2015 Conference- Session 7

Session 7 - Friday, March 20, 2:00 - 3:30

 

A.7: Retrospective BCA of Federal Rules (Marvin 309)

Chair: Dick Morgenstern (morgenst@rff.org), Resources for the Future

Presentations:

1.     A Retrospective Assessment of EPA’s Air Toxics Rules, Art Fraas* (fraas@rff.org), Resources for the Future

2.     A Retrospective Assessment of Federal Efforts to Reduce Foodborne Illness: Shell Eggs and Salmonella Enteritidis, Randall Lutter* (lutter@rff.org), Resources for the Future and University of Virginia

3.     A Retrospective Evaluation of the Cluster Rule: The Pulp and Paper Industry, Ron Shadbegian* (Shadbegian.ron@epa.gov), U.S. Environmental Protection Agency; Wayne Gray, Clark University

Dicussant: Al McGartland (McGartland.al@epa.gov), U.S. Environmental Protection Agency

B.7: Law and Economics Perspectives on Benefit-Cost Analysis (Marvin 307)

Chair: Jack Knetsch (knetsch@sfu.ca), Simon Fraser University

Presentations:

1.     Is Every Regulation Potentially Cost-Benefit Justified?: Methodological Pluralism and the Estimation of Regulatory Benefits, Jason Scott Johnston* (jjohnston@virginia.edu), University of Virginia

Recent work by Acs and Cameron (2013) reports that the requirement of regulatory impact analysis (RIA) has had no statistically significant impact in lowering the rate at which regulations are promulgated.  As some such impact was clearly among the objectives of requiring RIA, this is a phenomenon in need of explanation.  This paper argues that the reason that RIA does not constrain regulation is because there is so much discretion in the estimation of regulatory benefits.   This argument is made by first surveying recent estimates of regulatory benefits since 1990 prepared and published by the Office of Information and Regulatory Affairs (OIRA).  It reports, as have previous studies, that the vast majority of quantified benefits for regulations promulgated since 2008 come from the reduction in fine particulate air pollution.  It also notes that increasingly widespread use of contingent valuation in estimating regulatory benefits. The paper then critiques the methodological basis for recent regulatory benefit estimations.  It is argued that surveys, especially contingent valuation surveys, are unlikely to generate reliable and valid measures of actual benefits.  It is also argued that epidemiological evidence alone is highly unreliable as a measure of actual health impacts.  This point is made with a detailed analysis of estimates of the impact of fine particulates on excess mortality.  The data show that particulates have their biggest impact on cardiovascular mortality among the elderly in the winter months.  However, the medical literature reveals a variety of mechanisms that account for the heightened risk of death from cardiovascular causes among the elderly during the winter, and these mechanisms do not involve exposure to elevated levels of fine particulates.   If researchers look statistically at only one particular factor – fine particulates – while ignoring others, then estimates are subject to omitted variables bias.  A better approach is to look first to identify potential causal mechanisms so that all potential factors are controlled for in statistical studies of the relationship between exposure levels and excess mortality rates.

2.     Judicial Review of Agency Benefit-Cost Analysis, Caroline Cecot* (caroline.cecot@vanderbilt.edu) and W. Kip Viscusi, Vanderbilt University

This Article evaluates judicial review of agency benefit-cost analysis (“BCA”) by examining a substantial sample of thirty-eight judicial decisions on agency actions that implicate BCA. Essentially, the Administrative Procedure Act tasks federal courts with ensuring that federal agency action is reasonable. As more agencies use BCA to justify their rulemakings, the court’s duty often requires judges to evaluate the reasonableness of agency BCAs. In this Article, we discuss the challenges that trigger judicial review of agency BCAs and the standards that govern the review. We then present specific examples of how courts analyze BCAs. Overall, we find many examples of courts promoting high-quality and transparent BCA. Courts have been willing to question BCA methodology and assumptions and request more transparency on these issues. As agencies rely more on BCA in their decision making, judicial review of BCA will be increasingly important. The stakes are high. Additional judicial oversight can be valuable—but bolstering any oversight effort to provide a policy check can also impose societal costs if desirable policies are delayed or left unimplemented. Ideally, efforts to foster greater judicial review should be structured so that the enhanced role of the judiciary itself passes a benefit-cost test. Armed with this Article’s examination of the state of judicial review of BCA, scholars can more effectively evaluate the impact of judicial checkpoints on the use of BCA in agency decision making and assess whether shifting more regulatory oversight authority to the courts would be an effective approach to fostering more welfare-enhancing policies.

