May 5, 2003 Office of Information and Regulatory Affairs NEOB, Room 10235 1725 17th Street, N.W. Washington, D.C. 20503 Re: OMB’s Draft 2003 Report to Congress on the Costs and Benefits of Federal Regulations To Whom it May Concern: In 2001, Congress made this report a permanent, annual requirement through the Regulatory Right-to-Know Act, expressing a desire for cumulative estimates of regulatory costs and benefits. Despite its best effort, OIRA has failed to deliver on these expectations because of severe analytical barriers, which have been discussed in previous reports. This is not the fault of OIRA, but the inherent weakness of the enterprise. Consequently, OIRA has shifted gears over the last several years and taken the report in directions Congress never considered. The last two years OIRA has sought recommendations from outside parties on regulations to revise or repeal, and then directed agencies to evaluate, and potentially implement, those recommendations. This year, OIRA includes draft guidelines on cost-benefit analysis (which we comment on in a separate document, as OIRA requested), and asks for advice on the precautionary principle and cost-benefit analysis for terrorism-related regulation. These are all enormously important policy questions that will determine the effectiveness and responsiveness of government regulation for years to come. Estimates of regulatory costs and benefits – the chief interest of Congress – are essentially an obligatory afterthought. Instead of providing information – as the legislation’s title implies – this report has become a vehicle to expand OIRA’s influence over the regulatory process. In this effort, OIRA has seized on the legislation’s request of “recommendations for reform.” Yet as a report to Congress, it’s clear that these “recommendations” should be addressed to Congress, which can then decide on appropriate action. Instead, OIRA is using this language to set new mandates on agencies, which Congress explicitly rejected in adopting the legislation. Indeed, Sens. Joseph Lieberman, the ranking member of the Governmental Affairs Committee, and Carl Levin, another senior member of Governmental Affairs, made this a condition of their acquiescence. When the regulatory accounting requirement was first adopted as a one-year appropriations rider in 1996, a colloquy between Sen. Ted Stevens and Sen. Levin made this concern over new burdens clear. The intent was simply to pull together existing information. “I expect a rule of reason will prevail. Where the agencies can produce detail that will be informative to the Congress and the public, they should do so,” Sen. Stevens said at the time. “Where it is extremely burdensome to provide such detail, broader estimates should suffice.” By demanding that agencies evaluate recommendations by outside parties and by placing new analytical burdens on agencies, OIRA is violating the spirit of the law. This is especially disturbing given the fact that OIRA has no statutory authority over regulatory policy. Its power of regulatory review comes instead from presidential executive order. Only agencies have the congressionally-delegated authority to write and implement regulation. Our comments below respond to OIRA’s request for comments on the precautionary principle, cost-benefit analysis of terrorism-related regulation, and the report’s estimates of the costs and benefits of regulation. Analysis & Management of Emerging Risk OIRA asks for comment on the “appropriate level of precaution” in measuring risk. Specifically, this includes “ways in which ‘precaution’ is embedded in current risk assessment procedures through ‘conservative’ assumptions”; examples of risk assessment approaches “by U.S. regulatory agencies (e.g., consumer product safety, drug approval, pesticide registration, protection of endangered species) which appear unbalanced”; and how “the U.S. balances precautionary approaches to health, safety, and environmental risks with other interests such as economic growth and technological innovation.” The wording of this request seems tailored to generate comments that are hostile to the “precautionary principle,” which advises precautionary action when “activity raises threats of harm to the environment or human health ... even if some cause and effect relationships are not fully established scientifically.” The precautionary principle argues against the sort of balancing act implied by cost-benefit analysis and OIRA’s request for comment. Instead, public health, safety, and the environment are supposed to be the preeminent concerns. This idea is imbedded in the Clean Air Act and the Occupational Safety and Health Act, among other statutes designed to protect the public. Some – apparently OIRA included – may call these statutes “unbalanced” because they do not permit benefits to be weighed directly against costs. We call them sensible. The precautionary principle recognizes that it is frequently difficult, or even impossible, to achieve scientific certainty about benefits. We may be able to identify a problem that needs to be addressed, and in a general sense, we may be able to say with certainty that significant benefits will occur as a result of regulatory action. But we may not be able to say with certainty what specific benefits. On the issue of global warming, for instance, we know that significant damage is being done from carbon dioxide emissions, but there is a great deal of debate and uncertainty over specific consequences. The only way to achieve