Risk Analysis and Cost-Benefit Analysis of Environmental Regulations

94-961 ENR

TABLE OF CONTENTS FOR THIS SECTION

-- RISK MANAGEMENT AT EPA
-- -- Comparative Risk Analysis at EPA
-- -- Economic Analysis
-- -- -- The Influence of Environmental Statutes

Ordering of Perceived Risk for 30 Activities and Technologies

Table 1. Statutory Authority for Considering Risks,
Technological Capacity, and Costs in Developing Regulations

RISK MANAGEMENT AT EPA

The 103rd Congress debated whether EPA has adequately considered risks and costs when exercising its discretionary authority. Specifically, some questioned whether EPA has targeted its resources to address hazards posing the largest environmental risks and whether EPA regulations to reduce risks are worth the cost of compliance and implementation. The 104th Congress is expected to continue debating these issues. This section of the report summarizes EPA's use of risk comparisons and cost-benefit-risk analysis in regulatory decisions.

Comparative Risk Analysis at EPA

In the mid 1980s, the EPA Administrator commissioned a special task force to compare the risks associated with major environmental problems that remained to be controlled, given the level of Federal risk management that existed at the time. The purpose was to help the Administrator determine where available EPA resources could be applied to greatest effect.(l5) Senior EPA career managers and technical experts assigned to the task force ranked 31 environmental problems in a 1987 report Unfinished Business: A Comparative Assessment of Environmental Problems.

EPA scientists based their ranking on available data, but reported that data gaps and uncertainty about risks plagued their efforts. Ranks did not take into account the feasibility of controlling risks, the economic benefits of activities posing risks, the limits of EPA's statutory authority, or the distribution of risks and benefits geographically, over time, or among people. Problems were ranked based on relative risks within four categories: human cancer risks, other risks to human health, ecological effects, and human welfare (including such effects as visibility impairment and damage to building materials). Scientists grouped environmental problems within categories as relatively high, moderate, or low risks.

The exercise revealed that no environmental problem ranked relatively high or relatively low in all four categories of risk. Problems ranked relatively high or moderate in three or more categories included: criteria air pollutants (that is, lead, sulfur dioxide, nitrogen oxides, particulates, carbon monoxide, and tropospheric ozone), stratospheric ozone depletion, pesticide residues on food, and other pesticide risks. Other relatively high risks to human health included: hazardous air pollutants, indoor air pollution, indoor radon, pesticide application, exposure to hazardous substances in consumer products, and worker exposures to chemicals. Additional problems posing high risks to ecology or human welfare included: global warming; surface water pollution; physical alteration of wetlands, estuaries, and other aquatic habitats; and mining wastes.

Interpretation of these results requires caution. For example, the low relative risk of hazardous waste sites (as indicated by data available in 1987) was due, in part, to the existence of regulations and availability of funds to treat the problem. Problems such as indoor air pollution were characterized as relatively risky, at least in part, because they were not regulated by any Federal agency.

EPA scientists next compared the relative risk of each problem with its budget allocation and the results of national polls of public concerns. The public reported: high concern about chemical waste disposal, water pollution, chemical plant accidents, and air pollution; moderate concern about oil spills, worker exposure, pesticides, and drinking water; and low concern about indoor air pollution, consumer products, radiation (other than nuclear power), and global warming.

EPA concluded that its budget correlated better with the priorities of the public than with the scientists' evaluations of residual risks. However, there are several reasons why this conclusion may be suspect. First, EPA did not ask the public to rank environmental hazards, and it did not use the results of scientific studies of how people rank hazards based on risk. (The results of one such study are shown in the figure titled "How People Evaluate Hazards.")(16) Rather, EPA staff compiled public responses to questions asked in national opinion polls in 1985 and 1986 about 19 environmental problems which roughly coincided with the 31 hazards ranked by EPA scientists. Thus, the scientists' rankings were assigned after hours of careful deliberation, while the public was simply responding to a few questions in an opinion poll. In addition, the scientists and public responded to different questions. Scientists addressed the question, "Of the environmental hazards that are recognized, which pose the highest risks and remain to be controlled?" The public was asked, "Which of these 9 problems are most serious?" or in some cases, "How serious is the problem of [chemical waste disposal, for example]?" Finally, the public responses were compiled and interpreted by EPA staff.

