SMOKE GETS IN YOUR EYES: The EPA and Cost-Benefit Analysis

Wednesday, October 25, 2000

Almost everyone agrees on the importance of keeping our air and water pollution-free. But how much are we willing to pay and for what measure of protection? The Environmental Protection Agency (EPA) has been criticized for setting clean air standards without regard for the costs of meeting those standards. Critics of this approach argue that failing to weigh costs and benefits could threaten economic growth, which has its own implications for public health. How should the EPA set its standards? Can cost-benefit analysis lead to standards that are both efficient and effective?

Recorded on Wednesday, October 25, 2000

Peter Robinson: Welcome to Uncommon Knowledge. I'm Peter Robinson. Our show today, Health Versus Wealth, A Look at the Environmental Protection Agency. Over recent decades, public attitudes toward the environment have changed. Consider water. It used to be that if it looked clean coming out of the tap that was clean enough. Today, however, people are so acutely aware of the possibility of invisible contaminants that they're willing to spend money. Often quite a lot of money to get water that's pure.

Or consider air. Today people are so intent on breathing clean air that in some cities there are oxygen bars where you can pay by the minute to breathe the purest.

The point is this. People these days consider it important to have clean water and clean air and they're willing to pay something to get it. Which brings us to the Environmental Protection Agency. Under current law the EPA sets certain pollution standards without regard for the costs of meeting those standards. Critics of this approach argue that the failure to weigh benefits against costs could slow the economy. And that a slower economy would have implications for public health of it's own. So, how should the EPA set its standards?

With us today, three guests. Reed Hopper is with the Pacific Legal Foundation. Bill Curtiss is with the Earth Justice Legal Defense Fund. And James Strock, an independent consultant, spent six years as Director of California's own EPA.

Title: Smoke Gets in Your Eyes

Peter Robinson: Carol Browner, Administrator of the Environmental Protection Agency, I quote. "If the day comes when we find ourselves subjecting the health protections of our children and most vulnerable citizens to the outcome of cost-benefit analysis, literally putting a price on their heads, we will have dishonored our past and devalued our future." Is she right or is she wrong? Bill?

Bill Curtiss: She's right.

Peter Robinson: Jim?

James Strock: It depends.

Peter Robinson: Ah. The man--we should--appropriate they've seated you in the middle. What--what does it depend on? Can you give me a quick answer to that?

James Strock: Well, the quick answer would be that surely one has to always take cost into account in almost any decision on regulation. But by the same token the notion that people in desperate need would not receive health because of a minimal cost issue, that's unacceptable.

Peter Robinson: But don't you read her statement as really quite extreme? She wants nothing to do with cost-benefit analysis.

James Strock: I would say, out of kindness to her, I don't think she probably means what she said.

Peter Robinson: Alright. Reed?

Reed Hopper: I disagree.

Peter Robinson: You disagree. Okay. Now here's our issue. This past spring the Supreme Court announced that it would expand its review of a clean air dispute. The Justice has said they will decide whether antipollution regulations must take the costs of compliance, not just the health affects, but the cost of--cost of compliance into account. They don't already do that? How does the EPA operate?

Reed Hopper: It depends on the--on the statute that they're implementing.

Peter Robinson: What's at--what's at issue here is the Clean Air Act.

Reed Hopper: What's at issue here is a specific provision of the Clean Air Act. Under the Clean Air Act the EPA is required to set national ambient air quality standards requisite to protect public health with ad--adequate margin of safety. The question is, under the--under that provision, in setting an adequate margin of safety, can the EPA consider non-health factors; cost, technological feasibility and the like. That's one of the questions before the Supreme Court.

Peter Robinson: And the EPA, at present, as it does business at present, under that statute, does not take into account non-health matters?

Reed Hopper: That's--that's correct. Under other stan--other statutes for example the Safe Drinking Water Act it does, by mandate, consider costs.

Peter Robinson: Jim, what is Carol Browner so head up about? If it's purely a matter of statute, in certain cases the EPA already takes costs into account and it's just because of a statutory--a question of statutory language and this matter it happens not to. The EPA's well used to using cost-benefit analysis. What on earth is she on such a high horse about?

