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Report to Congressional Requesters: 

February 2005: 

Clean Air Act: 

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

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-252]: 

GAO Highlights: 

Highlights of GAO-05-252, a report to congressional requesters: 

Why GAO Did This Study: 

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. 

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-and-trade 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: Technology-based option; 
Annual costs: 2; 
Annual benefits[A]: 15 or more; 
Annual net benefits: 13 or more.

Policy option: Cap-and-trade option; 
Annual costs: Not estimated; 
Annual benefits[A]: Not estimated; 
Annual net benefits: Not estimated.

Policy option: Technology-based option and the interstate rule; 
Annual costs: Not estimated; 
Annual benefits[A]: Not estimated; 
Annual net benefits: Not estimated.

Policy option: Cap-and-trade option and the interstate rule; 
Annual costs: 3 to 5 or more[B]; 
Annual benefits[A]: 58 to 73 or more[B]; 
Annual net benefits: 55 to 68 or more[B].

Source: EPA.

[End of table]

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-and-benefit estimates. 

What GAO Recommends: 

GAO recommends that, prior to finalizing a rule, EPA take steps to 
address shortcomings in its cost-benefit analysis to increase the 
usefulness of the analysis for decision making. In commenting on the 
report, EPA said that it plans to largely address GAO’s 
recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-05-252.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John Stephenson at (202) 
512-3841 or stephensonj@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

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

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Environmental Protection Agency: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

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: 

Letter 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.[Footnote 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).[Footnote 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 year--unless otherwise prohibited by 
law.[Footnote 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.[Footnote 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.[Footnote 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.

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.[Footnote 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 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.[Footnote 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.[Footnote 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.[Footnote 9] Instead, EPA would set a 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.[Footnote 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.[Footnote 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 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: Technology-based option; 
Annual costs: 2; 
Annual benefits[A]: 15 or more; 
Annual net benefits: 13 or more.

Policy option: Cap-and-trade option; 
Annual costs: Not estimated; 
Annual benefits[A]: Not estimated; 
Annual net benefits: Not estimated.

Policy option: Technology-based option and the interstate rule; 
Annual costs: Not estimated; 
Annual benefits[A]: Not estimated; 
Annual net benefits: Not estimated.

Policy option: Cap-and-trade option and the interstate rule; 
Annual costs: 3 to 5 or more[B]; 
Annual benefits[A]: 58 to 73 or more[B]; 
Annual net benefits: 55 to 68 or more[B].

Source: EPA.

[A] As 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.

[B] According 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.

[End of table]

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.[Footnote 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.

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.[Footnote 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 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.[Footnote 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 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.[Footnote 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 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.[Footnote 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.[Footnote 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.

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.[Footnote 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 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: 

* 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.

* 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.

* 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.

* 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 [Hyperlink, 
http://www.gao.gov].

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

Signed by: 

John B. Stephenson: 
Director, Natural Resources and Environment: 

List of Congressional Requesters: 

The Honorable Barbara Boxer: 
United States Senate: 

The Honorable Thomas R. Carper: 
United States Senate: 

The Honorable Hillary Rodham Clinton: 
United States Senate: 

The Honorable Mark Dayton: 
United States Senate: 

The Honorable James M. Jeffords: 
United States Senate: 

The Honorable Frank Lautenberg: 
United States Senate: 

The Honorable Patrick J. Leahy: 
United States Senate: 

The Honorable Joseph I. Lieberman: 
United States Senate: 

The Honorable Olympia J. Snowe: 
United States Senate: 

[End of section]

Appendixes: 

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.

[End of section]

Appendix II: Comments from the Environmental Protection Agency: 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY: 
OFFICE OF AIR AND RADIATION:

WASHINGTON, D.C. 20460:

FEB 15 2005:

Mr. John B. Stephenson:
Director, Natural Resources and Environment: 
Government Accountability Office: 
Washington, D.C. 20548:

Dear Mr. Stephenson:

Thank you for the opportunity to review the draft of GAO's 
"Observations on EPA's Cost-Benefit Analysis of Its Mercury Control 
Options." GAO identified several areas of concern with the economic 
analysis underlying the Clean Air Mercury Rule (CAMR) that the 
Environmental Protection Agency (EPA) proposed in January 2004. We 
appreciate the chance to share our thoughts about this document.

As you may know, we intend to issue a final rule to control mercury 
emissions from power plants by March 15, 2005. This will mark the first 
time in U.S. history that the Federal government has regulated mercury 
emissions from power plants. We are currently in the final stages of 
analyzing and evaluating options for the final regulation.

In the report, GAO expressed concern that in our proposal we "used 
inconsistent approaches in analyzing the two proposed policy options." 
Given time and resource constraints, EPA analyzed its cap and trade 
proposal as part of a larger multipollutant approach that included the 
Clean Air Interstate Rule. In contrast, we analyzed our Maximum 
Achievable Control Technology (MALT) approach as a stand alone 
regulation. We appreciate GAO's comments that put into context these 
time and resource constraints. We will build on the work accomplished 
for the proposal as we conduct our final benefit-cost analysis.

In addition, GAO expressed concerns that EPA had not provided 
sufficient information to understand the benefits and costs of 
regulatory alternatives. Consistent with GAO's recommendation, EPA 
scientists, engineers and economists are conducting additional analyses 
for the final rule, which will help address GAO's concerns.

EPA has shared all analysis germane to the choices in the CAMR proposal 
with the public. There has been a 120-day comment period on the 
proposal, and an additional 45-day comment period on the March 2004 
supplemental proposal. EPA held public hearings in four cities during 
the rulemaking process. In addition, in November 2004, EPA announced a 
Notice of Data Availability (NODA). This Notice summarized the modeling 
analyses presented by EPA and those commenting on the proposal, and 
solicited comment on the inputs and assumptions underlying those 
analyses. The NODA also offered the public the opportunity to comment 
on EPA's benefit methodology. The public had 30 days to comment on the 
NODA. It is important that GAO acknowledge EPA's efforts to disclose 
information about the CAMR proposal in this context.

Finally, EPA appreciates GAO's comments about the proposal's limited 
health benefits analysis, and discussion of how we handled 
uncertainties underlying our cost and benefit analysis. To the extent 
possible, our analysis of the final CAMR will provide a more detailed 
health benefits analysis and characterization of uncertainty. Please 
contact me if you have questions about our concerns or have your staff 
contact Jason Burnett in the Office of Air and Radiation at (202) 564- 
2464.

Sincerely,

Signed by: 

Jeffrey Holmstead: 
Assistant Administrator: 

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

John B. Stephenson, (202) 512-3841; 
Christine Fishkin, (202) 512-6895: 

Staff Acknowledgments: 

In addition to the individuals named above, Tim Guinane and Michael Hix 
made key contributions to this report. Kate Cardamone, Jessica Fast, 
Cynthia Norris, Judy Pagano, Janice Poling, and Amy Webbink also made 
important contributions.

(360471): 

FOOTNOTES

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

[2] Both 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. 

[3] The Unfunded Mandates Reform Act of 1995, Pub. L. No. 104-4, 109 
Stat. 48 (1995) (codified at 2 U.S.C. § 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.

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

[5] For 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. 

[6] EPA 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. 

[7] Specifically, 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).

[8] EPA'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. 

[9] According 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.

[10] The 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). 

[11] See (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. 

[12] In 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. 

[13] OMB 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. 

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

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

[16] 69 Fed. Reg. 69864 (Dec. 1, 2004)

[17] OMB Circular No. A-4, Regulatory Analysis (Sept. 17, 2003). 

[18] A 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.

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