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Issue Analysis

    Issue Analysis 54 - The EPA's Proposed Air Quality Standards: First, Do No Harm

    06/19/1997

    The EPA's proposed air quality standards for ozone and particulate matter might actually do more harm than good, even just in terms of public health. Recent studies suggest that the costs of the proposed standards could be $90 billion to $150 billion annually, forcing consumers to spend less on health care and safety products. A recent study by the Reason Public Policy Institute found that up to 27,000 fatalities may be attributed to the proposed standards.

    The EPA's proposed air quality standards for ozone and particulate matter might actually do more harm than good, even just in terms of public health. Recent studies suggest that the costs of the proposed standards could be $90 billion to $150 billion annually, forcing consumers to spend less on health care and safety products. A recent study by the Reason Public Policy Institute found that up to 27,000 fatalities may be attributed to the proposed standards. The EPA's benefits estimate should have included an assessment of all impacts -- adverse as well as beneficial -- to determine if, on net, the standards improve public health. Otherwise, the unintended consequences of regulation can overwhelm the best of intentions.

    The EPA is currently revising the air quality standards for ozone and particulate matter. The agency has proposed tougher ozone standards as well as a new standard for fine particles, called particulate matter (PM2.5), that measure 2.5 microns or less in diameter. The EPA claims the new standards will save upwards of 15,000 lives annually, although the scientific community has raised serious questions about the scientific validity of the agency's claims. Nonetheless, the EPA remains confident in its analysis with little sign that the agency will shrink from the proposed standards.

    Although there may be concerns with the underlying science, there is little question that the new rules will impose significant costs on the economy. According to the EPA, more than 300 counties in 34 states will be in non-attainment under the new ozone standards, and over 160 counties in 37 states will be in non-attainment with the PM2.5 standard.1 These areas will have to develop and implement plans to achieve attainment status, which typically means adopting a series of costly control technologies and restrictions on various activities. The EPA's own estimates suggest that the standards will cost $6.6 billion to $8.5 billion a year, and that is for only partial attainment.2 Other estimates suggest much higher figures. For instance, President Clinton's Council on Economic Advisers suggests that compliance costs for the ozone standard alone could be as high as $60 billion a year.3 A recent Reason Foundation study places compliance costs for both ozone and PM2.5 at $90 billion to $150 billion annually; ultimately eliminating roughly 200,000 to 400,00 jobs across the country.4

    Given the scientific uncertainty and the substantial economic burden generated by the proposed standards, the rationale for the new standards becomes questionable. This is especially true when recent trends in air quality are examined. According to the EPA's air trends report, the air today is 30 percent cleaner than 25 years ago, despite population and economic growth.5 Forecasts suggest this trend will continue for the near future. The 1990 amendments to the Clean Air Act have yet to be fully implemented; as new controls are put in place, emissions reductions will continue, including emissions associated with fine particulate matter.

    In fact, the proposed standards may do more harm than good. There is a growing body of evidence that suggests that excessive regulations can have adverse effects that reduce the well being of people living under the regulations and may actually increase the level of premature mortality. Regulations can have unintended consequences that, in some instances, may swamp the intended benefits of the regulation. This is especially true when the regulation in question provides minimal benefits at a high cost, as is the case with the proposed air quality standards.

    Setting Air Quality Standards Under the Clean Air Act
    The adverse impacts of the proposed air quality standards are a symptom of a more fundamental error in the Clean Air Act. Specifically, both the legislation and the courts make it clear that economic or technological feasibility cannot be considered when setting air quality standards. By law, the EPA is to set primary standards "the attainment and maintenance of which, in the judgment of the Administrator, based on such criteria and allowing an adequate margin of safety, are requisite to protect public health."6 Critics of cost-benefit analysis have raised concerns that it is unethical to place a dollar value on human life. Consequently, there is no mention of economic costs in the language describing how the agency sets the standard. Air quality standards are health-based standards that provide an adequate margin of safety to protect public health. There is no role for a cost-benefit calculus when establishing standards, which has been made clear by the courts.7