James Strock: What she's reacting to is--is a fair visceral reaction that anyone would have that there would not be health protection because there's some vague notion of--of cost. But I think that's not really the question. I think the real question arises here to pull back a step, Peter. Most government agencies spend money in a very direct way. They build bridges or they transfer money to people in need. EPA is different. EPA has a very small actual budget but has a tremendous amount of costs it imposes on our economy. Because EPA doesn't do things directly. It tells other people what to do.

Peter Robinson: It tells other people what to do.

James Strock: And that's what cost-benefit analysis ideally would do is to help give a--a surrogate or substitute for usual budget debate when regulations are made.

Peter Robinson: Bill, sounds quite reasonable.

Bill Curtiss: EPA does take costs into account in the Clean Air Act.

Peter Robinson: How--how--how so?

Bill Curtiss: Well, the act was passed in 1970.

Peter Robinson: Right.

Bill Curtiss: And in setting the acts priorities the number one goal was to protect public health. Congress was reacting to what it perceived was a crisis in public health brought about by air pollution. And the strategy in the act is really a two-prong approach to the problem. In the first prong EPA sets ambient air quality standards, which in the judgment of the Administrator would be sufficient to protect public health if we could achieve them. The other prong was how to get there. And in the other prong what was supposed to happen was the states were supposed to develop pollution abatement plans to reduce emissions by enough to attain the standards. In certain other cases EPA itself regulates sources of air pollution through rules and regulations. Those rules and regulations, as well as the pollution abatement plans developed by the state are absolutely free to consider costs. Congress was very plain about the fact that when it comes to how to get there, costs are a legitimate and an important part of the equation.

For thirty years the EPA, however, has interpreted the standards setting part of the act that defines where we're going, to be based on medical science, epidemiology, not industries cost of compliance. The reason Carol is so upset is because, in this case, industry is asking the Supreme Court to say EPA has wrong--been wrong for the thirty--last thirty years, that costs need to be taken into account twice. Once when we set the standards and once when we apply those standards to particular facilities, to these abatement plans or through EPA rules.

Peter Robinson: A question for Bill. Why shouldn't the EPA use cost-benefit analysis?

Title: Filthy Rich

Peter Robinson: Setting the goals, by its very nature, implies a great deal for the second prong of the approach, of--where the cost-benefit analysis is permitted. Right?

Bill Curtiss: Congress knew that achieving those standards was going to be a challenge. And the legislative history is very clear in the debates on--in--over the Clean Air Act in Congress. The Congress knew it was asking, in 1970, things of industry and institutions that were at that time possible--not--could be impossible. Impossible technologically, impossible economically, in the state of the art as it existed in 1970.

Peter Robinson: So, it was understood from the beginning that it was EPA's job to coax industry along reasonably, over time and reasonably.

Bill Curtiss: With Congress able to step in and adjust things if the standards proved impossible to attain.

Peter Robinson: Okay. This all sounds quite reasonable.

Reed Hopper: Well, the problem I see with Carol Browner's statement is that it sets up a false conflict. I--I think the debate is over whether we're going to do what it takes to protect our children. That--that's an ended debate. The question how--with respect to cost-benefit analysis now is the--whether we're going--what means we're going to use to achieve that objective. I think it only makes common sense that we use the most cost effective means to achieve--achieve the objective.

Peter Robinson: But Jim what--what about this point that EPA already takes costs into account, under the Clean Air Act?

James Strock: Well, of course they do, because if they didn't they could, in affect, have regulations shutting down virtually anything for any risk. So, at some level they always do. But the problem is it's not done systematically. And I would argue that where this debate ought to be headed next is not simply to use cost-benefit analysis in a constructive way, which it can be done. But also to do it across various risks EPA deals with so it can help an Administrator like Carol Browner not only know what it costs say to adjust pollution from cars, but how that might relate in the overall picture to an alternative with say cleaning up indoor pollution. Right now EPA is not well equipped to make these internal comparisons.