the sort of certainty that the administration apparently seeks – and that would be necessary for a monetized cost-benefit analysis – is to wait around and see what happens. Yet by that time, the damage will have been done, and it will be too late. Indeed, it is generally much easier and cheaper to prevent a problem before it occurs than it is to reverse damage already done. And in fact, some damage (e.g., deaths, injuries, or extinction of species and ecosystems) will be impossible to reverse. The adage, “Better safe than sorry,” captures the underlying idea behind the precautionary principle. True implementation of the precautionary principle requires better thinking up front, rather than regulation after exposure to risk has occurred. For instance, when federal money is used for a major project, such as roads or other development, planners must do an “environmental impact statement,” which allows the public an opportunity to weigh in to make sure all potential consequences of action are considered. This is a precautionary action that seeks to head off damage before any harm is actually done. Likewise, the FDA must give approval to a new drug before it can be introduced in the marketplace. In this case, the burden of proof is appropriately placed on the manufacturer, which must demonstrate that the product is both safe and effective, and alert the public to any potential side effects. This contrasts sharply with the approach to regulating potential environmental contaminants or workplace hazards. The precautionary approach imbedded in the Clean Air Act and OSH Act kicks in only after harm is established, producing after-the-fact regulation. Very little, if anything, is required up front to consider potential damage and possible alternatives that could minimize risk to health, safety, or the environment. Instead, the burden of proof is shifted to the victims or potential victims, who must wait for damage to occur, and then once it has occurred, prove that it was directly linked to the action in question. In other words, polluters and manufacturers don’t have to prove what they are doing is safe; it is assumed safe until someone can prove otherwise. Yet, again, conclusive scientific “proof” of cause and effect is elusive, even if evidence is highly suggestive. For instance, smoking was suspected to cause lung cancer long before it met the very high standards of scientific proof. Indeed, tobacco manufacturers contested the linkage of smoking to cancer for years, even as evidence mounted. Those who ignored the manufacturers, and took precautionary action by quitting, were better off as a result. Likewise, regulatory agencies should take this same common-sense approach, and not wait for the bodies to pile up before responding. Analysis of Regulations for Homeland Security The need for anti-terrorism regulation highlights the weaknesses of cost-benefit analysis, as well as the strengths of the precautionary principle. For example, to date, there has never been a terrorist attack on a U.S. chemical plant. Yet does this mean it couldn’t happen? Or that we shouldn’t prepare for such a possibility? Indeed, the chemical industry has called itself a potential target, and even before the attacks of Sept. 11, 2001, convinced Congress to restrict public information contained in Risk Management Plans on the theory that it could be useful to terrorists. Since then, our intelligence agencies have received more information that chemical facilities could be at risk of attack. In response, Sen. Jon Corzine has pushed legislation requiring steps to improve safety and security at chemical plants, which potentially threaten millions of Americans. This is precautionary action based on a risk that has never materialized (accept in the form of an accident, which should also be unacceptable). It’s hard to see how we would ever get to this point using cost-benefit analysis. How do you determine the benefits of action, and then monetize them to show “net benefits” with such huge uncertainties? We understand that this is, in essence, the question OIRA is asking. But the truth is that it has no good answer. Ultimately, precautionary action against terrorism (like pollution and safety hazards) depends on good judgement and common sense, not the reductionist methods to which OIRA is wedded. We don’t know if a terrorist attack on a chemical plant will ever occur, and thus the benefits of action cannot be monetized to any degree of certainty, and “net benefits” would be impossible to prove. But if it did happen, the effects could be catastrophic. The Washington Post ran an extensive front-page story on Dec. 16, 2001, detailing some of the frightening possibilities. Based on worst-case scenario estimates provided by the facilities themselves, the Post reported that “a suburban California chemical plant routinely loads chlorine into 90-ton rail cars that, if ruptured, could poison more than 4 million people in Orange and Los Angeles counties”; “a Philadelphia refinery keeps 400,000 pounds of hydrogen fluoride that could asphyxiate nearly 4 million nearby residents”; and “a South Kearny, N.J., chemical company’s 180,000 pounds of chlorine or sulfur dioxide could form a cloud that could threaten 12 million people.” Common sense demands that we address this problem even if cost-benefit analysis would not permit it. Indeed, in this case, there are some obvious ways to make significant improvements that cost-benefit analysis may deny you from even considering. This includes shifting to