    Such language suggests an elementary misunderstanding of economics and the notion of cost. All choices entail costs and it is impossible to separate the act of choosing from the imposition of costs. Once a choice is made, the consequences of that choice must be accepted. The consequences of any choice are typically described as "opportunity costs." Costs are not dollars; costs are foregone opportunities or alternative uses of resources. Any elementary textbook in economics provides a discussion of this basic, but important, concept. And when the EPA establishes a standard, by definition, it is making a decision about resource allocations that entails costs. And individuals will bear those costs. As stated by Nobel laureate James M. Buchanan in his seminal exposition on costs, "Those who 'bear the burden'--even though bearing this burden is a subjective experience--need not be those who undergo the agony of choosing."8 This is most evident when a government agency makes a decision to regulate the public's behavior.

    Monetary values are often used as a proxy for costs, but the consequences of choice can be measured in other contexts as well. For example, one consequence of a new air quality standard that diverts resources away from individuals and families may be fewer trips to the doctor or a poorer diet due to a reduction in disposable income. To the extent that consequences impact health, it is logically impossible to separate the choice of a standard from cost, even when the standard is a health-based standard. Cost and choice are two sides of the same coin, and the economic consequences of a new standard can have very real impacts on public health, which is the very thing the EPA is mandated to protect.

    Every economist understands the importance of unintended consequences. Public policies that focus narrowly on specific benefits often overlook other consequences of regulation that may actually overwhelm the benefits addressed in the regulation. Even the Clean Air Act attempts to address the potential for unintended consequences when setting standards. For example, the EPA is required to establish a secondary standard for the criteria air pollutants "the attainment and maintenance of which, in the judgment of the Administrator, based on such criteria, is requisite to protect the public welfare from any known or anticipated adverse effects associated with the presence of such pollutant in the ambient air."9 By statute, public welfare is defined as, but not limited to, "effects on soils, water, crops, vegetation, manmade materials, animals, wildlife, weather, visibility and climate, damage to and deterioration of property, and hazards to transportation, as well as effects on economic values and on personal comfort and well-being."10

    Unfortunately, the EPA interprets public welfare benefits in a very narrow manner, choosing to exclude important secondary impacts that could have an adverse impact on public welfare. In fact, in the ozone proposal, the EPA only focuses on vegetation and crop damage when establishing the secondary standard. For the PM2.5 rule, the EPA limits its assessment of secondary effects to a discussion of "visibility, materials damage, and soiling."11 In other words, the agency examined the potential for PM2.5 pollution controls to reduce visibility and haze problems, the potential for reducing corrosion, and the potential to keep buildings from getting dirty. The agency completely neglected an assessment of personal comfort and well being.12

    A more accurate assessment should have attempted a broader comparison of public health and welfare under the current standard and public health and welfare under the proposed standard. By selectively defining public health and welfare, the EPA ignored important unintended and adverse consequences of the rule.

    What are the Costs of the Proposed Standards?
    Despite the ban on the use of cost-benefit analysis when establishing air quality standards, the EPA did conduct a regulatory impact analysis to determine the costs of the proposed new standards. According to the agency, the analysis is not to be used in setting standards but the analysis "should be useful in generally informing the public about the potential costs and benefits associated with the implementation of the proposed revisions."13 The EPA estimates that the costs could be as high as $2.5 billion annually for ozone and $6 billion annually for PM2.5. Unfortunately, these numbers do not go very far in informing the public, because these are estimates of partial compliance. At some point, the EPA simply stopped calculating the costs of further reductions of pollutants.

    Other studies have attempted to determine the full impact of the EPA's regulations. The President's Council of Economic Advisers (CEA) raised concerns that the ozone standard could cost as much as $60 billion a year. A study by the Reason Public Policy Institute found the costs of meeting the proposed standards for ozone and PM2.5 to be substantially higher. The Reason study concluded that the costs of full compliance with the ozone and particulate matter standards would be $90 to $150 billion annually.14 In turn, these costs would have an adverse effect on economic growth and employment. In fact, the report suggests that net employment impact eventually levels off at roughly 200,000 to 400,000 lost jobs. Across the board, retail and service industries are hit hardest, and the employment impacts disproportionately hit lower income groups. This map illustrates the job losses from the compliance costs of the proposed standards.