3.     Cost-Benefit Analysis, Distributional Weights, and Institutions, Matthew Adler* (adler@law.duke.edu), Duke University 

Adler Presentation

Distributional weights are a natural way to incorporate distributional considerations into cost-benefit analysis (CBA). CBA with appropriate weights can mimic either a utilitarian social welfare function (which is averse to inequality in income), or even a more egalitarian social welfare function. However, important institutional objections have been raised against distributional weighting. First, isn’t it better to handle distributional considerations through the tax system, with regulatory CBA undertaken in its traditional unweighted form? Second, doesn’t the specification of distributional weights involve contestable value choices? Is it normatively legitimate for unelected regulators to make such choices? This presentation will briefly present the theory of weighting, and then address the institutional questions.

4.     Using Kaldor-Hicks Tableaus for Distributional Accounting in Regulatory Impact Assessment, Kerry Krutilla* (krutilla@indiana.edu), Gabriel Piña, and Yu Zhang, Indiana University

The OMB recommends that agencies provide a separate description of the distributional effects of regulations in their regulatory impact assessments (RIAs). However, a review of recent RIAs shows that agencies rarely follow this analytical guidance. Our research assesses the feasibility of improving the representation of distributional effects in RIAs using the Kaldor-Hicks tableau (KHT) display format. In concept, a KHT disaggregates total benefits and costs and allocates them to stakeholders, and also records between-stakeholder financial transfers. The format provides a conceptually consistent display of distributional effects at a chosen level of stakeholder representation, revealing the effects on “public stakeholders” as a fiscal impact assessment. To operationalize this concept, five final RIAs completed from 2011-2013 are chosen for detailed analysis, one from each of the DOT, EPA, DOL, HHS, and DHS. KHTs are constructed based on information presented in the regulatory impact assessments themselves, and assumptions about the tax status of the identified industrial sector subjected to the regulation. We show that it is feasible to construct KHTs for regulatory impact assessments from the data that is usually collected to produce them, and that this approach provides better insight about the distributional effects of regulations than current practice. Moreover, revealing the fiscal impact of regulations is relevant for the efficiency analysis, given the marginal value of public funds.

C.7: Preliminary Recommendations from the 2nd Panel on Cost-Effectiveness in Health and Medicine (Marvin 308)

Chair: Theodore Ganiats (tganiats@mac.com), UC San Diego

Panelists to Include:

Scott D. Grosse (sgrosse@cdc.gov), Centers for Disease Control and Prevention

James K. Hammitt (jkh@harvard.edu), Harvard University

D.7:Cost-Effective Air Quality Strategies (Marvin 413-414)

Chair: Anne Smith (anne.smith@nera.com), NERA

Presentations:

1.     A Critical review of the Development and Use of Externality Costs for Air Quality, Elisabeth Gilmore* (gilmore@umd.edu), University of Maryland

Externality costs are needed for regulatory and policy analysis. For exposure to adverse air quality, an impact pathway approach is generally used to estimate the externality costs. This entails converting the emissions to ambient concentrations, translating the concentrations to their equivalent health and ecosystem effects, and applying willingness to pay estimates to avoid these outcomes. Since this approach can be time consuming, estimates from the literature are frequently used instead of conducting a full impact pathway approach. There is, however, limited guidance for selecting literature values for a specific policy under consideration. Here, I conduct a critical review of the available estimates for the externality costs from air quality. I then use these values to develop a set of characteristics to consider when selecting literature values, namely physical features of the sources, exposed population, and air quality chemistry and meteorology. For pollutants that undergo significant chemical transformations after release, it can be challenging yet critical to account for differences in the temporal profile of the emissions, concentrations of other pollutants and meteorological conditions. For policies where this is likely to matter, it may be more appropriate to conduct a bounding analysis of the magnitude of the air quality externality rather than selecting a value from literature.

