CRS Report: 98-619 - Risk Analysis: Background on Environmental Protection Agency Mandates

It took several months for executive branch agencies like EPA to adapt to President Clinton's orders. OMB issued preliminary guidance on implementing President Clinton's order October 12, 1993. In the following year, the Regulatory Working Group established by the executive order developed principles of analysis for use by all agencies and 0MB. In response, 0MB issued new guidance for Economic Analysis of Federal Regulations Under Executive Order 12866 on January 11, 1996, replacing the detailed guidance that was last published in Appendix V of the Regulatory Program of the United States Government April 1, 1992-March 31, 1993. Internal EPA guidelines for conducting cost and benefit analyses have been reviewed by EPA's Science Advisory Board (SAB). Additional policy guidance is being developed by EPA economists who have drafted an economics framework document. The purpose is to improve the consistency of economic analyses done in the various program offices.19

GAO evaluated agencies' compliance with the Clinton order in a 1996 study.20 GAO identified 29 economically significant final rules promulgated in 1995, 4 issued by EPA. GAO found that EPA analyzed the costs and benefits of alternatives for each rule. GAO also looked at a random sample of final rules that were designated significant but not for economic reasons. Agencies had analyzed costs and benefits for only 9 of the 23 rules GAO reviewed. However, GAO reported that OIRA officials stated that cost-benefit assessment would not have been useful for the remaining 14 rules, because some were implementing detailed statutory or procedural requirements, some were administrative in nature, one eliminated an outdated requirement, and one was significant only because of its relationship to another rule

In another study, GAO found that EPA analyses supporting air quality regulations did not identify key economic assumptions and did not always explain the reason for choosing one assumption over another.21 GAO also has reported that the economic analyses it has reviewed most recently (for rules developed by EPA and the Department of Transportation) vary widely in type, form, and format, and that in some cases cost-effectiveness analyses were conducted rather than cost-benefit analyses.22 (Both types of analysis appear to be required by the executive order.) Of course, variation may be appropriate, given the varying nature and severity of risks and available management strategies. Variation may reflect differing amounts of resources available in different programs. Statutory or judicial deadlines might limit available time for analysis in one case, while lack of scientific knowledge might frustrate scientists in another. Finally, EPA regulations might vary for less innocent reasons reflecting political influence, incompetence, or fluctuating levels of effort.

The most recent OMB implementation report indicated that 0MB reviewed 88 significant EPA rules during the second full fiscal year after the order was issued (Oct. 1, 1994 - Sept. 30., 1995) and 63 significant rules in FYI 996.23 Less than 33% of these rules were significant because they were expected to cost more than $100 million in one year.24 For comparison, between 1981 and 1992, EPA issued 60 major final rules and 92 major proposed rules. However, because these figures are not truly comparable, they should be interpreted with caution. Of the significant EPA rules reviewed by OMB in FY1995 and FY1996, 51% and 63%, respectively, were modified by the agency during the course of OMB review, according to OMB. OMB reported that cost-benefit analysis allowed EPA to reduce the stringency of at least one regulation without sacrificing its regulatory objectives.25

Executive orders cannot override statutory provisions; thus, the Clinton orders did not affect the statutory barriers to analysis of environmental regulations. However, a general statutory requirement to conduct analysis of significant federal rules was enacted in 1996 and is described below.

The 104th Congress enacted legislation that mandates risk analysis indirectly by requiring quantitative analysis of benefits for all substantive, "major" proposed regulations and final regulations promulgated. For environmental regulations, the benefits generally are reductions in risk that the agency aims to achieve. The Unfunded Mandates Reform Act (P.L. 1044), Title II, requires agencies to quantitatively assess benefits, including the effect of the federal mandate on health safety, and the natural environment, and to compare benefits to costs for all proposed and final rules with an expected cost of $100 million or more. It also requires agencies to promulgate the alternative that is least costly, most cost-effective, or least burdensome, or to explain why such an alternative was not adopted. To ensure compliance, the Act requires agencies to submit rules to the GAO, which is to report to the appropriate congressional committees on agency conduct of cost-benefit analysis, regulatory flexibility analysis, and other requirements. EPA compliance also is overseen by OMB and the Advocacy Office of the Small Business Administration.

GAO reviewed federal agencies' implementation of the Act in 1997 and concluded that it had a limited effect on agency rulemaking. Of 110 economically significant rules promulgated in the first 2 years of the Act, written statements were not on file at the Congressional Budget Office for 80 rules. For a variety of reasons, GAO concluded that the Act did not require written statements for 78 of those rules.26 For example, the Act does not require analysis if it would be duplicative or not reasonably feasible, given time constraints. GAO noted that requirements for analysis (in Section 202) were similar to requirements of the executive orders, and therefore might be duplicative. Assessments also are not required if rules do not impose an enforceable duty except as a condition of federal financial assistance or associated with a voluntary program. In summary, it appears that EPA complied with the law but that compliance required little additional analysis, given the available grounds for exempting rules from the requirements.

