Clean Air Act: Observations on EPA's Cost-Benefit Analysis of Its
Mercury Control Options (28-FEB-05, GAO-05-252).		 
                                                                 
Mercury is a toxic element that can cause neurological disorders 
in children. In January 2004, the Environmental Protection Agency
(EPA) proposed two options for limiting mercury from power	 
plants, and plans to finalize a rule in March 2005. The first	 
would require each plant to meet emissions standards reflecting  
the application of control technology (the technology-based	 
option), while the second would enable plants to either reduce	 
emissions or buy excess credits from other plants (the		 
cap-and-trade option). EPA received over 680,000 written comments
on the proposal. EPA is directed by statute and executive order  
to analyze the costs and benefits of proposed rules, and the	 
agency summarized its analysis underlying the two options in the 
proposal. In this context, GAO was asked to assess the usefulness
of EPA's economic analysis for decision making. In doing so, GAO 
neither independently estimated the options' costs and benefits  
nor evaluated the process for developing the options or their	 
consistency with the Clean Air Act, as amended. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-252 					        
    ACCNO:   A18376						        
  TITLE:     Clean Air Act: Observations on EPA's Cost-Benefit	      
Analysis of Its Mercury Control Options 			 
     DATE:   02/28/2005 
  SUBJECT:   Air pollution control				 
	     Comparative analysis				 
	     Cost analysis					 
	     Cost effectiveness analysis			 
	     Economic analysis					 
	     Economic policies					 
	     Environmental law					 
	     Environmental monitoring				 
	     Environmental policies				 
	     Federal regulations				 
	     Financial analysis 				 
	     Hazardous substances				 
	     Health hazards					 
	     Pollution control					 
	     Powerplants					 
	     Policies and procedures				 

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GAO-05-252

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

February 2005

CLEAN AIR ACT

Observations on EPA's Cost-Benefit Analysis of Its Mercury Control Options

                                       a

GAO-05-252

[IMG]

February 2005

CLEAN AIR ACT

Observations on EPA's Cost-Benefit Analysis of Its Mercury Control Options

                                 What GAO Found

GAO identified four major shortcomings in the economic analysis underlying
EPA's proposed mercury control options that limit its usefulness for
informing decision makers about the economic trade-offs of the different
policy options. First, while Office of Management and Budget (OMB)
guidance directs agencies to identify a policy that produces the greatest
net benefits, EPA's analysis is of limited use in doing so because the
agency did not consistently analyze the options or provide an estimate of
the total costs and benefits of each option. For example, as seen in the
table, EPA analyzed the effects of the technology-based option by itself,
but analyzed the effects of the cap-and-trade option alongside those of
another proposed rule affecting power plants, the Clean Air Interstate
Rule (the interstate rule), without separately identifying the effects of
the cap-and-trade option. As a result, EPA's estimates are not comparable
and are of limited use for assessing economic trade-offs. EPA officials
said they analyzed the cap-andtrade option alongside the interstate rule
because the agency views the two proposed rules as complementary.
Nonetheless, to provide comparable estimates, EPA would have to analyze
each option alone and in combination with the interstate rule.

Estimated Annual Economic Impacts of EPA's Proposed Mercury Policy Options
in 2010 (1999 dollars, in billions)

Policy option Annual costs Annual benefits

Annual net benefits

                   Technology-based             2  15 or more    13 or more   
                             option                             
               Cap-and-trade option Not estimated Not estimated Not estimated 
                   Technology-based                             
                             option                             
                 and the interstate Not estimated Not estimated Not estimated 
                               rule                             
               Cap-and-trade option                             
                                and                             
                                        3 to 5 or  58 to 73 or    55 to 68 or 
                the interstate rule          more     more               more 

Source: EPA.

Second, EPA did not document some of its analysis or provide information
on how changes in the proposed level of mercury control would affect the
cost-and-benefit estimates for the technology-based option, as it did for
the cap-and-trade option. Third, EPA did not estimate the value of the
health benefits directly related to decreased mercury emissions and
instead estimated only some secondary benefits, such as decreased exposure
to harmful fine particles. However, EPA has asked for comments on a
methodology to estimate the benefits directly related to mercury. Fourth,
EPA did not analyze some of the key uncertainties underlying its
cost-andbenefit estimates.

                 United States Government Accountability Office

Contents

  Letter 1

Results in Brief 3

Background 5

EPA's Economic Analysis Is of Limited Use for Informing Decision

Makers about the Economic Trade-offs of Different Policy

Options 8 Conclusions 15 Recommendations for Executive Action 16 Agency
Comments 16

  Appendixes

Appendix I: Objectives, Scope, and Methodology 20

Appendix II: Comments from the Environmental Protection Agency 21

Appendix III:	GAO Contacts and Staff Acknowledgments 23 GAO Contacts 23
Staff Acknowledgments 23

Table Table 1:	Estimated Annual Economic Impacts of EPA's Proposed Mercury
Policy Options in 2010

Abbreviations

CAA Clean Air Act
EPA Environmental Protection Agency
FDA Food and Drug Administration
IPM Integrated Planning Model
MACT Maximum Achievable Control Technology
OMB Office of Management and Budget
UMRA Unfunded Mandates Reform Act