Bill Curtiss: And I think the issue that's bothering Carol is that if economics defines the goals and then economics gets factored into how we get there a second time, public health always takes a hind seat to the cost of compliance. And she's concerned about the fact that the measure of public health that children and elderly get is a function of dollars.

James Strock: The problem is not that the public health tend to take a back seat. It's that it's not done systematically. That the environmental agencies tend to react to a given crisis. So they might put in a whole lot of money say in a Superfund cleanup that may not be nearly as good for the environment or help nearly as many people as say a particular clean air issue. And that's where EPA, in my judgment, ought to be stepping in, framing these issues so other people like the Congress and the public can understand what those decisions are.

Reed Hopper: In fact, the cost-benefit analysis of benefits of public health, because we do have limited resources. And by virtue of the fact we have limited resources, we need to prioritize their use. When--when we--when we use--when we expend enormous amounts of money to chase inconsequential risks…

Peter Robinson: Whose we? EPA?

Reed Hopper: Well, we and EPA, society…

Peter Robinson: EPA forces other people to spend a lot of money.

Reed Hopper: Exactly. Then--then we're taking money that could better be used for--for public health, for education.

Peter Robinson: Give me an example in which EPA has forced other people to spend lots of money chasing inconsequential risks.

Reed Hopper: Under the Safe Drinking Water Act in 1992, a group--a forum of Governors got together to do reports to assess the EPA's effective in implementing that--that act, and determined that, in some cases, to--to address one incident of--of--of death, the cost was 92 billion dollars. And, in some cases…

Peter Robinson: One incidence of…?

Reed Hopper: One--one incidence of premature death…

Peter Robinson: I see.

Reed Hopper: …caused by a pollutant in drinking water. 92 billion dollars.

Peter Robinson: Let's turn to a court brief that was submitted by some very prominent economists. It happens to agree with Reed's position.

Title: Running (from) the Numbers

Peter Robinson: Forty economists have signed an Amicus Brief to the Supreme Court calling on the EPA to take costs into account. No doubt they'd like it to happen in a systematic way, as Jim suggests. They economists say that ignoring costs, quote, "…could lead to a decision to set the standard at zero pollution, which would," quote, "threaten the very economic prosperity on which public health primarily depends."

How is it that forty economists, three of them Nobel Prize winners, are wrong, and you and Carol Browner are right?

Bill Curtiss: That cost-benefit analysis is clearly appropriate in some spheres of EPA's regulatory functions. In other spheres, it's not. The question is, how broadly should it be applied and how rigorously should it be applied. If you look at the industry briefs and some of the Amicus Briefs in that case, there's a much more rigorous view of it, which says, "cost analysis--cost-benefit analysis is a litmus test for regulatory action. Before an agency can act, the dollar value of the benefits computed by this analysis must be greater than the dollar value of the costs."

Peter Robinson: Well, of course. That's what cost-benefit analysis is!

Bill Curtiss: That's not what those economists say.

Peter Robinson: Go ahead Jim.

James Strock: It's slightly different. In some cases, you can't know the costs in advance. And--but even there, it's still useful to go through the exercise of isolating what the uncertainty is. I'll give you an example. In the state of California, which--which generally does take costs into account as best they can in it's own regulations. The state forces new technologies, say for new automobiles. Now it's very difficult to know what those exact cost-benefits are going to be. But that's not to say it's not still useful to go through he exercise, at the very least so you can compare the lack of certainty to what you might get in another alternative type of regulation.

Peter Robinson: Okay. So you would do it as a matter of discipline almost to sort out the arguments within an agency. But you would not make cost-benefit analysis binding on an agency…

James Strock: Well, the--the problem…

Peter Robinson: …precisely because you can't actually do a rigorous cost-benefit analysis.

James Strock: You can't always. And--and what's more, the cost-benefit analysis is not giving the answer. It can help you prioritize on an economic issue. But the ultimate decision that say Carol Browner has to make, or a Governor, or a President is generally not solely an economic question. The fact is, for example, people will often accept much greater risk from pollution if they're consulted first as to what that risk might be.

Reed Hopper: And that's one of the virtues of the cost-benefit analysis. It always provides valuable information. One of the things it does is it--it flushes out inconsequential risk. It--it also brings to the public attention the trade offs that must be made. And this is valuable so that individuals can hold elected officials accountable for the regulation that they're imposing.

