Economic Analyses of Environmental Regulations
Evaluating the effects of new regulations aimed at improving the environment
Since before President Richard Nixon established the Environmental Protection Agency in 1970, the United States has periodically taken regulatory actions to reduce pollution in our air, water, and land. These regulations are complex, with far-reaching but sometimes little-understood effects on our daily lives.
Over time, each of these regulations requires additional review, consideration, and revision. This process inevitably elicits expressions of concern from citizens and lawmakers about whether businesses can meet the costs of complying with new regulations.
But the costs and benefits of environmental regulations are measured in more than just dollars and cents. A full investigation of regulations’ impacts requires a deep understanding of not only the costs of a specific industry’s compliance, but of broader considerations such as how changes in that industry would affect the environment, human health, jobs, and consumer costs.
Over the past two decades, our team of environmental economists has conducted dozens of economic impact analyses for air quality rules administrated by EPA under the Clean Air Act. In setting up new rules for environmental quality, the EPA must go through a nine-step process to satisfy the regulatory planning and review requirements of the White House Office of Management and Budget. We have developed a sophisticated, efficient system that we can adapt to each situation, helping the EPA through this multifaceted process.
The Impact of Regulations on Brick Manufacturers
The 2015 Regulatory Impact Analysis: Final Brick and Structural Clay Products, a report on the implications of clean air standards for the brick manufacturing industry, is one example of the work we’ve provided to the EPA.
EPA proposed regulating air emissions from brick manufacturing plants because they release harmful pollutants, including hydrogen fluoride, hydrogen chloride, chlorine, mercury, and other metals. The report outlines the cost and other effects of reducing emissions to certain levels using air pollution control devices. It also explores the impact on human health if the industry meets the proposed new standards.
These and other considerations create costs and benefits that factor into the effect a regulation can have on the market for brick products and the larger economy. To estimate these economic costs, we developed a simulation model of economic behavior using information collected for the industry. Because bricks are heavy and expensive to ship over long distances, brick markets are regional in nature, so we divided the country into nine regions and gathered information on brick production, consumption, and trade in each region. For other projects, we have created simulation models that consider the characteristics of the targeted industry.
Accounting for these regional differences, our brick industry model estimates the likely costs to comply with the regulation, the change in market prices, and change in production for each of nine regions. For the final standards, total U.S. annual economic loss was projected to be $27.2 million. The economic model suggests that industries can pass on $15.1 million of costs to U.S. industry and households through higher prices. Under the final standards, the model predicted an average national price increase of 1.8 percent. Overall domestic production would fall by 1.5 percent, or 52 million bricks per year.
With projects like this, it is also typical to receive requests to analyze a policy’s effect on a specific small business. For the report on the brick industry, we handled more than 50 of these requests, which helped these businesses better understand the potential impact of various regulations on their livelihood. Under the final standards, we found two to four brick manufacturing facilities were at significant risk of closure. Under less stringent standards, one to three brick manufacturing facilities were at significant risk of closure, and under more stringent standards, nine to thirteen brick manufacturing facilities were at significant risk of closure.
Our contribution was only part of the report that the EPA considered when determining which course to take. The report includes a crucial assessment of reduced emissions on public health—and the cost savings that result from that improvement. As air pollution decreases, we see fewer cases of diseases such as asthma and bronchitis, meaning that society pays less for health care and workers can be more productive.
Understanding the Costs and Benefits of Environmental Policies
For the brick industry, EPA used their independent benefit assessment and our cost analysis to determine that the regulation enhanced overall economic efficiency. In other words, the net benefits after accounting for both the benefits of air quality improvements and the costs was estimated to be between $48 million and $150 million.
Sound economic impact analyses help inform important decisions. Across all aspects of American manufacturing—including the steel, cement, automobiles, chemicals, and plastics industries—we have performed similar analyses. Such work helps the EPA set rules that protect the environment without hindering economic growth, which is often a delicate balance to strike.