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A

United States Government Accountability Office Washington, D.C. 20548

February 28, 2005

Congressional Requesters

Mercury is a toxic element that poses human health threats, especially to
fetuses and children. For example, children of women exposed to mercury
during pregnancy-typically from contaminated fish-may face increased risk
of neurological disorders, including delays in learning ability. According
to the Centers for Disease Control, 6 percent of women of childbearing age
have mercury blood levels that exceed safe levels. Mercury enters the
environment through natural and human activities, such as volcanic
eruptions and fuel combustion. In January 2004, the Environmental
Protection Agency (EPA) issued a proposed rule under the Clean Air Act to
regulate mercury emissions from the nation's largest unregulated
industrial source: coal-fired power plants. The proposed rule laid out two
policy options, one of which EPA plans to choose and finalize in a March
2005 rule. The first, the "technology-based" option, would require
coal-fired power plants to meet specific mercury emissions standards
reflecting the application of control technology.1 The second option would
set a national cap on mercury emissions and allow power plants flexibility
either to achieve reductions or to purchase credits from plants that
achieved excess reductions (the "cap-and-trade" option).2 The proposed
rule has become a contentious environmental policy issue, with EPA
receiving over 680,000 written public comments on the proposal.

Much of the debate over the proposed rule centers on the relative merits
of the two policy options, such as the potential costs to industry and the
expected human health benefits. Federal agencies are required by statute
and executive order to analyze the impacts of economically significant
rules-those that would affect the economy by $100 million or more each

1Under this option, also referred to as the Maximum Achievable Control
Technology (MACT) approach, the emissions standards would vary depending
on coal type.

2Both proposed options would apply to coal-fired electricity generating
units greater than 25 megawatts in size that produce electricity for sale.
We refer to these units as coal-fired power plants.

year-unless otherwise prohibited by law.3 Further, the Office of
Management and Budget (OMB) has developed guidance and best practices
under Executive Order 12866 that, among other things, direct agencies to
explore alternative regulatory approaches, taking into consideration
different levels of stringency, and identify the policy that would
maximize net benefits (total benefits minus total costs), unless another
approach is required by statute.4 OMB guidance states that identifying the
policy option with the greatest net benefits is useful information for
decision makers and the public, even when maximizing net benefits is not
the only or overriding policy objective. In addition, OMB guidance directs
agencies to conduct their economic analyses in accordance with the
principles of full disclosure and transparency. Furthermore, in cases such
as the final mercury rule, where expected economic impacts would exceed $1
billion annually, OMB guidance directs agencies to identify and
quantitatively analyze key uncertainties in their economic analysis.5 EPA
analyzed the economic effects of its proposed mercury rule and found that
a rule based on either option would impose billions of dollars in
emissions control costs but would also generate human health benefits of
even greater value. EPA summarized the results of its economic analysis in
the January 2004 proposed rule and plans to conduct additional analysis to
support a final rule.

3The Unfunded Mandates Reform Act of 1995, Pub. L. No. 104-4, 109 Stat. 48
(1995) (codified at 2 U.S.C. S: 32) (UMRA) and Executive Order 12866
require agencies to conduct economic analyses of economically significant
rules. Further, UMRA requires agencies to choose the least costly, most
cost-effective, or least burdensome option unless inconsistent with law or
the agency head explains why this option was not adopted, and the
executive order directs agencies to select the policy that maximizes net
benefits to society unless a statute requires otherwise.

4OMB, Economic Analysis of Federal Regulations under Executive Order 12866
(Washington, D.C., January 1996).

5For rules with annual benefits or costs exceeding $1 billion, OMB directs
agencies to conduct a formal probabilistic assessment of key uncertainties
underlying its cost-and-benefit estimates. OMB Circular No. A-4,
Regulatory Analysis (Sept. 14, 2003). This guidance did not apply to the
proposed rule but does apply to the final rule.

EPA's economic analysis of its mercury control options is complicated by
another proposed rule, the Clean Air Interstate Rule (the interstate
rule), which would reduce emissions of sulfur dioxide and nitrogen
oxides.6 This rule would share some of the costs and benefits of
regulating mercury because the technologies that power plants would likely
install to comply with the rule could also reduce mercury emissions. EPA
had planned to finalize the interstate rule by the end of 2004, but
announced in December 2004 that it would delay a final decision on the
rule until March 2005. Also in December 2004, EPA issued a public notice
providing new data and information relevant to EPA's economic analysis of
the proposed mercury rule and solicited additional public comment on this
information for consideration by the agency prior to finalizing the rule.