     

    200,000 Jobs Lost Nationwide from the EPA's Proposed Air Quality Standards

    Up to 1,000 jobs lost. 1,000 to 5,000 jobs lost. 5,000 to 10,000 jobs lost. More than 10,000 jobs lost.
    Note: Assumes annual costs of compliance with the new air quality standards of $90 billion per year. (Source: Anne E. Smith, D. Warner North, et al., "Costs, Economic Impacts, and Benefits of EPA's Ozone and Particulate Standards," Reason Public Policy Institute and Decision Focus, June 1997.)

    Despite the significant economic burdens imposed by the standards, EPA Administrator Carol Browner is adamant in rejecting such burdens when considering the form and level of the new standard. If the agency is truly interested in protecting public health and welfare, however, it cannot overlook the unintended consequences of an overly stringent standard. Unemployment and income loss can contribute to a decline in public health. Most studies show a positive association between unemployment and mortality, and, as discussed below, there is a statistically significant relation between income loss and mortality.

    In addition, it must be remembered that all choices reflect costs. Resources are scarce and a decision to set a stringent standard may divert resources from more cost-effective uses that would save more lives with the same amount of resources. For example, a recent National Center for Policy Analysis study by Tammy Tengs examined 139 government regulations and found that $4.11 billion was spent per year to save 94,000 years of life. Spending that money on more cost-effective regulations could have more than doubled the years of life saved, for a total of 211,000 years.15

    Health-Health Analysis
    The impact of a regulatory change, such as the proposed air quality standards, can be far-reaching, affecting many aspects of an individual's life. The reason is simple: Individuals have only a limited amount of income. Costly new regulations can reduce disposable income and therefore the quality of life of many individuals. If income levels decline, individuals can no longer afford the same levels of health care, the same dietary choices, or the same investments in healthy lifestyles. These important trade-offs were first raised by Aaron Wildavsky and summarized in his book, Searching for Safety.16 Wildavsky suggested that the costs of government programs might actually have an adverse effect on health because they make people poorer. This analysis, which incorporates unintended health risks that may arise because of increased spending on risk reduction programs, has been termed "health-health" analysis. Such research has created a new field of study that evaluates the relationship between income and mortality.17

    Health-health analysis provides an analytical framework that attempts to capture the opportunity cost of regulation strictly in terms of health. The empirical work underlying this analysis avoids the thorny problem of putting a value on human life, which is perhaps the main objection to the use of cost-benefit analysis. Instead, this analysis acknowledges the importance of costs while allowing a broad comparison of the number of lives at risk under the current standard and the number of lives at risk under the proposed standard. The calculation is not in dollars and cents; it is in lives saved versus lives lost.

    Using health-health analysis, for example, it is possible to develop an understanding of the broader health impacts of a new standard. A standard that will save 15,000 lives based on adopting new controls can be evaluated according to how many premature deaths may arise due to the loss of income associated with the new controls. Health-health analysis provides a much broader view of health and social welfare than a simple evaluation of the benefits specific to one rule. It is a way to determine whether a rule does more harm than good. In fact, in 1991 Judge Williams, of the U.S. Court of Appeals for the D.C. Circuit, argued that the Occupational Safety and Health Administration (OSHA) should have used health-health analysis or some other analytical tool to reflect the opportunity cost of compliance with a new safety standard.18 Judge Stephen Williams saw health-health analysis as a useful alternative to cost-benefit analysis that should be applied because it can be argued under case law that, like EPA's air quality standards, OSHA's health standards cannot be set using cost-benefit analysis.

    Ralph Keeney is one of the pioneers in health-health analysis. His early work suggested that economic growth was more important than government regulation in improving public health. Government policies that hamper or reduce growth affect individuals by lowering their income: "The basic idea to estimate cost-induced fatalities is rather simple. Economic costs of expensive programs are somehow apportioned as costs to individuals. These costs, which decrease the disposable income of individuals, increase their fatality risks. Higher fatality risks lead to additional expected fatalities."19 This type of analysis provides an assessment of the indirect impacts of new standards or regulations, which allows a more accurate assessment of the overall impact on public health associated with regulation.