Peter Robinson: What about the contention that industry always overstates the costs and difficulty of meeting pollution standards.

Title: The Industry Doth Protest Too Much

Peter Robinson: The EPA establishes auto emissions standards. This is in the 1970s. The auto industry screams, testifies before Congress, "We can't meet the standards, it'll shut down the American auto industry, it will irreparably harm the American economy." Today, a few decades later, we'll all driving around with catalytic converters. Auto emissions have plummeted. They've been cut by half or more. Isn't that right? Dramatically. Dramatically. And the economy is booming. Forcing the EPA to engage in cost-benefit analysis is to issue an open invitation to industry to produce inflated costs, to engage in political posturing, to testify before Congress in very dramatic fashion about how many people are going to be thrown out of…and it's all a bunch of bologna.

Reed Hopper: It's beside the point what--what industry--industry may argue or presume. The cost-benefit analysis is done in house, by the agency, using their own economists, making their own presumptions.

Peter Robinson: You ran California's en--it's not called EPA. What's it called in this state?

James Strock: Cal-EPA

Peter Robinson: You ran that organization for how long Jim?

James Strock: Seven years.

Peter Robinson: Seven years. Did--would you want industry to be able to go up to the legislature in Sacramento and say, "Strock's got his numbers wrong again?"

James Strock: Well, they do anyway.

Peter Robinson: They do anyway?

James Strock: And so does the other side. But the fact is that this again--this area of cost-benefit analysis can be used properly. Let me give you an example with respect to automobiles. When--there is uncertainty as to mandating that Detroit say meet a given standard of pollution. But if they're given a target and not told how to do it, they can often get there. And what's more, you can often know up front that that will cost a lot less than the alternative. The way this comes up in real life is in California most of our pollution comes from automobile exhaust. It's much more cost efficient to lower exhaust from cars than it is to continue to ratchet down on fixed industries.

Peter Robinson: So…

Bill Curtiss: Can we…?

Peter Robinson: Sure, go ahead.

Bill Curtiss: I can't speak to Jim's experience at EPA. But let's stick to the national level. If the Clean Air Act is deemed to require cost-benefit considerations, if industry believes EPA has its numbers wrong, it can sue EPA and challenge the standards on the grounds that the numbers are wrong. This is not just a political debate. This is the ground for lawsuits, this is the grounds for judicial review and overturning the standards that the numbers are wrong enough. Now let's get back for a minute to what these numbers mean.

Peter Robinson: Right.

Bill Curtiss: EPA, in it's brief to the Supreme Court, conceded that it's own analysis of compliance costs over the years have been consistently wrong. They have over stated compliance costs between 30 and a hundred percent, for years.

Peter Robinson: The EPA did?

Bill Curtiss: EPA said that. Now let's look at the industry standards for--arguments for this set of regulations we're talking about. Industry claims, excuse me, I think EPA's number are that it would take 43 billion dollars a year to comply with the particulate in ozone standards. Industry claims it isn't 43 billion, it's 210 billion.

Peter Robinson: Right.

Bill Curtiss: So, here's the public listening to industry say, "No. No. It's 200 billion." EPA says it's 40 billion. Industry says, "You're overvaluing the lives of those old people who would be saved if the PM10 standards were tighter. They're going to die in a few years anyway. You shouldn't be using the average value of a life for those people. It should be smaller for them." And the public throws up it's hands and says, "How does this contribute to informed decision making? If Congress wanted to create that situation and allow all that to happen, it could do so. It hasn't and it's declined all the invitations to do that."

Reed Hopper: It has done so, however, in other circumstances like I mentioned before. In the Safe Drinking Water Act, because of over-regulation, because of extremely high costs that were being imposed on--on industry to meet inconsequential risks, the Congress mandated, in 1996 that the EPA engage in a very robust cost-benefit analysis in setting drinking water standards. This can be done under the Clean Air Act just as well and just as effectively.

Peter Robinson: Could we improve the EPA by narrowing the scope of its job?