In this context, you asked us to assess the usefulness of the economic
analysis underlying EPA's proposed mercury rule for decision making. To
respond to this objective, we, among other things, reviewed EPA's analysis
of the proposed rule's economic effects using OMB guidance and standard
economic principles, and discussed the analysis with senior officials
within EPA's Office of Air and Radiation, which is responsible for
developing the proposed rule and analyzing its economic effects. In doing
this work, we did not independently estimate the costs or benefits of
either control option, evaluate the process for developing either option,
or assess the options' consistency with the Clean Air Act, as amended.
(See app. I for a more detailed description of the scope and methodology
of our review.) You also asked us to provide information on the
availability and cost of mercury control technologies, and we surveyed
mercury technology vendors, power companies, and federal and other
researchers on these issues. Subsequent to this report, which we plan to
issue before the agency promulgates a final rule, we will provide
information on mercury control technologies in a separate product. We
performed our work between May 2004 and February 2005 in accordance with
generally accepted government auditing standards.

Results in Brief	We identified four major shortcomings in the economic
analysis underlying EPA's proposed mercury rule that limit its usefulness
for informing decision

6EPA currently regulates power plant emissions of sulfur dioxide and
nitrogen oxides through its acid rain program. Both pollutants contribute
to acid rain and the formation of fine particles that have been linked to
aggravated asthma, chronic bronchitis, and premature death.

makers and the public about the economic trade-offs of the two policy
options. First, because EPA used inconsistent approaches in analyzing the
two proposed policy options, the analysis did not provide sufficient
information to compare the two options and determine which would provide
the greatest net benefits. For example, EPA analyzed the costs and
benefits of the technology-based option by itself but analyzed the
cap-and-trade option in combination with the proposed interstate
rule-combining the costs and benefits of the two rules without separately
identifying those associated with the cap-and-trade option. EPA officials
said they analyzed the effects of the cap-and-trade option alongside the
interstate rule because the agency views the two proposed policies as
complementary. Nonetheless, EPA's December 2004 decision to postpone the
interstate rule highlights the need for consistent analysis of the two
mercury policy options on their own merits, independent of the proposed
interstate rule. In addition, the comparability of EPA's analysis is
further limited because the agency did not provide consistent information
on the total costs and benefits of the two options over the entire
implementation period.

Second, EPA did not document some of its analysis or adhere to the
principles of full disclosure and transparency as directed by OMB, and it
did not provide decision makers or the public with consistent information
on how changes in the proposed level of control would affect its estimates
of net economic benefits for each option. Third, because of time,
resource, and technical constraints, EPA did not quantify the human health
benefits specifically related to reductions in mercury emissions, such as
reduced incidence of neurological disorders. Instead, EPA estimated only
some of the health benefits that would occur as a secondary benefit of
regulating mercury-that is, decreased exposure to fine particles that
cause respiratory and heart ailments. The two options in the proposed rule
differed significantly in their targeted mercury reduction levels and time
frames, and we believe that monetary estimates of the health benefits of
mercury reductions would assist decision makers in comparing the net
benefits of each option. Along these lines, EPA recently solicited public
comment on a proposed methodology for estimating mercury-specific benefits
in the final rule. Fourth, EPA did not analyze some of the key
uncertainties underlying its cost-and-benefit estimates, although the
agency plans to conduct a more formal assessment of these uncertainties,
as directed by OMB guidance, prior to issuing a final rule. In light of
these limitations, we are recommending that the EPA Administrator improve
the agency's economic analysis prior to issuing a final rule by providing
some additional analysis and ensuring that the analysis supporting the
final rule

is documented and available to decision makers and the public. In
commenting on a draft of this report, EPA's Assistant Administrator for
Air and Radiation said that, prior to issuing a final mercury regulation
by March 15, 2005, EPA will conduct additional analysis that will largely
address the findings and recommendations identified in our report. EPA's
letter is included as appendix II.

Background	Mercury enters the environment through natural and man-made
sources, including volcanoes, chemical manufacturing, and coal combustion,
and poses ecological threats when it enters water bodies, where small
aquatic organisms convert it into its highly toxic form-methylmercury.
This form of mercury may then migrate up the food chain as predator
species consume the smaller organisms. Through a process known as
bio-accumulation, predator species may develop high mercury concentrations
in their tissue as they take in more mercury than they can metabolize or
excrete.

Fish contaminated with methylmercury may pose health threats to those that
rely on fish as part of their diet. According to EPA, mercury harms
fetuses and can cause neurological disorders in children, including poor
performance on behavioral tests, such as those measuring attention, motor
and language skills, and visual-spatial abilities (such as drawing). In
addition, populations that consume larger amounts of fish than the general
population-including subsistence fishers, as well as certain Native
Americans and Southeast Asian Americans-may face higher risk of exposure
to contaminated fish, according to EPA. The Food and Drug Administration
(FDA) and EPA recommend that expectant mothers, young children, and those
nursing children avoid eating swordfish, king mackerel, shark, and
tilefish and limit consumption of other potentially contaminated fish,
such as tuna. These agencies also recommend checking local advisories for
recreationally caught freshwater and saltwater fish. According to EPA, 45
states issued mercury advisories in 2003 (the most recent data available).

