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FRAAS AND LUTTER: Rule-making negligence at the EPA

- - Tuesday, October 8, 2013

Regulations that are better than nothing are not good enough

Behind the uproar over the federal government shutdown, there lies a fundamental disagreement about the merit of contentious new regulations coming out of the Environmental Protection Agency (EPA).

Ultimately, Congress will have to decide on a budget for federal agencies for fiscal 2014, which started Oct. 1, and that decision will affect the fate of these new rules. House Republicans, focused on removing barriers to economic growth, have acted to block some of these new regulations, but the EPA is continuing to develop them, as shown by its recent announcement on limits carbon emissions from new coal-fired power plants.

In light of this controversy, it is important to recognize that there is ample evidence that the agency is failing to conduct the supporting economic analysis necessary to assess the economic merit of proposed regulations. A look back at the rules issued by the office that Gina McCarthy headed before becoming the EPA's new administrator shows that the agency did not make reasoned determinations that new rules are the best or most cost-effective way to protect public health.

One of the rules in question — the EPA's recent Tier 3 proposal to reduce emissions from cars and light trucks — illustrates the problem. This rule would cost Americans about $3.4 billion annually, according to the agency, placing it among the administration's most costly rules. The EPA, however, proposed the rule while estimating net benefits of only the proposed option. It did not identify, let alone evaluate, any alternatives.

Failure to analyze alternatives is first among the cardinal sins that tempt regulators. Without analysis of alternatives, they may claim that their preferred alternative is good — meaning better than doing nothing. They have no basis, however, for saying that their rule is cost-effective or best among plausible alternative approaches.

The EPA's failure to analyze alternatives violates White House directives. President Clinton's Executive Order 12866, which President Obama endorsed, requires "an assessment, including the underlying analysis of costs and benefits of potentially effective and reasonably feasible alternatives."

The Tier 3 proposal provides a textbook example of why quantitative analysis of feasible alternatives is essential. It combines various regulatory requirements that logically ought to be analyzed and considered separately. Specifically, the proposal would require additional vehicle emissions-control equipment — with additional costs for manufacturers and consumers — to limit nitrogen oxides, hydrocarbons and carbon monoxide. It says nothing, though, about any potential net benefits of this specific requirement.

Such incremental analysis is crucial because EPA researchers and others report the nitrogen-oxide emissions targeted by the additional control technology on tailpipe emissions could be beneficial in many urban areas. That is, the required reductions in nitrogen-oxide emissions could end up raising concentrations of ozone and fine particles and actually increase mortality risks. Thus, it is possible that the tailpipe standards, which the EPA estimates will increase car costs by $710 million in 2017 and more than $2 billion in 2030, could yield negative net benefits because reductions in some urban nitrogen-oxide emissions likely raise public health risks.

The agency's failure to analyze alternatives to its Tier 3 rule is symptomatic of a much broader problem. Only two of the past five proposed major rules issued by EPA's air program identified and evaluated alternatives. Thus, the White House is allowing the EPA to develop rules while breaking from the established practice of considering reasonable alternatives in light of estimates of benefits and costs.

Whether the agency's analysis would show that the costs of the Tier 3 vehicle-emissions controls exceed their benefits is unknown. However, proposing requirements for such controls — which would impose annual costs ranging from $710 million to more than $2 billion and could provide only small benefits, if any — constitutes negligence.

The EPA should delay development of a final rule until it completes an adequate analysis of alternatives and solicits comment on its proposed rule in light of such an analysis. Similarly, the newly confirmed Office of Management and Budget regulatory chief, Howard Shelanski, needs to remind regulatory agencies publicly that draft rules prepared without identifying or assessing reasonable alternatives do not wash.

Without analysis of alternatives, there is no reason to think that the EPA's Tier 3 rule or other weakly supported rules protect public health while promoting economic growth. This approach might get lucky, but it is not the sort of deliberate process that employs reasoned consideration of both benefits and costs of regulatory options.

Art Fraas is a former chief of the natural resources branch at the Office of Information and Regulatory Affairs at the Office of Management and Budget. Randall Lutter is a senior lecturer in public policy at the University of Virginia. Both are visiting scholars at Resources for the Future.