EPA's Science Advisory Board (SAB), an advisory group of independent scientists, reviewed EPA's efforts in its 1990 report Reducing Risk: Setting Priorities and Strategies. SAB praised EPA for considering "the long-term public policy importance of understanding relative risks," but criticized the accuracy and methods of ranking and the omission of important environmental problems. It devised its own method and ranked a different, though overlapping, set of environmental issues. The results were largely consistent with those of the EPA scientists, but the SAB expressed more concern about ecological risks because of "the vital links between human life and natural ecosystems." The SAB identified the following hazards that remained to be controlled as the highest human health risks: ambient air pollutants (both toxic and criteria), occupational chemical exposures, indoor air (including radon), and pollutants in drinking water. Relatively high-risk problems affecting ecology and human welfare included: habitat alteration, loss of biological diversity, stratospheric ozone depletion, and global climate change.

Congress appears to support EPA's efforts to rank and compare environmental risks, but to question whether the Agency uses relative risks in the preparation of its budget proposals. Recently, the National Academy of Public Administration (NAPA) initiated a study mandated by a provision in EPA's FY 1994 appropriations legislation (Public Law 103-124). NAPA is "to address whether the Agency's resources are being directed to the most pressing environmental hazards, the Agency's statutory mandates in the context of relative risk to human health and the environment, and the effectiveness of the Agency's organizational structure," (S. Rept. 103-137, p. 110). Congress urged NAPA to work with the Risk Assessment and Management Commission (established under the Clean Air Act Amendments of 1990 and discussed above) and NAS. NAPA hopes to report study results prior to February 1995.

HOW PEOPLE EVALUATE HAZARDS

Research has shown that risk experts and the public rank hazards in the same order when they are asked to judge the lethality of hazards (Fischhoff B. and D. MacGregor. "Judged Lethality: How Much People Seem to Know Depends Upon How They Are Asked," Risk Analysis, v. 3, n. 4, 1983: 229-236.) However, when asked to judge relative "riskiness", people rank hazards differently, depending on their personal perspectives, training, knowledge, and values. Risk analysts have been trained to evaluate hazards based primarily on annual, average, national death rates. Other groups use broader (and potentially more comprehensive) criteria.

Ordering of Perceived Risk for 30 Activities and Technologies

Note: The ordering is based on the geometric mean risk ratings within each group. Rank 1 represents the most risky activity or technology.

Source: Adapted from Slovic, P., B. Fischhoff, and S. Lichtenstein. "Facts and fears: Understanding perceived risk." p. 191. In: Schwing, R.C. and W. A. Albers, Jr., (eds.). Societal Risk Assessment: How Safe is Safe Enough? New York Plenum Press, 1980.

Economic Analysis

EPA began analyzing the costs of proposed regulations in the early 1970s. Benefit analysis began a bit later because it is more difficult to describe systematically the progress a proposed or existing regulation will achieve toward goals such as ''fishable, swimmable waters" or safe drinking water. At first, the results of EPA's cost-benefit analyses often compared costs expressed in dollars with benefits described qualitatively. Gradually, however, quantitative measures of benefits replaced qualitative descriptions. Recently, the consistent measure of the benefits of an environmental regulation became the risks avoided, expressed as, for example, numbers of lives saved or critical ecosystems protected. To permit mathematical calculations of "net benefits'' or a benefit-cost ratio, analysts use various methods to translate the measures of avoided risk into dollars.(17)

Statutory directives, executive orders, and judicial decisions encouraged this development of methods for expressing and comparing the costs and benefits of environmental regulations, but legal mandates also sometimes discourage EPA's use of economic analysis when developing regulations. The following sections describe some key provisions of Federal law and how they might influence EPA actions.

The Influence of Environmental Statutes

Many of EPA's regulatory decisions are driven by specific statutory mandates concerning the degree of protection to be achieved, the actions to be taken, and the criteria to be considered. These mandates vary in specificity, sometimes granting EPA broad discretionary power, and other times little or no power, to consider the economic impacts of its decisions. Some authorize or even require consideration of economic factors, but others do not. A few have provisions that arguably inhibit EPA's ability to consider costs. No statutory provision requires an analysis of net benefits as part of the rulemaking process (although requirements in some statutes to weigh costs and benefits may imply a net benefit analysis). Selected relevant provisions of some key environmental statutes are described below and are summarized in Table 1.