Because mercury released to the atmosphere can circulate for long periods
of time and be transported thousands of miles before it gets deposited, it
is difficult to link mercury accumulation in the food chain with sources
of mercury emissions. EPA estimates that about half of the mercury
deposited in the United States is emitted by sources within this country.
In 1999, the most recent year for which data were available, EPA estimated
that man-made sources within the United States emitted about 115 tons of

mercury. Of these emissions, the agency estimates that about 48 tons, 42
percent of the total, came from coal-fired power plants. While power
plants are not required to limit their mercury emissions, EPA estimates
that the plants currently capture about 27 tons of mercury each year,
primarily through the use of controls for other pollutants, such as those
used to control nitrogen oxides, particles, and sulfur dioxide. EPA
estimates that power plants would otherwise emit about 75 tons of mercury
per year.

The Clean Air Act (CAA) Amendments of 1990 required EPA to study the
environmental and health effects of hazardous air pollutants from
coal-fired power plants and determine whether it was "appropriate and
necessary" to regulate these pollutants. In 2000, EPA determined that
mercury was a hazardous air pollutant and that it was appropriate and
necessary to regulate mercury using the technology-based option. Under
this section of the act, the emissions limit had to be at least as strict
as the average emissions of the facilities with the best-controlled
emissions.7 Because power plants did not already use controls specifically
intended to control mercury, EPA analyzed the effectiveness of controls
for other pollutants that capture mercury as a side benefit.8

This effort culminated in EPA's January 2004 proposal for a
technology-based option that would reduce mercury emissions from a current
level of 48 tons per year to a projected 34 tons per year (a 29 percent
reduction) by 2008. At the same time, however, EPA proposed an alternate
policy option that would limit mercury emissions in two phases: to 15 tons
in 2018 (a 69 percent reduction from current levels), preceded by an
as-yet-unspecified interim cap starting in 2010. The alternate policy
option, which would rely on a cap-and-trade system similar to that
currently used to control emissions that cause acid rain, differs from the
technology-based option in that it would not require each facility to meet
emission standards based on control technology.9 Instead, EPA would set a

7Specifically, the act required EPA to establish limits based on the
mercury removal achieved by the top 12 percent of facilities (in terms of
their mercury removal).

8EPA's Office of Research and Development discusses mercury control
technologies in a January 2004 white paper entitled "Control of Mercury
Emissions from Coal-Fired Electric Utility Boilers." We will provide
information on the availability, cost, performance, and use of mercury
control technologies in a subsequent report.

9According to EPA, if it selects this policy option, it will first have to
formally reverse its 2000 decision that it was appropriate and necessary
to regulate mercury with a technology-based standard.

nationwide "cap" for mercury emissions from coal-fired power plants and
then distribute tradable emissions allowances that represent a certain
amount of the total cap. At the end of each year, each power plant would
have to hold sufficient allowances for the mercury it emitted that year.
Plants that reduced their emissions below the levels represented by their
allowances could sell their extra allowances to other plants.

In addition to its proposed mercury rule, EPA has proposed another rule
for power plants, the Clean Air Interstate Rule, which is intended to
reduce emissions of nitrogen oxides and sulfur dioxide beginning in 2010.
EPA expects that this proposed rule would result in the installation of
pollution controls that capture mercury as a side benefit, and thereby
decrease mercury emissions to 34 tons per year by 2010, the same level of
reduction as the technology-based option. Under the cap-and-trade option,
EPA has indicated that it may establish a mercury cap for 2010 equal to
the control level expected through the interstate rule. EPA postponed its
decision on finalizing the interstate rule until March 2005 while the
agency awaits congressional action on pending legislation, known as the
Clear Skies Act, that would establish emissions caps and an allowance
system similar to those in the interstate rule and the cap-and-trade
mercury control option.10 EPA has stated a preference for achieving
reductions of mercury, nitrogen oxides, and sulfur dioxide simultaneously
through legislation rather than regulations.

Responsibility for analyzing the economic impacts-including costs to
industry and expected public health effects-of air pollution control
policies rests with EPA's Office of Air and Radiation. EPA provided
documentation of its economic analysis for the proposed mercury rule in
three primary documents, some of which refer readers to additional
documentation on the agency's Web site or in the public rule-making
docket.11 According to EPA, the agency did not have time to assemble its
economic assessment of the proposed rule in a single document prior to
issuing the proposed rule. To assist in estimating costs that air quality
regulations will impose on the power industry, EPA uses the Integrated

10The Clear Skies Act was initially introduced in both houses of Congress
in 2003 (H.R. 999 and S. 485) and would limit emissions of mercury,
nitrogen oxides, and sulfur dioxide simultaneously. The proposed
legislation was reintroduced in the Senate in 2005 (S.131).

11See (1) 69 Fed. Reg. 4652 (Jan. 30, 2004); (2) U.S. EPA, Benefit
Analysis for the Section 112 Utility Rule, January 2004; and (3) U.S. EPA,
Economic and Energy Impact Analysis for the Proposed Utility MACT
Rulemaking.

Planning Model (IPM), which estimates how power plants would respond to
various environmental policies. The assumptions underlying this model,
such as those regarding fuel costs, the costs of pollution controls, and
future electricity demand, can affect the modeling results, according to
EPA officials responsible for the modeling.

