EPA Critiques Its Estimated Rulemaking Cost Calculations: Interim Findings Differ from AGC’s Experience
August 24, 2012

The U.S. Environmental Protection Agency (EPA) is taking a look at the factors that may attribute to the differences between the Agency’s “projected” and the “actual” costs of meeting various regulatory mandates.  Preliminary findings appear to show that EPA has overestimated the cost of the rules that currently are under analysis.  However, AGC’s experience over the last decade has found the exact opposite; namely that EPA consistently underestimates compliance costs. 

The interim report, Retrospective Study of the Costs of EPA Regulations: An Interim Report of Five Case Studies” (March 2012), actively examines the processes and factors that affect how EPA forecasts the costs of its environmental regulations.  EPA recently released an interim report on its progress and challenges so far.  The preliminary findings of five initial case studies suggest that EPA overestimated the costs of several rules; however, the report is not conclusive and represents only a small subset of regulatory and other policy actions taken by the EPA.   

EPA Consistently Underestimates Industry Costs, AGC Finds

In evaluating any new EPA requirement(s), AGC looks to EPA’s economic analysis for the Agency’s assessment of what it would cost industry to comply with the rule under development.  In many cases, AGC (and related industry groups) have found that EPA has significantly underestimated the cost and burden that its proposed rule(s) would have on industry.  Following are some noteworthy examples— 

  • Lead-Paint Requirements for Target Housing and Child-Care Facilities – EPA underestimated the cost and overestimated the benefits of the Lead: Renovation, Repair and Painting (RRP) rule, according to a July 25 report from its own Office of the Inspector General.  The report is consistent with AGC’s own findings and reflects what members of Congress have told the agency since the rule was announced four years ago.  EPA has been asked to re-examine costs and benefits of the rule. 
  • Stormwater Runoff Requirements for Construction Sites – In August 2010, EPA abruptly decided to abandon the first nationwide numeric limit on the amount of sediment that can cloud the water running off of construction sites.  AGC and the National Association of Home Builders had combined forces to submit detailed comments demonstrating that EPA had significantly underestimated the cost and impact of a nationwide numeric turbidity limit.  EPA continues to collect more information on the effectiveness of existing stormwater treatment technologies at construction sites before proposing a “corrected limit” on stormwater runoff from construction sites.    
  • Clean Water Act (Section 404) Permits for Construction Work in US Waters/Wetlands – AGC continues to urge EPA and the U.S. Army Corps of Engineers to abandon the agencies’ proposed “wetlands guidance” that describes the agencies’ view of their authority to regulate all waters and wetlands and significantly changes and expands which water features are subject to federal jurisdiction and permit requirements under the Clean Water Act (CWA).  A review and critique of the agencies’ economic analysiscommissioned by AGC and other industry groups that make up the Waters Advocacy Coalition – finds that the agencies’ have failed to consider many major categories of impacts and significantly underestimated the cost of implementing the proposed guidance.  The guidance remains under final review at the White House Office of Management and Budget (OMB).  Visit AGC’s Legislative Action Center to tell your Members of Congress that EPA has gone too far.   
  • Heavy-Duty Truck Emissions Standards — The automotive industry recently released a report that calls into question EPA’s cost analysis of emissions control requirements for model year 2004-2010 commercial trucks.  Industry collected data (e.g., sales invoices and related documents) show that EPA significantly underestimated industry compliance costs (the Agency’s estimates were off by a factor of between two and five).  The report – click here– finds that EPA’s rule has resulted in substantially higher prices for commercial vehicles and slower sales than what EPA originally predicted, leading to delayed environmental benefits.  It also calls into question EPA’s and the National Highway Traffic Safety Administration’s ability to make long-term cost projections on technology that has not yet been commercialized.

EPA Asks for Science Advisory Board Feedback

EPA admits that the process of analyzing the actual (ex post) costs of a rule have proven more challenging than anticipated.  EPA is seeking advice from its Science Advisory Board (SAB) on how best to move forward with retrospective cost analyses in the face of these challenges given the limited information available. The case studies are considered works in progress at this stage as they may change in response to SAB feedback.  

Congress established the EPA Science Advisory Board (SAB) in 1978 and gave it a broad mandate to advise the Agency on technical matters.

The report represents the Agency’s latest action to strengthen environmental regulation under the “Improving Regulation and Regulatory Review” Executive Order issued last year.   You can download the full report here.

Background: Cost-Benefit Analysis Requirements

Currently, federal agencies are required to produce cost-benefit analyses (sometimes referred to as benefit-cost analysis) of significant regulations (e.g., are expected to have a $100 million annual effect on the economy), as prescribed by a series of presidential and congressional initiatives enacted over the last 50 years. The current set of requirements includes Executive Order 12866 (supplemented by President Obama’s Executive Order) and OMB Circular A-4, the Regulatory Flexibility Act (RFA), and the Unfunded Mandates Reform Act (UMRA).

On October 28, 2010, OMB published an agency checklist for the regulatory impact analyses required by Executive Order 12866 and OMB Circular A-4.  OMB subsequently published a Circular A-4, “Regulatory Impact Analysis: A Primer on August 15, 2011.

In addition, Federal regulatory agencies must prepare a regulatory flexibility analysis for proposed and final rules unless the Agency can certify that a rule will not have a significant impact on a substantial number of small entities, per the Regulatory Flexibility Act (1980) as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).  A regulatory flexibility analysis includes a description of the steps an agency has taken to minimize the significant economic impact on small businesses. This law requires agencies to collect input from small entities on regulations and to identify alternative regulatory approaches for small businesses, small governmental jurisdictions and non-profit organizations.

A number of bills have been introduced in the 112th Congress – and supported by AGC – that would codify and expand the executive order’s requirements for cost-benefit analysis; apply the executive order’s principles to independent regulatory agencies; require cost-benefit analysis for certain agencies’ rules; or improve the implementation of the RFA and UMRA. Enactment of some or all of these bills would add to the existing patchwork of analytical requirements, and some would significantly increase the number of rules for which analyses would be required.

For more information, contact AGC’s Senior Environmental Advisor Leah Pilconis at pilconisl@agc.org.