    Ralph Keeney and Kenneth Green have updated this research in a paper published by the Reason Public Policy Institute.20 The findings raise new concerns about the benefits of the EPA's proposed air quality standards. First, there are a significant number of deaths associated with the costs of the proposed standards. A true evaluation of the benefits of the rule should evaluate net benefits, which means evaluating the specific health benefits of the standards, as well as any indirect premature fatalities associated with the costs of achieving the new benefits.

    The Reason study provides an analysis of three different scenarios, based on various cost estimates for the proposed standards. Using the EPA's cost scenario, roughly 1,600 fatalities may be induced by adopting the new standards. However, the EPA's analysis only provides the costs for partial attainment, not the full cost of compliance with the standard. The Reason scenario, based on an estimate of the full cost of attainment, provides a more harrowing figure, with premature fatalities of up to 27,000. This number is, in fact, larger than the 15,000 lives the EPA claims will be saved by adopting the proposed standards. By ignoring the potential costs of the regulation and relying on a very narrow definition of the public welfare, the EPA may actually be putting more people at risk than they claim they will save. Further, a more recent analysis of the EPA's benefits claims by Dr. Kay Jones demonstrates that fewer than 1,000 premature fatalities would be avoided by the EPA's proposed rules.21 In this case, even using the EPA's scenario for the costs of the rule, the new standards would do more harm than good.

    Moreover, the induced fatality estimates suggest that the EPA's regulations have the potential to disproportionately affect lower income groups and minority populations. For example, if it is assumed that the economic burden of the proposed standards are so pervasive that all households bear the costs equally, then the number of fatalities is higher for low income groups, and the black population is disproportionately affected. On the other hand, if the economic burden is distributed proportionally to income, with higher incomes bearing more of the costs, the number of fatalities is reduced somewhat and the fatalities are shifted to the middle class. However, as Keeney and Green conclude, "Under all scenarios, the majority of induced fatalities occur among people earning less than $35,000 annually, and fall disproportionately among the black population."22

    Conclusion
    The EPA claims that the proposed air quality standards will provide benefits that far outweigh the costs of new control technologies. However, the narrow scope of the EPA's analysis ignores potential adverse impacts that could overwhelm the benefits claimed by the agency. By neglecting the costs of the primary standard and arbitrarily constraining the definition of public welfare in the secondary standard, the EPA has turned a blind eye to a number of unintended consequences that may actually induce more fatalities than are avoided by the proposed standards. To fully assess the benefits of the proposed air quality standards, the EPA should revisit its analysis of benefits without imposing artificial constraints on the scope of the study.

    In the long run, the false dichotomy between health and costs stipulated by the Clean Air Act must be revisited. All choices, even those relating to health, have economic consequences. Those consequences bear directly on the question of health, especially if the choice of a standard reduces individual incomes and increases unemployment. Economic costs reflect alternative uses of scarce resources, not the profit and loss columns of an accounting ledger. Establishing new standards without examining costs provides no way to determine whether society is better or worse off with the new standard. As stated by Tammy Tengs, "All risk reduction policies have two things in common: they have economic consequences and they save lives. Thus it makes sense to compare lifesaving interventions according to their 'value for the money.'"23

    In the short run, the EPA's proposed standards should be delayed until more research can be conducted on their impacts. Many in the scientific community have already raised serious concerns about the weak scientific underpinnings of the EPA's proposed standards. Now, there is mounting evidence that costly regulations actually induce fatalities by reducing incomes. Economic studies estimate the costs of the new standards could be as high as $90 billion to $150 billion a year, with a net loss of roughly 200,000 to 400,000 jobs. In addition to the many adverse effects of unemployment, recent research has identified a positive statistical link between income loss and premature mortality. Data suggest that the costs imposed by the new air standards could more than offset the benefits through increased fatalities. To ignore the public health impacts of these findings by arbitrarily constraining the scope of analysis is not in the public interest.