2.     A Mixed Integer Programming Model for National Ambient Air Quality Standards (NAAQS) Attainment Strategy Analysis, Alexander Macpherson* (macpherson.alex@epa.gov), Heather Simon, David Misenheimer, Charles Fulcher, Bryan Hubbell and Robin Langdon, U.S. Environmental Protection Agency

The United States Environmental Protection Agency (EPA) is currently reviewing the National Ambient Air Quality Standard (NAAQS) for ozone. States with areas designated as nonattainment with the standards are required to develop State Implementation Plans (SIPs) to demonstrate how pollution levels will be reduced to meet the standard. Historically, many states have developed SIPs independently. However, for ozone, some states have at times recognized the important role of regional transport (for example the Ozone Transport Commission which addresses ozone air quality in the Northeast) and have developed regional agreements to control ozone-forming emissions. These types of regional air quality management approaches have the potential for improved pollution control efficiency if states collaboratively determine the least-cost controls within or across regions. We present a Mixed Integer Programming model for devising least cost control strategies that recognize the potential for interstate transport of ozone. While linear programming models have been used to assess regional ozone control strategies, this model applies the framework nationally to identify efficiencies from reducing regional transport. Air quality is characterized by a source-receptor matrix estimating the impact of regional emissions reductions on ozone concentrations at monitors. Least cost control strategies are determined by decisions about using specific control technologies on emissions sources. This tool allows user-defined policy constraints about which ozone precursors and emissions locations to consider in identifying the least cost attainment strategy. A case study is presented using information from a series of emissions sensitivity air quality model simulations along with current emissions abatement supply information. The model holds promise for evaluating alternative scenarios, testing the role of transport in compliance strategies, and identifying monitors exerting disproportionate influence on attainment strategies. The case study is a proof of concept but is limited by the specificity of the source-receptor matrix. As additional air quality simulations are performed, more refined information about the response of ozone to emissions reductions in specific locations will improve the accuracy of the model.

3.     Benefit-Cost Analysis of Phasing Out Coal in Power Plants and for Residential Use, Henrik Andersson* (henrik.andersson@tse-fr.eu), Professor, Toulouse School of Economics (LERNA); Yana Jin and Shiqiu Zhang, Peking University

To cope with the serious air pollution situation the Chinese State Council issued the National Action Plan on Air Pollution Prevention and Control. Coal consumption reduction was chosen as a key strategy and three key regions were targeted to achieve negative growth of total coal consumption by 2017. One of these regions was the Beijing-Tianjin-Hebei region (BTH). In this study we focus on Beijing and its proposed prioritization of coal reduction options, which has also then been followed by many other local governments, focusing on substituting coal fired power plants and large boilers by gas fired ones, while substituting residential cooking and heating coal consumption to cleaner energy sources is given least emphasis. Despite the fact that this priority can realize rapid coal reduction, the substitution for gas fired plants has been remarkably costly, and the efficiency of pollution reduction and health protection from such interventions are under debate.

This study estimates the benefits and costs of interventions for phasing out coal in power plants and among residential users in Beijing. Our study helps to evaluate the conventional claim that coal fired power plants contribute more on ambient air quality-born health damage, and allows for taking both ambient and household air-pollution from coal combustion into consideration. The results suggest that the substitution of coal in residential sector can realize net social benefits, while for the power plant sector it actually brings net social costs. This analysis indicates that the current coal consumption reduction plan in Beijing, with its focus on coal fired power plants instead of the residential sector, will realize limited health and environment benefits, and may induce huge social cost in the long run. Given the current trend of scaling up coal reduction interventions in China, this study is timely for reevaluation and adjustment of the current policy.