Environmental statutes do not provide a consistent standard for the use of risk analysis in development of regulations. Long-standing statutory mandates to protect public health "with an adequate margin of safety" or to prevent "unreasonable" adverse environmental effects seem to require, or at least to encourage, risk analysis to make regulatory determinations. The latest amendments to the drinking water and pesticide laws explicitly require EPA to balance risks of different kinds in selecting among regulatory options. Many of EPA's regulatory decisions are driven by statutory provisions dictating the degree of environmental protection to be achieved, the actions to be taken, and/or the criteria to be considered. While some provisions of environmental laws grant EPA broad discretionary power, others grant little or no power, to consider the significance of risks or the relationship between costs and reductions in risks expected to be achieved. In part, the variable requirements contained in these laws reflect evolving attitudes and knowledge with respect to environmental risks, risk assessment, economic assessment, and other factors, as well as political changes in the Congress and executive branch.

Efforts to encourage consistent use of risk analysis in rulemaking have had a limited impact, in part because executive orders do not override provisions of environmental statutes. Compared to earlier executive orders, President Clinton's Executive Order 12866 appears to require EPA to conduct more comprehensive analysis of risks for more rules, but it requires fewer EPA analyses to be reviewed by OMB. According to a GAO analysis of EPA compliance with President Clinton's executive order, EPA economic analyses vary widely in type, form, and format. This variability may be unavoidable, however, given constraints imposed by environmental statutes, judicial deadlines, limited resources, and the state of the science.

The general requirement for cost-benefit analysis imposed by the 104th Congress in Title II of the Unfunded Mandates Reform Act March 22, 1995, apparently has not noticeably increased analytic activities at EPA. GAO found that the Act has had a limited effect on analysis of environmental rules, apparently due to the limited number of rules to which the Act applies and the comparable analyses that already are required by executive order.

Policymakers may well disagree about the adequacy of existing mandates for risk analysis and cost-benefit comparisons, because they affect a small, though significant percentage of EPA regulations. The 105th Congress may consider proposals to add mandates for considering risks to the Comprehensive Emergency Response, Compensation, and Liability Act (Superfund); also it has before it proposals for an overriding statute to establish broad risk and cost analysis requirements. Based on the GAO report, Members might propose to reduce exemptions currently allowed by the Unfunded Mandates Reform Act. However, other Members oppose the extended use of risk analysis in environmental rulemaking, arguing that it would delay important new regulations and ultimately force EPA to conform its decisions to the analytic results, regardless of the quality of underlying data and analysis.

Decision Point	Now Revoked Executive Orders 12291 and 12498	Executive Orders 12866 and 12875


Whether to regulate	Only when the potential benefits to society exceed the potential costs to society, to the extent permitted by the law	Only when required by law, necessary to interpret the law, or necessary due to compelling public need; only upon a reasoned determination that the benefits justify costs; and only if it would not create a mandate upon a state, local, or tribal government, unless funds are provided by the federal government to pay direct costs incurred by that government or the agency provides to OMB a description of :10 the extent of prior consultation with that government; 2) the nature of that government's concerns, 30 written communications submitted by such government, and 4) the agency's position supporting the need to issue the regulation


Which regulations to analyze	"Major rules," both existing and proposed, designated by the agency of OMB as likely to result in an annual effect on the economy of $100 million or more; a major increase in costs or prices for consumers, individual industries, federal, state, or local government agencies, or geographic region;or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.- based enterprises to compete with foreign-based enterprises in domestic or export markets.27	"Significant rules," existing and proposed, that may have and adverse material effect on the economy, any sector of the economy, productivity, competition, jobs, or local or tribal governments or communities(e.g., by imposing an unfunded mandate); may adversely affect the environment or public health or safety; may create a serious inconsistency with an action taken or planned by another agency; may alter the budgetary impact of entitlements, grants, user fees, or loan programs or rights and obligations of recipients; or may raise novel legal or policy issues.


How priorities are to be established	Maximize aggregate net benefits to society; taking into account the condition of the particular industries affected, the condition of the national economy, and other regulatory actions contemplated; target risks that are real and significant rather than hypothetical or remote	After consideration of degree and nature of risk


How to choose a regulatory objective	To extent permitted by law, to maximize net benefits	To implement law; to address significant problems, including the failure of private markets or public institutions; or to address compelling public need such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of Americans


Which regulatory approach to choose	to the extent permitted by law, the alternative with the least net cost; address ends rather than means.28	To extent permitted by law, maximize net benefits; minimize burden for society, taking into account the costs of cumulative regulations; and designed in the most cost-effective manner. Requires consideration of incentives for innovation, consistency, predictability, enforcement and compliance costs, flexibility, distributive impacts, and equity. Requires specification of performance objectives.