  EPA's Economic Analysis Is of Limited Use for Informing Decision Makers about
  the Economic Trade-offs of Different Policy Options

We identified four major shortcomings in the economic analysis underlying
EPA's proposed mercury rule that limit its usefulness for informing
decision makers and the public about the economic trade-offs of the two
options. First, EPA did not consistently analyze each of its two mercury
policy options or provide estimates of the total costs and benefits of the
two options, making it difficult to ascertain which policy option would
provide the greatest net benefits. Second, EPA did not document some of
its analysis or provide consistent information on the anticipated economic
effects of different mercury control levels under the two options. Third,
the agency did not estimate the economic benefits directly related to
decreased mercury emissions. Finally, the agency did not analyze some of
the key uncertainties underlying its cost-and-benefit estimates.

    EPA Did Not Consistently Analyze Each Policy Option or Provide a Complete
    Accounting of Costs and Benefits

EPA's estimates of the costs and benefits of its two proposed policy
options are not comparable because the agency used inconsistent approaches
in analyzing the two options. As shown in table 1, EPA analyzed the
technology-based option alone, while it analyzed the cap-and-trade option
in combination with the interstate rule. In analyzing the technology-based
option by itself, EPA estimated the rule would cost about $2 billion
annually, and achieve benefits of $15 billion or more annually, yielding
net benefits (benefits minus costs) of $13 billion or more annually. In
contrast, EPA analyzed the effects of the cap-and-trade option in
combination with the proposed interstate rule by combining the costs and
benefits of the two proposed rules without separately identifying and
documenting those associated with the cap-and-trade option alone. This
analysis found that the two proposed rules together would impose costs of
$3 billion to $5 billion or more annually, while generating annual
benefits of $58 billion to $73 billion or more and annual net benefits of
$55 billion to $68 billion or more.

Table 1: Estimated Annual Economic Impacts of EPA's Proposed Mercury
Policy Options in 2010

                           1999 dollars, in billions

             Policy option  Annual costs Annual benefitsa Annual net benefits 
            Technology-bas             2       15 or more          13 or more 
                 ed option                                
             Cap-and-trade Not estimated  Not estimated         Not estimated 
                    option                                

                  Technology-bas  Not estimated Not estimated   Not estimated 
                   ed option and                               
                  the interstate                               
                            rule                               

Cap-and-trade 3 to 5 or moreb 58 to 73 or moreb 55 to 68 or moreb
option and the
interstate rule

Source: EPA.

aAs discussed further below, EPA's monetary benefits estimates do not
include the human health benefits specifically related to reductions in
mercury emissions. Instead, EPA monetized some of the health benefits that
would occur as a secondary benefit of regulating mercury.

bAccording to EPA, the lower end of the range reflects a scenario
involving no additional reductions beyond those achieved by the interstate
rule, while the upper end of the range reflects mercury caps similar to
those in the Clear Skies legislation. EPA estimated that the interstate
rule alone would generate annual benefits of $58 billion or more while
imposing annual costs of about $3 billion.

Because the estimates for the two options are not comparable, however, it
is not clear which option would provide the greatest net benefits. This is
particularly important in light of EPA's decision to delay finalization of
the interstate rule.12 EPA officials responsible for the rule acknowledged
the lack of comparability with its analysis of the two proposed options.
These officials said the agency analyzed the cap-and-trade option
alongside the interstate rule because it viewed these two proposed
policies as complementary. They also said it would have been useful to
analyze the technology-based option alongside the interstate rule, but the
agency did not do so because of time constraints. Nonetheless, it is
important for EPA to consistently analyze each policy option and provide
decision makers with comparable estimates of net economic benefits.

12In December 2004, EPA announced that it would finalize the interstate
rule in March 2005, unless Congress makes substantial progress on Clear
Skies legislation. Rules may also be delayed or blocked in court. For
example, a coalition of environmental groups and state attorneys general
challenged a 2003 EPA New Source Review rule, and the U.S. Court of
Appeals for the District of Columbia Circuit issued a stay on the rule's
implementation. State of New York v. United States Environmental
Protection Agency, Docket No. 03-1380.

The comparability of EPA's analysis is further limited because the agency
did not provide consistent information on the total costs and benefits of
the two options over their entire implementation periods. Specifically,
EPA provided cost-and-benefit estimates for 2010, rather than estimates of
the total costs and benefits over the entire implementation period.13 This
is important because the economic impact of the policy options could vary
from year to year and because the two options have different
implementation timelines. For example, under the proposed cap-and-trade
option, a second level of mercury reductions would take effect in 2018,
which would likely generate additional costs and benefits at that time.
Thus, the estimates EPA provided for 2010 did not fully account for the
expected costs and benefits over the implementation period for this
option. In contrast, EPA officials said that its estimate of the
technology-based option in 2010 reflects the full implementation cost
because its analysis assumes that power plants would achieve compliance
with the technology-based option by that date. However, without estimates
of the total value of benefits and costs of each option over the entire
implementation period, it is difficult to ascertain which option would
generate the greatest net benefits.