Table 1. Statutory Authority for Considering Risks,
Technological Capacity, and Costs in Developing Regulations

* These are apparently authorized considerations, given the paraphrased or quoted statutory language under the heading "Degree of Protection". Other interpretations of the cited statutory provisions are possible and may have legal precedence.

Section 109 of the Clean Air Act (CM, 42 U.S.C. 7401-7626) mandates the establishment of national primary ambient air quality standards for pollutants from numerous or diffuse sources whose emissions may cause or contribute to air pollution that may "reasonably be anticipated to endanger public health or welfare" [§ 108(a)(1)]. Under this provision, EPA is required to set standards such that their attainment and maintenance "are requisite to protect the public health" in the judgment of the Administrator, based on air quality criteria and allowing an adequate margin of safety. Air quality criteria are compilations of information reflecting the latest scientific knowledge relevant to the assessment of risks to public health or welfare posed by the presence of criteria pollutants in the ambient air [§ 108(a)(2)]. This statutory provision only authorizes consideration of environmental and human health risks.

In contrast, the CM § 112(d) requires EPA to consider risks, available technologies, and costs in promulgating regulations to control emissions of 188 hazardous air pollutants from major industrial sources.(19) It directs EPA to require source facilities to apply the "maximum achievable control technology," taking into account costs and other factors. However, subsection (f) of this section also requires EPA to evaluate and report to Congress on the need for health-based standards for these hazardous air pollutants. If Congress fails to act on the basis of EPA's report, EPA is required, if necessary, to promulgate technological standards for industries that provide an ample margin of safety to protect public health and reduce the lifetime excess cancer risks for the most exposed individual to less than one in a million. (This provision will take effect after 2001.) This latter provision does not permit EPA to consider the cost of regulation because the statute defines the level of protection EPA standards must afford.(20) Subsection (f) also requires prevention of adverse environmental effects "with an ample margin of safety" but allows consideration of costs, energy, safety and other relevant factors.

The CAA § 202 requires EPA to establish emission standards for new motor vehicles which reflect the greatest degree of emission reduction achievable through available technology that does not itself pose an unreasonable risk to health, welfare, or safety. These emission standards are set after consideration of cost, energy, and safety factors.

Finally, section 312 of the Clean Air Act requires EPA to conduct comprehensive analyses of the impact of the Act on the public health, economy, and environment of the United States and to report to Congress every two years on the results. It requires consideration of the costs, benefits, and other effects associated with compliance. Specific instructions are given for assessment of costs and benefits of regulations.

Section 307 of the Clean Water Act (33 U.S.C. 1251 et seq.) requires EPA to set effluent limitations for discharges of toxic pollutants to surface waters achievable by applying the best available technology that is economically achievable and "will result in reasonable further progress toward the national goal of eliminating the discharge of all pollutants" [§ 301(b)(2)(A).] In addition, the Act requires effluent standards to provide an ample margin of safety, taking into account "the toxicity of the pollutant, its persistence, degradability, the usual or potential presence of the affected organisms in any waters, the importance of the affected organisms and the nature and extent of the effect of the toxic pollutant on such organisms, and the extent to which effective control is being or may be achieved under other regulatory authority." The Act does not instruct the Agency in how it should balance these considerations relative to one another.

The Safe Drinking Water Act does not directly delineate how EPA is to balance risks and costs in setting drinking water standards, but rather has several provisions that, when taken together, inform the Agency on this matter. The Act requires EPA to set drinking water quality goals at levels believed to be safe, and directs the Agency to issue regulations that will reduce levels of contaminants to as close to the goals as is "feasible". In 1986, Congress revised the definition of "feasible" to mean feasible with the use of the "best available technology" that the EPA Administrator determines is available (taking costs into consideration). The law previously used the term 'best generally available technology.' Since 1986, the Administrator has been authorized to adopt regulations that may be achieved by use of technologies that are available, although they may not be as widely available or appropriate for controlling water quality in small-scale systems as technologies that are generally available.

The legislative history states that the Administrator's determination of what technologies are available (taking costs into account) in setting drinking water standards should be based on what may reasonably be afforded by large metropolitan or regional public water systems.(2l) EPA considers systems serving 50,000 persons or more to be large systems. Only five percent of all public water systems are this large; consequently some smaller public water systems may experience financial hardship meeting regulations. Although legislative history is not necessarily binding on the Agency, EPA has relied on it for guidance in determining congressional intent.