Title: Industrial Engineering

Peter Robinson: First EPA establishes the standards and then it figures out how it's going to tell industry to reach those standards. Maybe what we ought to do is just set standards and let industry figure out, on its own, how to get there. You--would that be a bigger and more important reform in your judgment?

James Strock: Much more important. And I think one of the biggest weaknesses in the USEPA today is, and it's partly statute but it's also partly a leadership gap in my opinion, is they tend to get much more involved in telling people how to do things than setting a given standard and--and--the…

Peter Robinson: And then just--you just measure over a period of years. Give them a certain time to reach the standard and if they reach it, fine. And if they don't they pay fines. It's as simple as that.

James Strock: Exactly right. And--and…

Peter Robinson: Would you go for that?

Bill Curtiss: If it's enforceable, yes. But a lot of the incentive programs aren't.

Peter Robinson: Huge fines.

Bill Curtiss: A lot of those programs are not.

Peter Robinson: Why--why not?

Bill Curtiss: I'm not criticizing Jim's concept. I'm just saying the devil is in the details here.

Peter Robinson: Would you go for the basic concept, just…?

Reed Hopper: Absolutely.

Peter Robinson: You would? Okay. You would also suggest a rejiggering of--of the relative weight between the state EPAs and the EPA at the national level. Explain what you mean by that.

James Strock: Well, in 1970 when EPA was started the states were the problem. The states--and--and in the context of the civil rights era, the whole notion of states rights was properly very dubious in many people's minds.

Peter Robinson: You couldn't--you couldn't trust the states.

James Strock: You really couldn't trust states. And EPA was there to make up for it. Today, it's the exact opposite. A--a number of states, particularly states like California, New York, Massachusetts, New Jersey are far ahead of the U. S. as a whole. And we ought to do more to empower them, have them pull the rest of us.

Peter Robinson: Give me an example of the way in which Cal EPA is ahead of the EPA in Washington.

James Strock: Very simple one is in automobile standards, where there's a particular authority for California and then also other states to follow California to go further than national emissions requirements.

Peter Robinson: Standards are tougher in California than the EPA in Washington requires.

James Strock: They're tougher. They're tougher.

Bill Curtiss: And the EPA ozone standards essentially match the standards that California set based it's own notions of priorities in 1987 and reaffirmed in 1984.

Peter Robinson: So what would be--give us a nice clean statement that Bill and Reed can agree with or disagree with. How would you redefine the role of the EPA in Washington as against that of the state EPAs?

James Strock: I would, through statute and through just regulatory action, pull EPA out of a lot of the business of telling people what to do, that is how to meet requirements. But instead to set very precise, environmental indicators with the states what to meet and let the states figure out how to do them. Where it works, EPA share their information. Where it fails, they enforce very hard against the states.

Peter Robinson: Would you go for that?

Reed Hopper: I would go for that. And I think we're actually fairly close to that in many ways. While the EPA continues to exercise a command and control approach, rather than a cooperative approach or setting performance standards and letting industry respond, under the Clean Air Act, the--the EPA does set general standards. The state implements them through a state implementation plan. And the state has a fair amount of leeway in how they're going to accomplish that.

James Strock: That's--that's--it looks like it by law, but it's not reality. Two examples in California. Because of both Congressional and executive action, California and many other states basically had to put MTBE as the only sensible choice to meet a federal mandate. They weren't told…

Peter Robinson: Into gasoline.

James Strock: …they weren't told to meet the standard. They were told, in effect, there's two ways to do it, ethanol or MTBE, take your pick. And the states end up; frankly they could have done a better job just being given the standard, not being forced into that box.

Peter Robinson: And MTBE, now, it turns out has all kinds of health problems associated with it.

James Strock: And the federal government, having, in affect, lead to that decision is not paying for the clean up. That goes back to the states and the private parties.

Peter Robinson: Let's wrap up with some ways to reform the EPA.

Title: A Breath of Fresh Air

Peter Robinson: We'll test out three quick policy initiative. Up or down vote. Number one, mandate that the Environmental Protection Agency in Washington use cost-benefit analysis in a rigorous and systematic way across its entire portfolio of responsibilities. Are you in favor?