    EPA Did Not Document Some of Its Analysis Supporting the Policy Options or
    Provide Consistent Information on the Economic Impacts of Different Control
    Levels

The economic analysis underlying the proposed mercury rule does not
consistently reflect OMB's guidance to agencies in terms of adhering to
the principles of full disclosure and transparency when analyzing the
economic effects of regulations. Specifically, we identified two primary
cases where EPA's analysis does not adhere to these principles, further
limiting the usefulness of the agency's analysis in decision making and
diminishing the transparency of the analysis to the public.

First, while EPA provides substantial information on its analysis of the
technology-based option in the documents supporting its economic analysis
of the proposed rule, the agency does not do so for the cap-and-trade
option. For the technology-based option, EPA provides documents that
describe its findings. In contrast, the agency provides only a summary of
its findings for the cap-and-trade option in the rule's preamble and
refers to its findings as "rough estimates" that are based on
consideration of available analysis of the interstate rule, the

13OMB guidance states that agencies should discount costs and benefits
that accrue in different time periods to present values. To compute
present value, the agencies need to discount the estimated costs and
benefits using interest rates recommended by OMB.

technology-based option, and the proposed Clear Skies legislation. EPA
does not describe specifically how the agency used this analysis of other
proposed rules and legislation to estimate the costs and benefits of the
cap-and-trade option, and it does not identify the key analytical
assumptions underlying its cost-and-benefit estimates. This lack of
documentation and transparency leaves decision makers and the public with
limited information on EPA's analysis of the cap-and-trade option.

Second, EPA officials responsible for the economic analysis told us that
they analyzed two variations of the proposed technology-based option with
more stringent mercury limits than the option included in the proposal,
but the agency did not include this analysis in the documents supporting
its economic analysis or in the public rule-making docket. This is
inconsistent with EPA's analysis of the cap-and-trade option, in which it
provided a range of costs and benefits associated with different levels of
stringency. This omission is also at odds with OMB guidance directing
agencies to conduct their economic analysis in accordance with the
principles of full disclosure and transparency.14

With respect to the analysis of the technology-based scenarios that the
agency did not make publicly available, EPA officials said the additional
modeling showed that the more stringent scenarios were not as
cost-effective as the proposed technology-based option. However, EPA did
not estimate the benefits of these two scenarios, thereby precluding a
comparison of the net economic benefits under the proposed mercury policy
options. As a result, it is unclear whether the reduction levels and
implementation timelines under either proposed option represent the
regulatory scenario that would provide the greatest net benefits.

In January 2005, EPA officials responsible for the mercury rule said the
agency does not have an obligation to analyze and document every control
scenario. We recognize that OMB guidance gives agencies latitude in
determining the number of regulatory alternatives to consider and that
agencies must balance the thoroughness of their analysis with the
practical limits of their ability to carry out analysis. Nonetheless,
providing information on the costs and benefits of even a limited range of
control scenarios under both proposed options would help decision makers
and the public in assessing how different levels of stringency would
affect

14OMB, Economic Analysis of Federal Regulations under Executive Order
12866 (Washington, D.C., January 1996).

overall estimates of costs and benefits. In December 2004, EPA solicited
public comment on additional economic analyses the agency received from
commenters on the January 2004 proposed rule, including some that relied
on models, assumptions, and levels of stringency that were different from
the scenarios EPA analyzed.

    EPA Did Not Estimate the Human Health Benefits of Mercury Reductions

Although EPA's analysis states that a mercury regulation would generate a
variety of benefits, the agency did not estimate in monetary terms all of
the benefits expected from reducing mercury emissions. Most notably, EPA
did not quantify the human health benefits of decreased exposure to
mercury, such as reduced incidence of developmental delays, learning
disabilities, and neurological disorders. Instead, EPA estimated only some
of the health benefits it anticipates would occur from decreased exposure
to fine particles and discussed other impacts qualitatively.15 Because the
two options in the proposed rule differed significantly in both the amount
of mercury emission reductions and the time frames in which these
reductions would occur, the lack of estimates of the mercury-specific
benefits of each policy option represents a significant limitation of
EPA's economic analysis. That is, to the extent that each proposed option
would yield measurable mercury-specific health benefits, EPA's analysis
may underestimate the total expected benefits of both options. Moreover,
because the options may yield different mercury-related health benefits,
the lack of estimates of these benefits makes it difficult to weigh the
relative merits of the two proposed options.

According to EPA, its analysis did not estimate key mercury-related health
benefits because of technical, time, and resource limitations.
Specifically, agency officials responsible for the analysis said the
agency did not have a method for determining the extent to which mercury
reductions from power plants would translate into decreased incidence of
mercury-related health problems. According to EPA, estimating these
benefits involves a number of complex chemical, physical, and biological
processes, as well as a wide variety of human behaviors, such as fish
consumption practices.