4.     Benefit-Cost Analysis of Efficient Environmental Damage Emission Pricing in the Power Sector, Daniel Shawhan* (DLS77@cornell.edu), Resources for the Future; Biao Mao, Rensselaer Polytechnic Institute; Ray Zimmerman, Charles Marquet, and Jubo Yan, Cornell University; Yujia Zhu, Arizona State University

We estimate the benefits and costs of charging each commercial electricity generator in the US and Canada for the estimated value of the premature mortality caused by its sulfur dioxide (SO2) and nitrogen oxide (NOX) emissions and the climate changes caused by its carbon dioxide (CO2) emissions.  We use, and describe, several new methods useful in benefit-cost analysis of electricity policies and transmission and generation investments.  Our representation of the power grid retains all of the thousands of high-voltage transmission line segments.  The power flows in our model are based on physics, which cause flows to be largely uncontrollable except by changing where the power is generated.  This is important because avoiding the overloading of each transmission segment can affect how a policy or investment will change the pattern of generation, and hence the costs and benefits.  We have also developed a method of modeling price-responsive demand while keeping the model linear for tractability.  We use an air pollution fate-and-transport model in order to estimate the mortality impact of each generator, which depends on its location and effective smokestack height.  We know the economic and environmental characteristics of each of the 19,000 generators from creating an unprecedented combination of twelve data sets.  We simulate Pigouvian pricing of just SO2 and NOX, just CO2, and both together.  We calculate the consumer, producer, environmental, government, and congestion surplus of each policy.  The SO2 and NOX pricing has a net benefit almost twice as large as that of the CO2 pricing and reduces CO2 by almost as much, while increasing the average electricity price by less.  Both kinds of pricing together reduce estimated premature deaths by 12,000 per year and produce an estimated net benefit similar to the current direct variable cost of electricity.

E.7: Valuing Outcomes and Performing BCA for Social Policy Intervention (Marvin 310)

Chair: Francisco Perez-Arce (fperezar@rand.org), RAND Corporation

Presentations:

1.     Benefit-Cost Analysis of Communities That Care: Social Policy Implications in Washington State, Margaret R. Kuklinski* (mrk63@uw.edu), University of Washington

Social policies increasingly consider the economic implications of various policy alternatives. In Washington state, E2SHB 2536, passed in 2012, mandated that “prevention and intervention services delivered to children and juveniles in the areas of mental health, child welfare, and juvenile justice be primarily evidence-based and research-based.” In response, the Washington State Institute for Public Policy (WSIPP) and the University of Washington Evidence-Based Practice Institute, both independent bodies, were asked by the legislature to create an inventory of evidence-based practices and services that met criteria for receiving legislative funding and support. To receive the most favorable “evidence-based” designation, programs needed to generate positive net present value when subjected to benefit-cost analysis, among other criteria.

In this presentation, we examine the policy from the lens of one evidence-based program included in the inventory, Communities That Care (CTC). CTC is a coalition-based prevention system shown in a rigorous community-randomized trial to have sustained preventive effects through Grade 12 on youth delinquency and substance use. CTC has also been subjected to a benefit-cost analysis with WSIPP’s benefit-cost analysis software tool, also used to evaluate programs for inclusion in the E2SHB inventory.  The tool can monetize benefits across a number of policy and program areas, incorporates Monte Carlo methods for capturing uncertainty, and produces several policy-relevant outcomes, including net present value, costs and benefits to various stakeholders, investment risk, and cash flows.

Using CTC as a case study, this presentation shows how substance use and delinquency outcomes are monetized under the model. It also illustrates the sensitivity of benefit-cost conclusions to alternative assumptions about costs, effect sizes underlying benefits estimates, and time frame for estimating benefits.  Results point to the need for principles and standards in economic analysis of prevention programs, particularly when conclusions are used to inform policy decisions.

2.     Investigations of the Links Between Early Non-cognitive Skills and Future Adult Outcomes:  Relevance for Economic Assessment of Programs for Children, Damon Jones* (dej10@psu.edu) and Mark Greenberg, Pennsylvania State University

In recent years, much focus has been directed toward understanding the link between non-cognitive traits in children and the likelihood of healthy personal development and eventual adult well-being.  Such traits play an important role both independently of and in conjunction with cognitive traits (such as IQ) in influencing long-term outcomes.  From an economic perspective, non-cognitive skills are worth studying given their potential role in influencing future labor force outcomes or reducing the likelihood for future problems that require societal resources (crime, substance abuse, etc.).  An additional feature of non-cognitive traits is that they may be more malleable than cognitive skills, and thus may be effective targets for prevention or intervention programming.  A challenge lies in effectively assessing children’s competencies at an early enough age when such efforts might be introduced but also when such skills can be measured. 