What to analyze, generally	Potential benefits, costs, and net benefits, including effects that cannot be quantified in monetary terms, of the proposed regulation relative to the alternative of no regulation; alternative approaches that could substantially achieve the same objective at lower cost 29	All costs and benefits(including quantitative and qualitative ) of the proposed regulation and alternatives, including the alternative of no regulation and alternatives that do not regulate directly(e.g., by providing economic incentives or information); explore use of regulatory negotiation and other consensual processes


What to analyze, specifically	Costs to consumers, individual industries, federal, state, or local government agencies, or geographic regions; effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.- based enterprise to compete with foreign- based enterprises in domestic or export markets; and who is likely to receive the benefits and bear the costs	Effects on the efficient functioning of the economy and private markets (productivity, employment, and competitiveness); health and safety; the natural environment; implementation and compliance costs; costs of cumulative regulations; effects on state, local, and tribal governments, including availability of resources to carry out mandates; and discrimination or bias


Comparative risk analysis	No provision	Requires agencies to include in their annual regulatory plan comparisons of the magnitude of the risk addressed by each regulatory activity to other risk within the agency's jurisdiction


Basis for analysis	Adequate information; scientific risk assessment procedures	Best reasonably obtainable scientific, technical, economic, and other information


How to treat state, local and tribal governments	Should not preempt state laws or regulations except to guarantee rights of national citizenship or the avoid significant burdens on interstate commerce 30	Develop a process to permit meaningful and timely input by state, local, and tribal governments indeveloping regulatory proposals containing significant unfunded mandates; in all cases, seek views of state, local, and tribal officials; assess effects on state, local, and tribal governments; minimize burdens on state, local, and tribal governments; harmonize federal regulations with state, local, and tribal functions; streamline process for waiver application by state, local, or tribal governments; attempt to increase opportunities for flexible policy approaches, render a decision within 120 days, and notify applicant and explain decisions to deny such application in writing; OMB to consult with state, local, and tribal government representatives quarterly.


How to treat the private sector	Regulations should be substantially supported by the full record, with full consideration to public comments	Seek stakeholder views before publishing a Notice of Proposed Rule Making; periodically consult with representatives of businesses, nongovernmental organizations,and the public

19 "Broad EPA Group Crafting Cost-Benefit Analysis Framework," Risk Policy Report, v.4, n.10, Oct. 17, 1997, p.6.

20 U.S. Congress. General Accounting Office. Regulatory Reform: implementation of the Regulatory Review Executive Order. GAOIT-GGD-96-185. U.S. Govt. Pruit. Off., Sept. 1996. p.7.

21 U.S. Congress. General Accounting Office. Regulatory Reform: Comments on S. 981-The Regulatory improvement Act of 1997. GAO/T-GGDIRCED-97-25 0. U.S. Govt. Print. Off.,Sept. 1997. llp.

23 Office of Information and Regulatory Affairs, Office of Management and Budget. More Benefits Fewer Burdens: Creating a Regulatory System that Works for the American People,A Report to the President on the Third Anniversary of Executive Order 12866, Dec.1996, p. 39. http://www.Whitehouse.gov/WH/EOP/OMB/html/miscdoc/3_;Year_Report.html

26 GAO. Unfunded Mandates: Reform Act Has Little Effect on Agencies Rulemaking Actions. GAO/GGD-98-30. Washington, U.S. Govt. Print. Off., Feb.1998. p.2.

27 Effects of a rule on the environment, public health or safety, actions of other agencies, budget, or novel legal or policy issues may be considered in a cost-benefit analysis conducted in accord with E.O. 12291, but these effects alone are not sufficient to trigger the requirement to conduct an analysis.

28 Additional criteria are specified in guidelines provided by OMB (Circular Number A-94, October 29, 1992, and the Regulatory Program of the U.S. Government for April 1 1991 to March 31, 1992, Appendix V) and EPA (cited above), but these are not included in Table 1. OMB staff have indicated that their guidelines are not expected to change as a result of the Clinton order, and EPA has not issued guidance since it re printed its 1983 Guidelines with revised appendices in 1991. With regard to choice of a regulatory approach, OMB guidelines with state that: entry in private markets should be regulated only where necessary to protect health or safety or to manage public resources efficiently; uniform quality standards for private goods or services should not be prescribed except where products are needlessly unsafe or product variation are wasteful, and voluntary private standards have failed to correct the problem; qualification for receiving government licenses should be the minimum necessary; encourage unrestricted exchange of rights or obligations created by regulation; and the terms or conditions of federal grants, contracts, or financial assistance should be limited too the minimum necessary to achieve the purposes for which the funds were authorized and appropriated.

29 According to page 5 of EPA's 1983 Guidelines, the benefits and costs of proposed regulations and important alternatives were to be compared to the benefits and costs in the absence of regulation, referred to as the 'baseline". In addition, the Guidelines required consideration of alternatives to federal regulation such as "negotiated voluntary action, and market, judicial, or state or local regulatory mechanisms" and " market-oriented regulatory alternatives."

30 President Reagan's executive Order 12612 on Federalism Considerations in Policy Formulation and Implementation is still in effect. In general, it aims to "restore the division of governmental responsibilities between the national government and the states that was intended by the Framers of the Constitution and to ensure that the principles of federalism established by the Framers guide the Executive departments and agencies in the formulation and implementation of policies" (52 Federal Register 41685, Oct. 26, 1987). Section 6(c)(3) of the order required agencies preparing Federalism Assessments for policies "[i]dentify the extent to which the policy imposes additional costs or burdens on the states, including the likely source of funding for the states and the ability of the states to fulfill the purposes of the policy."

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