Although EPA did not estimate the expected human health and other benefits
of decreased exposure to mercury emissions in the analysis supporting the
proposed rule, the agency did list the various human health

15According to EPA, health effects associated with fine particles include
exacerbated asthma, bronchitis, heart attacks, premature mortality, and
respiratory diseases.

and other benefits it expects would stem from a mercury rule. Importantly,
in December 2004, the agency announced that it was revising its benefit
estimates and solicited public comment on a proposed method for estimating
mercury-specific benefits. According to EPA, this method would focus on
(1) quantifying projected emissions from coal-fired power plants relative
to other sources, (2) modeling the dispersion and deposition of mercury,
(3) modeling the link between changes in mercury deposition and changes in
the methylmercury concentrations in fish, (4) assessing the methylmercury
exposure from consuming fish, and (5) assessing how reductions in
methylmercury exposure affect human health. According to EPA officials
responsible for analyzing the proposed rule's effects, the agency will
consider public comments on this approach and revise its analysis before
finalizing a rule. In January 2005, EPA officials responsible for the
analysis agreed that providing monetary estimates of mercury-specific
benefits would enhance their analysis, and said that the agency might have
sufficient information to estimate some, but not all, of the expected
human health benefits of reducing mercury emissions.

    EPA Did Not Assess Key Analytical Uncertainties That Could Affect Its
    Cost-and-Benefit Estimates

OMB guidance under Executive Order 12866 stipulates that agencies should
analyze and present information on uncertainties with their
cost-and-benefit estimates. According to EPA officials responsible for the
economic analysis, the agency's cost model is generally sensitive to
assumptions about future electricity demand and fuel prices, as well as
the availability, cost, and performance of pollution controls. Because
these assumptions involve long-term projections, they also involve a
substantial amount of uncertainty. EPA conducted a limited uncertainty
analysis of natural gas prices and electricity demand growth on the cost
estimates by examining the impact of alternative projections and concluded
that its cost estimates were not particularly sensitive to changes in
these variables. However, EPA did not assess how the distribution of
estimated benefits and costs would differ given changes in its assumptions
about the availability, cost, and performance of mercury control
technologies, even though the agency believes that these assumptions could
affect its economic modeling.

Furthermore, EPA's December 2004 notice for additional public comment on
the mercury proposal highlighted the uncertainty surrounding the ability
of its computer model to estimate mercury control costs, primarily because
of the power industry's limited experience with implementing mercury
controls.16 This notice solicited public comment on, among other things,
the assumptions in its economic modeling related to the cost,
availability, and performance of mercury control technologies. According
to senior EPA officials responsible for analyzing the mercury proposal,
changes in these assumptions could have a sizable impact on the agency's
cost-and-benefit estimates. This acknowledgment of key uncertainties in
its economic modeling highlights the need to determine how they could
affect the overall cost-and-benefit estimates for each proposed option.

In addition, EPA did not analyze the key uncertainties surrounding its
benefit estimates. For example, EPA used economic data from its earlier
assessment of the proposed Clear Skies legislation to approximate the
impact of emissions reductions that would be expected under the mercury
rule. According to EPA, the agency used this approach-referred to as a
"benefits-transfer approach"-because time and resource constraints
prevented it from performing new research to measure the value of health
impacts under a mercury rule. OMB's September 2003 guidance, which applies
to economically significant final rules issued after January 1, 2005,
states that although such an approach can provide a quick and low-cost
means of obtaining monetary values, the method may be characterized by
uncertainty and potential biases of unknown magnitude and should be
treated as a last-resort option.17 Furthermore, EPA's economic analysis
states that the benefits analysis has many sources of uncertainty,
including those associated with emissions data, air quality modeling, and
the effect of emissions on human health. The agency did not, however,
formally assess the impact of these uncertainties.

1669 Fed. Reg. 69864 (Dec. 1, 2004) 17OMB Circular No. A-4, Regulatory
Analysis (Sept. 17, 2003).

In January 2005, EPA officials responsible for the proposed mercury rule
acknowledged this limited analysis of key uncertainties and said that the
agency plans to conduct a more formal assessment of these uncertainties
prior to issuing a final rule, as directed by OMB's September 2003
guidance.18 This guidance directs agencies to assess the sources of
uncertainty in their regulatory analyses and the way in which
cost-and-benefit estimates may be affected under plausible assumptions.
Furthermore, in cases where the annual economic effects total $1 billion
or more, the guidance states that agencies should provide a formal
quantitative assessment of the key uncertainties about costs and benefits.

Conclusions	Because EPA estimates that regulating mercury emissions would
have significant economic impacts totaling billions of dollars per year,
it is important for the agency to have a credible basis for selecting a
policy that will maximize the return on this investment. However, EPA's
initial economic analysis of the two policies it is considering has a
number of shortcomings. Specifically, because EPA did not analyze and
document the economic effects of each policy option by itself-as well as
in combination with the interstate rule-over their varying full
implementation periods, the results cannot be meaningfully compared. In
addition, EPA did not document the analysis supporting the cap-and-trade
option or provide consistent information on the economic impacts of
different mercury control levels for the two options, limiting the
transparency and usefulness of the analysis. Further, without monetary
estimates of the human health benefits of mercury emissions reductions-a
primary purpose of a mercury regulation-over the full implementation
period of each option or, at a minimum, a qualitative comparison of these
benefits, EPA's analysis does not provide decision makers with a strong
basis for comparing the net benefits under each option. Finally, because
EPA did not analyze some of the key analytical uncertainties that could
affect its estimates of net benefits, the agency could enhance its
economic analysis by further evaluating these uncertainties and how they
could affect its overall findings. Unless EPA conducts and documents
further economic analysis, decision makers and the public may lack
assurance that the agency has evaluated the economic trade-offs of each
option and taken the appropriate

18A formal quantitative analysis under the Circular involves an assessment
of the probability distributions underlying the estimated benefits and
costs, conducted using tools such as simulation models or expert opinion.

steps to identify which mercury control option would provide the greatest
net benefits.