The Resource Conservation and Recovery Act (42 U.S.C. 6901-6991i) aims to assure that hazardous waste management practices "are conducted in a manner which protects human health and the environment" (§ 6902.) It further states that it is the national policy of the United States "that, wherever feasible, the generation of hazardous waste is to be reduced or eliminated as expeditiously as possible. Waste that is nevertheless generated should be treated, stored, or disposed of so as to minimize the present and future threat to human health and the environment" (§ 6902.) The Act requires EPA to establish standards "as may be necessary to protect human health and the environment" (§ 6922 - 6924.) The Act does not specify that consideration of costs is permitted, required, or prohibited.

The Federal Food, Drug, and Cosmetic Act, as amended, (FFDCA, 21 U.S.C. 301-394) contains at least two different requirements for evaluating risks and benefits of standards for pesticide residues on food, depending on whether a food is a raw agricultural commodity (e.g., fresh fruit) or a processed food (e.g., jelly) and whether the pesticide has been shown to produce cancer in people or animals. For raw agricultural commodities, section 346a (better known as section 408 of the Act) allows EPA to consider the risks and benefits of pesticide use in setting standards for pesticide residues "to the extent necessary to protect the public health." This section applies equally to carcinogenic and non-carcinogenic pesticides.

In contrast, section 348 (section 409 of the Act), which regulates food additives, treats carcinogens and non-carcinogens differently. Pesticide residues on raw foods that concentrate during processing (for example, canning, drying, or freezing) are treated as food additives. The Act requires EPA to regulate all food additives to assure that "the proposed use ... will be safe." According to the legislative history, "the test which should determine whether or not a particular additive may be used ... should be that of reasonable certainty in the minds of competent scientists that the additive is not harmful to man or animal" (S. Rept. 2422, 85th Cong., 2nd Sess., Aug. 18, 1958, p. 2-3.) The Senate Committee report also stated that the use of food additives "may benefit our people and our economy when the proposed usages of such additives are in amounts accepted ... as safe." This seems to indicate that Congress expects EPA to weigh risks of additives against the benefits they provide when the Agency considers whether a particular pesticide use is "safe" or "not harmful". EPA has interpreted the legislative history to allow risk-benefit balancing (53 Federal Register 41106, October 19, 1988.

However, the "Delaney clause" in the same section of the Act prohibits any use of a food additive (including pesticides residues that concentrate during processing) that is shown to be carcinogenic, regardless of the level of risk posed. This interpretation of Delaney as a zero-risk provision for carcinogens that concentrate in processed food was recently supported by the U.S. Court of Appeals for the Ninth Circuit (Les et al. vs. Reilly, July 8, 1992.)

The Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 136 -136y) directs EPA to limit the sale or use of pesticides "to the extent necessary to prevent unreasonable adverse effects on the environment." The statute further defines this to mean "any unreasonable risk to man or the environment, taking into account the economic, social, and environmental costs and benefits of the use of any pesticide."

The Toxic Substances Control Act, as amended, (15 U.S.C. 2601-2671) mandates the screening of new and existing chemicals in commerce to determine whether their production, distribution, use, or disposal might pose an unreasonable risk of injury to health or the environment. To that end, EPA is authorized to require companies manufacturing such chemicals to provide data on the chemical's characteristics and use. If the Administrator determines that a chemical poses a "significant risk of serious or widespread harm to human beings from cancer, gene mutations, or birth defects," the Act requires EPA to promulgate regulations to prevent or reduce "to a sufficient extent such risks or publish in the Federal Register a finding that such risk is not unreasonable." The Act requires EPA in promulgating a regulation to consider and publish a statement concerning the potential health and environmental effects of the chemical, the magnitude of exposure to the chemical, the benefits of the chemical for various uses and the availability of substitutes, and "the reasonably ascertainable economic consequences of the regulation, after consideration of the effect on the national economy, small business, technological innovation, the environment, and public health. The Act directs the Administrator to regulate "to protect adequately against such risk using the least burdensome requirement," but to regulate only if it is in the public interest. In determining whether regulation is in the public interest, EPA is directed to consider all relevant aspects of the risk, a comparison of the estimated costs of compliance and the relative efficiency in protecting against risk.