safer substitute chemicals, such as bleach, or storing hazardous materials in safer, smaller volumes. Accordingly, our advice to OIRA is to re-evaluate its emphasis on cost-benefit analysis and whether it should be determinative. Cost-benefit analysis can be a useful tool in some cases, but it cannot be a substitute for good judgement. Estimates of Costs & Benefits OIRA’s cumulative cost-benefit estimates continue to suffer from vast analytical limitations, including outdated studies, prospective rather than retrospective data, and the fact that agencies are unable to monetize many benefits. These problems are inherent in conducting cumulative cost-benefit analysis, and over the years, OIRA has acknowledged them. Yet the natural bias that results – overstated costs and understated benefits – is only exacerbated by OIRA’s analytical choices. Lisa Heinzerling, professor at Georgetown Law Center, critiqued these choices in her comments to OIRA and in testimony on March 11, 2003, before House Subcommittee on Energy Policy Natural Resources and Regulatory Affairs. We endorse those comments here. Specifically: Important benefits are excluded and downplayed by OIRA. OIRA’s tables show dramatic benefits from regulation aimed at air pollution, yet instead of offering praise, OIRA seeks to minimize this accomplishment. Moreover, as Heinzerling explains, OIRA arbitrarily excludes from its estimates a number of highly effective rules with significant benefits, making environmental regulation look less favorable. This includes three rules on “mobile source” emissions because of the “uncertainties associated with benefits transfer” – using monetary valuations from one context (i.e., workplace safety) and applying them to another (i.e., environmental protection) – and differences in “sources, meteorology,” etc. Yet as Heinzerling points out, these sort of uncertainties are found in almost all health, safety, and environmental rules that OIRA does include. What’s the distinction? OIRA makes little effort to justify their exclusion. Heinzerling also notes that OIRA has excluded EPA’s revised National Ambient Air Quality Standards (NAAQs) for ozone and particulate matter without explaining why – apparently because OIRA believes this would be “double counting,” as stated in last year’s report. OIRA should explain why it excludes these revised standards, and how specifically the associated benefits and costs are accounted for in the draft report. In the interest of transparency, OIRA should do the same for any other rules it has excluded. OIRA is consumed with the costs of health and environmental regulation. Heinzerling notes that there is no accounting for deregulatory actions, such as recent changes to relax EPA’s New Source Review program. Yet such actions can carry significant impacts, which in the context of this report, should be listed for public evaluation. This leaves the impression that OIRA is biased in favor of deregulatory action – that such action does not need to be accounted for. OIRA also does not account for “transfer rules,” such as agricultural subsidies, which though different than health and safety regulation, can still have enormous economic impacts. Instead, OIRA is chiefly focused on costs associated with health and environmental regulations, and the need for those regulations to show “net benefits” (monetized benefits minus costs). The same sort of emphasis and analytical rigor has not been applied to deregulatory action or the effects of transfer rules, reflecting a bias in OIRA’s priorities. OIRA has admitted that it overestimated the costs of air regulation in last year’s report by an incredible $20 billion per year. It seems unlikely this would have happened were OIRA not already predisposed to accept high regulatory costs. OIRA’s estimates are not transparent. OIRA’s previous reports have all had transparency problems, and this one is no different. OIRA needs to take this problem seriously. Reports should be easy to follow, understand, and critique. OIRA recently produced agency-wide data quality guidelines, demanding that information disseminated to the public meet standards of “quality, objectivity, utility, and integrity,” and that “influential information” – potentially like OIRA’s report – be independently “reproducible.” It’s fair to wonder whether OIRA’s report could meet these standards. Besides the issues previously mentioned, Heinzerling points out that OIRA refers to its 2000 report to explain its cost-benefit estimates from 1995-1999; yet OIRA has apparently made changes to these estimates without explanation. OIRA also does not present a single chart with all of the cost-benefit estimates on all of the rules it is evaluating. Nor does it reference these rules in the Federal Register. In the past, OIRA has made changes to agency estimates, sometimes without warning. A Federal Register cite would help the public evaluate any changes OIRA may be making. Nonetheless, even with proper citation, OIRA needs to clearly identify any changes it has made to agency estimates, and provide a full justification for these changes. Heinzerling also notes that OIRA relies on two documents that are not in the public record “in justifying its decision to value benefits of reducing the same air pollutant – nitrogen oxides – differently depending on whether it comes from stationary or mobile sources.” Without making these documents public, full evaluation of OIRA’s assumptions is impossible. Sincerely, Reece Rushing Policy Analyst, OMB Watch