Our study investigated how well adult outcomes can be predicted from ratings of children’s social-emotional (SE) skills, one indicator of non-cognitive ability, measured many years earlier in elementary school. We examined how early SE skills predict late adolescent and adult outcomes in participants from lower SES neighborhoods in both urban and rural areas.  We utilized data from three intervention projects.  Our analytic models assessed the link between indicators in early elementary school and economically-relevant outcomes 13-19 years later.  Models included a large number of control variables enabling us to explore the unique determination of featured predictors.  Results indicate how early non-cognitive skills are uniquely predictive of adult outcomes across multiple domains such as crime, employment and future need for public assistance.  Such data that are rich in coverage of early non-cognitive skills as well as adult outcomes many years later can provide important information that may facilitate development of shadow prices for use in economic assessment of programs for children.

3.     Valuing Outcomes of Social Programs: The RAND Database of Shadow Prices for Benefit-Cost Analysis of Social Programs, Lynn A. Karoly* (karoly@rand.org), RAND Corporation

In conducting benefit-cost analyses (BCAs) of social programs, the analyst requires estimates of the economic value, or “shadow prices,” associated with the various short- and long-term outcomes that may be affected by a particular program. Indeed, many important benefits that flow from well-designed and -implemented social programs are rarely, if ever, captured in monetary terms in the associated BCAs, or such BCAs are not performed, in part because shadow prices (i.e., the economic values) are not readily available to express the outcomes that the programs affect in monetary terms. In other cases, BCAs are performed but are not comparable with BCAs in the same or other areas of social policy because different shadow prices are used. The lack of valid shadow price measures or the inconsistent use of such measures across BCAs currently constrains the set of social programs for which benefit-cost studies are conducted and limits the comparability of those BCAs that are prepared. This presentation will feature the Valuing Outcomes of Social Programs (VOSP) database, a new resource developed by researchers at the RAND Corporation, which serves as a centralized web-based repository of shadow prices for use by the research and policy communities. The primary objective for the database is to reduce the “transaction costs” associated with conducting BCAs of social programs by providing researchers with an objective, well-documented resource. A second goal is to support standardization in the shadow prices used by the research community. The presentation will outline the range of shadow prices covered in the database, describe the methods used to populate the database, and demonstrate the output from the tool.

4.     Strengthening Benefit-Cost Analyses of Behavioral Prevention: Report on Progress of the Society for Prevention Research’s Task for on Economic Analyses of Prevention, Max Crowley* (maxcrowley@gmail.com), Duke University

Increasingly, behavioral researchers are recognizing the importance of understanding the costs and benefits of their interventions.  Yet, best practices for conducting benefit-cost analyses of programs that intervene in psychosocial functioning remain limited. For instance, infrastructure for delivering preventive services continues to be inadequate. As a result, cost analyses of these programs must include essential, but hard to measure, capacity building resources (e.g., home visiting, substance abuse prevention).  Further, prevention programs that intervene early in life are known to accrue benefits across decades. Such expanded time-horizons make direct measurement of benefits difficult (e.g., Perry Preschool, Abecedarian).  Guidance on such issues is needed to support future benefit-cost evaluations. This presentation will provide an overview of efforts by the Society for Prevention Research’s Task Force on Economic Analyses of Prevention to provide such guidance.  This includes outlining a working paper developed by the taskforce. In particular, this work explores issues around how to integrate behavioral research with economic and public finance methodologies. Efforts to find consensus around best practice for quantifying resources and valuing benefits will be shared. The struggle to balance the need for consistent estimates—while maintaining a flexible methodology will be highlighted. Feedback will be solicited from the SBCA membership. A new NIH supported research network studying the science of investing in healthy development and employing best practices identified by the SPR task force will be introduced.