The Comprehensive Emergency Response, Compensation, and Liability Act, as amended, (CERCLA, 42 U.S.C. 9601-9676 and 26 U.S.C. 4611, 4612, 4661, 4662, 4681, and 4682) requires choice of cost-effective remedial actions for contaminated sites, but also requires that the degree of cleanup "at a minimum assures protection of human health and the environment." In effect, CERCLA's standard of risk protection varies from site to site, because for cleanup purposes, the numerical standards, criteria, and goals of all other applicable Federal and State environmental statutes are applied to the conditions at the site. The statute specifically states that where remedial action is taken to protect groundwater, it must at least attain the water quality goals established under the Safe Drinking Water Act, a level of protection greater than is provided by the national primary drinking water standards. CERCLA also specifically requires attainment of the water quality criteria developed by EPA for surface water under the authority of the Clean Water Act; water quality criteria are set at a level that is expected to protect human health and aquatic plant and animal species.

In summary, each environmental statute approaches the problem of controlling risk from a different vantage point and authorizes consideration of different factors by EPA. Some statutes authorize several different approaches for controlling different kinds of risk. one statute, CERCLA, incorporates all of the other statutory approaches to risk, at least in effect. These diverse statutes, however, seem to conform to a few general rules: they generally allow consideration of the costs of regulation at some stage of risk management, either explicitly or by reference to feasible, practical, or available technology (the Delaney clause is an exception to this rule); they tend to exclude costs from consideration in the development of scientific documents (e.g., water quality criteria,) safety goals (e.g., safe drinking water goals,) or health-based standards of ambient environmental quality (e.g., primary air quality standards,) all of which clearly are meant to be protective of health and the environment; and they require consideration of costs when EPA directly regulates commerce, that is, the production, distribution, and use of commercial products.

Endnotes

15 U.S. EPA, Office of Policy Analysis. Unfinished Business: A Comparative Assessment of Ens Environmental Problems. Washington, U.S. Environmental Protection Agency, February 1987. p. Xlll.

16 Scientists, engineers, and other experts in the evaluation of hazards tend to use and interpret the term "risk" in a narrow actuarial sense (e.g., as average, annual mortality rates for a population), whereas non-experts may employ or interpret any of several common meanings of the term, depending on the context. Often, the public interprets "risk" in a very personal way, depending on whether they or their families are exposed. In scientific studies that asked the public to estimate the annual mortality rate for hazards, public and scientific hazard rankings are more similar. For example, see Fischhoff, B., S. Watson, and C. Hope. ''Defining Risk." Policy Sciences, v. 17, n. 2, (1984). p. 123-139.

17 As defined above, "net benefit" is the value of the benefit less the cost, that is, the difference of costs subtracted from benefits. The benefit-cost ratio is the quotient of benefits divided by costs.

18 The Act neither encourages nor excludes consideration of costs.

19 Prior to enactment of the Clean Air Act Amendments of 1990, §112 was widely known as the "cost-blind" statutory provision that required EPA to base decisions on risk alone, that is, without regard to cost. However, the extremely slow pace at which EPA established risk-based regulations led Congress to amend the law.

20 The statute requires provision of "an ample margin of safety to protect public health in accordance with this section (as in effect before the date of enactment of the Clean Air Act Amendments of 1990)." The reference to the Act prior to amendment indicates that Congress intended a strict interpretation of this language. The Court of Appeals for the District of Columbia Circuit decided in 1987 that section 112 of the Act required EPA to determine what is "safe" based "solely upon the risk to health," and that EPA "could not under any circumstances consider cost and technological feasibility at this stage of the analysis" under the Act (Natural Resources Defense Council v. EPA, 824F.2d at 1164-1165). However, the Court stated that costs and technological feasibility could be considered in promulgating an emissions standard below the "safe" level to provide an "ample margin" and to "take into account the inherent limitations of risk assessment and the limited scientific knowledge of the effects of exposure to carcinogens at various levels."

21 U.S. Senate. Committee on Environment and Public Works. A Legislative History of the Safe Drinking Water Act. 97th Cong. 2d. Sess. Serial No. 97-9. Feb. 1982. p. 550. See also 132 Cong. Rec. S6287 (daily ed. May 21, 1986).