  Recommendations for Executive Action

To improve the usefulness of the agency's economic analysis for informing
decision makers and the public, and to help ensure consistency with OMB
guidance for economic analysis, we recommend that, as the agency revises
its economic analysis prior to selecting a mercury control option, the EPA
Administrator take the following four actions:

o 	Analyze and fully document the economic effects of each policy option
by itself, as well as in combination with the interstate rule, over their
full implementation periods.

o 	Ensure that the agency documents its analysis supporting the final rule
and consistently analyzes the effect that different levels of mercury
control would have on cost-and-benefit estimates under each policy option.

o 	Include monetary estimates, where possible, of the human health
benefits of reductions in mercury emissions from power plants or, at a
minimum, provide qualitative information on how these benefits are likely
to compare under the two options over a consistent time frame, reflecting
full implementation of both options.

o 	Further analyze uncertainties surrounding estimates of costs and
benefits, as directed by OMB guidance, and evaluate how these
uncertainties could affect overall estimates of the rule's impacts.

Agency Comments	We provided EPA with a draft of this report for review and
comment. In commenting on the draft report, the Assistant Administrator
for Air and Radiation said that, prior to issuing a final mercury
regulation by March 15, 2005, EPA will conduct additional analysis that
will largely address the findings and recommendations identified in our
report. EPA's letter is included as appendix II.

As agreed with your offices, unless you publicly announce the contents of
this letter earlier, we plan no further distribution until 7 days from the
report date. At that time, we will send copies of the report to the EPA

Administrator and other interested parties. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202)
512-3841 or [email protected]. Key contributors to this report are
listed in appendix III.

John B. Stephenson Director, Natural Resources and Environment

List of Congressional Requesters

The Honorable Olympia J. Snowe Chair, Committee on Small Business and
Entrepreneurship United States Senate

The Honorable James M. Jeffords
Ranking Minority Member
Committee on Environment and Public Works
United States Senate

The Honorable Joseph I. Lieberman
Ranking Minority Member
Committee on Homeland Security and Governmental Affairs
United States Senate

The Honorable Patrick J. Leahy
Ranking Minority Member
Committee on the Judiciary
United States Senate

The Honorable Thomas R. Carper
Ranking Minority Member
Subcommittee on Clean Air,

Climate Change, and Nuclear Safety Committee on Environment and Public
Works United States Senate

The Honorable Barbara Boxer
Ranking Minority Member
Subcommittee on Superfund and Waste Management
Committee on Environment and Public Works
United States Senate

The Honorable Hillary Rodham Clinton
United States Senate

The Honorable Mark Dayton
United States Senate

The Honorable Frank Lautenberg United States Senate

Appendix I

                       Objectives, Scope, and Methodology

Congressional requesters asked us to assess the usefulness of the economic
analysis underlying EPA's proposed mercury rule for decision making. To
respond to this objective, we, among other things, reviewed EPA's analysis
of the proposed rule's economic effects using standard economic
principles, OMB guidance, Executive Order 12866, and the Unfunded Mandates
Reform Act of 1995. We also discussed the analysis with senior officials
within EPA's Office of Air and Radiation responsible for developing the
proposed rule and analyzing its economic effects. In doing this work, we
did not independently estimate the costs or benefits of the mercury
control options, evaluate EPA's process for developing the options, or
assess legal issues surrounding the extent to which the options comply
with the provisions of the Clean Air Act or its amendments.

We took several steps to assess the validity and reliability of computer
data underlying EPA's estimates of economic impacts discussed in our
findings, including reviewing the documentation and assumptions underlying
EPA's economic model and assessing the agency's process for ensuring that
the model data are sufficient, competent, and relevant. We also discussed
these assumptions and procedures with agency officials responsible for the
modeling data. (For the background section of this report, we obtained
data on mercury emissions. Because they are used for background purposes
only, we did not assess their reliability.) We assessed compliance with
internal controls related to the availability of timely, relevant, and
reliable information. Our concerns about EPA data and analysis are
discussed in the body of this report.

We performed our work between May 2004 and February 2005 in accordance
with generally accepted government auditing standards.

Appendix II

Comments from the Environmental Protection Agency

Appendix II
Comments from the Environmental
Protection Agency

Appendix III

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	John B. Stephenson, (202) 512-3841 Christine Fishkin, (202)
512-6895

Staff 	In addition to the individuals named above, Tim Guinane and Michael
Hix made key contributions to this report. Kate Cardamone, Jessica Fast,

Acknowledgments	Cynthia Norris, Judy Pagano, Janice Poling, and Amy
Webbink also made important contributions.

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