance with internal controls related to
the availability of timely, relevant, and reliable information. Our
concerns about EPA data and analysis are discussed in the body of this
report.
We performed our work between May 2004 and February 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Environmental Protection Agency:
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY:
OFFICE OF AIR AND RADIATION:
WASHINGTON, D.C. 20460:
FEB 15 2005:
Mr. John B. Stephenson:
Director, Natural Resources and Environment:
Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Stephenson:
Thank you for the opportunity to review the draft of GAO's
"Observations on EPA's Cost-Benefit Analysis of Its Mercury Control
Options." GAO identified several areas of concern with the economic
analysis underlying the Clean Air Mercury Rule (CAMR) that the
Environmental Protection Agency (EPA) proposed in January 2004. We
appreciate the chance to share our thoughts about this document.
As you may know, we intend to issue a final rule to control mercury
emissions from power plants by March 15, 2005. This will mark the first
time in U.S. history that the Federal government has regulated mercury
emissions from power plants. We are currently in the final stages of
analyzing and evaluating options for the final regulation.
In the report, GAO expressed concern that in our proposal we "used
inconsistent approaches in analyzing the two proposed policy options."
Given time and resource constraints, EPA analyzed its cap and trade
proposal as part of a larger multipollutant approach that included the
Clean Air Interstate Rule. In contrast, we analyzed our Maximum
Achievable Control Technology (MALT) approach as a stand alone
regulation. We appreciate GAO's comments that put into context these
time and resource constraints. We will build on the work accomplished
for the proposal as we conduct our final benefit-cost analysis.
In addition, GAO expressed concerns that EPA had not provided
sufficient information to understand the benefits and costs of
regulatory alternatives. Consistent with GAO's recommendation, EPA
scientists, engineers and economists are conducting additional analyses
for the final rule, which will help address GAO's concerns.
EPA has shared all analysis germane to the choices in the CAMR proposal
with the public. There has been a 120-day comment period on the
proposal, and an additional 45-day comment period on the March 2004
supplemental proposal. EPA held public hearings in four cities during
the rulemaking process. In addition, in November 2004, EPA announced a
Notice of Data Availability (NODA). This Notice summarized the modeling
analyses presented by EPA and those commenting on the proposal, and
solicited comment on the inputs and assumptions underlying those
analyses. The NODA also offered the public the opportunity to comment
on EPA's benefit methodology. The public had 30 days to comment on the
NODA. It is important that GAO acknowledge EPA's efforts to disclose
information about the CAMR proposal in this context.
Finally, EPA appreciates GAO's comments about the proposal's limited
health benefits analysis, and discussion of how we handled
uncertainties underlying our cost and benefit analysis. To the extent
possible, our analysis of the final CAMR will provide a more detailed
health benefits analysis and characterization of uncertainty. Please
contact me if you have questions about our concerns or have your staff
contact Jason Burnett in the Office of Air and Radiation at (202) 564-
2464.
Sincerely,
Signed by:
Jeffrey Holmstead:
Assistant Administrator:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
John B. Stephenson, (202) 512-3841;
Christine Fishkin, (202) 512-6895:
Staff Acknowledgments:
In addition to the individuals named above, Tim Guinane and Michael Hix
made key contributions to this report. Kate Cardamone, Jessica Fast,
Cynthia Norris, Judy Pagano, Janice Poling, and Amy Webbink also made
important contributions.
(360471):
FOOTNOTES
[1] Under this option, also referred to as the Maximum Achievable
Control Technology (MACT) approach, the emissions standards would vary
depending on coal type.
[2] Both proposed options would apply to coal-fired electricity
generating units greater than 25 megawatts in size that produce
electricity for sale. We refer to these units as coal-fired power
plants.
[3] The Unfunded Mandates Reform Act of 1995, Pub. L. No. 104-4, 109
Stat. 48 (1995) (codified at 2 U.S.C. § 32) (UMRA) and Executive Order
12866 require agencies to conduct economic analyses of economically
significant rules. Further, UMRA requires agencies to choose the least
costly, most cost-effective, or least burdensome option unless
inconsistent with law or the agency head explains why this option was
not adopted, and the executive order directs agencies to select the
policy that maximizes net benefits to society unless a statute requires
otherwise.
[4] OMB, Economic Analysis of Federal Regulations under Executive Order
12866 (Washington, D.C., January 1996).
[5] For rules with annual benefits or costs exceeding $1 billion, OMB
directs agencies to conduct a formal probabilistic assessment of key
uncertainties underlying its cost-and-benefit estimates. OMB Circular
No. A-4, Regulatory Analysis (Sept. 14, 2003). This guidance did not
apply to the proposed rule but does apply to the final rule.
[6] EPA currently regulates power plant emissions of sulfur dioxide and
nitrogen oxides through its acid rain program. Both pollutants
contribute to acid rain and the formation of fine particles that have
been linked to aggravated asthma, chronic bronchitis, and premature
death.
[7] Specifically, the act required EPA to establish limits based on the
mercury removal achieved by the top 12 percent of facilities (in terms
of their mercury removal).
[8] EPA's Office of Research and Development discusses mercury control
technologies in a January 2004 white paper entitled "Control of Mercury
Emissions from Coal-Fired Electric Utility Boilers." We will provide
information on the availability, cost, performance, and use of mercury
control technologies in a subsequent report.
[9] According to EPA, if it selects this policy option, it will first
have to formally reverse its 2000 decision that it was appropriate and
necessary to regulate mercury with a technology-based standard.
[10] The Clear Skies Act was initially introduced in both houses of
Congress in 2003 (H.R. 999 and S. 485) and would limit emissions of
mercury, nitrogen oxides, and sulfur dioxide simultaneously. The
proposed legislation was reintroduced in the Senate in 2005 (S.131).
[11] See (1) 69 Fed. Reg. 4652 (Jan. 30, 2004); (2) U.S. EPA, Benefit
Analysis for the Section 112 Utility Rule, January 2004; and (3) U.S.
EPA, Economic and Energy Impact Analysis for the Proposed Utility MACT
Rulemaking.
[12] In December 2004, EPA announced that it would finalize the
interstate rule in March 2005, unless Congress makes substantial
progress on Clear Skies legislation. Rules may also be delayed or
blocked in court. For example, a coalition of environmental groups and
state attorneys general challenged a 2003 EPA New Source Review rule,
and the U.S. Court of Appeals for the District of Columbia Circuit
issued a stay on the rule's implementation. State of New York v. United
States Environmental Protection Agency, Docket No. 03-1380.
[13] OMB guidance states that agencies should discount costs and
benefits that accrue in different time periods to present values. To
compute present value, the agencies need to discount the estimated
costs and benefits using interest rates recommended by OMB.
[14] OMB, Economic Analysis of Federal Regulations under Executive
Order 12866 (Washington, D.C., January 1996).
[15] According to EPA, health effects associated with fine particles
include exacerbated asthma, bronchitis, heart attacks, premature
mortality, and respiratory diseases.
[16] 69 Fed. Reg. 69864 (Dec. 1, 2004)
[17] OMB Circular No. A-4, Regulatory Analysis (Sept. 17, 2003).
[18] A formal quantitative analysis under the Circular involves an
assessment of the probability distributions underlying the estimated
benefits and costs, conducted using tools such as simulation models or
expert opinion.
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