Reed Hopper: In favor.

Peter Robinson: You in favor?

James Strock: In favor.

Peter Robinson: You?

Bill Curtiss: No.

Peter Robinson: Gone.

Bill Curtiss: If rigorous means it's a litmus test up or down, before you can regulate, absolutely no.

Peter Robinson: Okay.

Bill Curtiss: It's not that good a tool.

Peter Robinson: Policy and proposal number two. The Environmental Protection Agency in Washington simply sets standards, then goes about the business of making certain that industries have met those standards and has considerable enforcement power to fine industry heavily if it fails to meet those standards, but stops telling industry how to meet those standards. You in favor?

Reed Hopper: Very much.

Peter Robinson: You in favor?

James Strock: Absolutely.

Bill Curtiss: It's a decent theory.

Peter Robinson: And the third is that the EPA in Washington becomes much less powerful relative to--to the state Environmental Protection Agencies. It sets some national standards. It acts as a clearinghouse for information. You in favor?

Reed Hopper: Generally in favor.

Peter Robinson: Generally in favor. Jim?

James Strock: With one caveat.

Peter Robinson: Go ahead.

James Strock: To underscore that the EPA would have a greatly enhanced enforcement role at the same time.

Peter Robinson: You give the EPA in Washington a--a bigger stick.

James Strock: But…

Peter Robinson: Smaller rulebook, but a bigger stick.

James Strock: Exactly. Exactly.

Peter Robinson: You would be in favor?

Bill Curtiss: We did that one once and it didn't work.

Peter Robinson: When did you do it? What do you mean?

Bill Curtiss: 1967. The Clean Air Act as it existed at that time let the states do exactly what you're talking about.

Peter Robinson: Right.

Bill Curtiss: The states were--could set their own standards. EPA provided information about control technologies. They provided public health information to the states. The states were supposed to figure out how to achieve those criteria and use the control strategy information they were given by EPA.

Peter Robinson: And what happened?

Bill Curtiss: They didn't.

Peter Robinson: They just ignored it.

Bill Curtiss: What the states did is they looked at economics and their hopes for economic development, and industrial growth in their states and they competed with one another to set low standards to attract industry.

Peter Robinson: And no Governor of Ohio or Michigan was going to say to himself, "I'm going to get guys thrown out of jobs in auto factories because I set up a state EPA…" Well, he has a point there, doesn't he?

James Strock: But that's why the federal government does set the standard. And that's why the federal government has that strong enforcement power. That's what was missing in 1967.

Peter Robinson: Would you go for it if the EPA in Washington had strong enough enforcement powers?

Bill Curtiss: And those enforcement powers extended to the public, yes, another short-coming of EPA in Washington.

Peter Robinson: Extended to the public. What do you mean by that?

Bill Curtiss: The current--many current environmental statutes allow the public to enforce environmental laws when EPA doesn't, or won't.

Peter Robinson: You mean by bringing suit?

Bill Curtiss: Right. And one of the problems that EPA has at the national level is it is not a vigilant enforcer.

Peter Robinson: It doesn't have the budget.

Bill Curtiss: It doesn't have the political will. Look at the fights with California over inspection and maintenance in the '80s. And again, there was this stalemate between the--the state and the EPA. And, those kind of controversies scare EPA. They are not as consistent as they ought to be.

Peter Robinson: Are you suggesting that when Cal EPA goes eye-ball to eye-ball with the EPA in Washington already blinks.

James Strock: They did. They were wrong. But that's not the question. The question is how should it be done properly? The problem is not California. The problem is--although it could be, but generally it's other states that have different interests in lowering standards. They need to have a credible enforcement threat.

Peter Robinson: Bill, Reed, Jim, thank you very much.

Bill Curtiss: Thank you.

Reed Hopper: Thank you.

James Strock: Thanks.

Peter Robinson: Balancing the costs against the benefits of achieving clean air and clean water. A couple of our guests argued that doing so would not only permit greater economic growth, but make the Environmental Protection Agency itself more effective, permitting us all to breath a little easier. I'm Peter Robinson. Thanks for joining us.