    In the medical profession, a doctor's first principle is "primum non nocere"--first, do no harm. When the public's health is at stake, it is a wise policy. The air quality standards currently under consideration at the EPA can have sweeping impacts on individuals and families across the country. Without a thorough understanding of the direct and indirect effects of the standards, the outcome may be just as deadly as a scalpel in the hands of an untrained surgeon. Before issuing new standards, the EPA should examine the broader implications of the proposed standards to ensure that the standards do, in fact, promote public health.

    1 Others view this as a conservative estimate. The American Petroleum Institute, for example, states that the proposed standards would result in 800 counties being in non-attainment.

    2 Testimony of Mary D. Nichols, Assistant Administrator for Air and Radiation, U.S. Environmental Protection Agency before the Subcommittees on Health and Environment and Oversight and Investigation, Committee on Commerce, U.S. House of Representatives, April 17, 1997. The ozone rule is projected to cost $600 million to $2.5 billion annually, while the PM2.5 standard is estimated to cost $6 billion annually.

    3 Alicia Munnell, "Memorandum from Alicia H. Munnell to Sally Katzen, Office of Management and Budget," Council of Economic Advisers, December 10, 1996.

    4 Anne E. Smith, D. Warner North, James P. Bekemeier, Nathan Y. Chan, Rana Glasgal, and Justin Welsh, "Costs, Economic Impacts and Benefits of EPA's Ozone and Particulate Standards," Reason Public Policy Institute and Decision Focus Incorporated, June 1997.

    5 Environmental Protection Agency, National Air Quality and Emissions Trends Report, 1995, EPA 454, Office of Air Quality Planning and Standards, Research Triangle Park, North Carolina, October 1996.

    6 42 U.S.C. 7409 (b)(1) 1996.

    7 Lead Industries Association v. Environmental Protection Agency, United States Court of Appeals, District of Columbia Circuit, 1980, 647 F.2d 1130.

    8 J. M. Buchanan, Cost and Choice, p. 48.

    9 42 U.S.C. 7409(b)(2) 1996.

    10 42 U.S.C. 7602(h) 1996.

    11 "National Ambient Air Quality Standards for Particulate Matter: Proposed Decision," Federal Register, vol. 61, no. 241, December 13, 1996, p. 65662.

    12 For ozone the EPA proposed two options for the secondary standard. One would be identical to the primary standard, and the second option would be a seasonal standard. For PM2.5 the proposed secondary standard is identical to the primary standard with the addition of a regional haze program.

    13 Federal Register, December 13, 1996, p. 65667.

    14 Anne E. Smith, D. Warner North, et al. "Costs, Economic Impacts, and Benefits of EPA's Ozone and Particulate Standards," Reason Public Policy Institute and Decision Focus, June 1997.

    15 Tammy O. Tengs, "Dying Too Soon: How Cost-Effectiveness Analysis Can Save Lives," NCPA Report No. 204, National Center for Policy Analysis, May 1997, p. 1.

    16 Aaron Wildavsky, Searching for Safety, 1988.

    17 For a survey of health-health analysis, see, Regulatory Program of the United States Government, April 1, 1992 - March 31, 1993, Executive Office of the President, Office of Management and Budget, 1993, pp. 19-28.

    18 UAW v. OSHA, U.S. Court of Appeals for the D.C. Circuit, No. 89-1559, 1991.

    19 Ralph L. Keeney, "Mortality Risks Induced by Economic Expenditures," Risk Analysis, vol. 10, no. 1, 1990, p. 149.

    20 Ralph L. Keeney and Kenneth Green, "Estimating fatalities induced by the Economic Costs of Proposed Air Quality Standards for Ozone and Particulates," Working Paper, Reason Public Policy Institute, May 12, 1997.

    21 Kay Jones, Is the EPA Misleading the Public about the Health Risks from PM 2.5? An Analysis of the Science behind EPA's 2.5 Standard, Citizens for a Sound Economy Foundation, May 1997.

    22 Keeney and Green, p. 11.

    23 Tammy O. Tengs, May 1997, p. 1.