Regulatory Impact Analysis: Overview Deborah Vaughn Aiken, Ph.D. U.S. Department of transportation Eliane Catilina, Ph.D. U.S. Environmental Protection Agency

Regulatory Impact Analysis (RIA) Objective Regulatory Impact Analysis organizes information and describes the implications of policy alternatives not just for economic efficiency, but also for the magnitude and distribution of an array of impacts. Regulatory Impact Analysis is one component in the decision-making process. Other factors include but are not limited to: Enforceability, Technical feasibility, Affordability, Political concerns, Ethics.

RIA Framework Regulatory Impact Analysis is used to assess issues of both efficiency and distribution. These issues often take the form of three distinct questions: Is it theoretically possible for the “gainers” from the policy to fully compensate the “losers” and still remain better off? Who are the “gainers” and “losers” from policy and associate economic changes? And how did a particular group, specially a group considered to be disadvantaged, fare as a result of the policy change?

Why Conduct RIA? Helps inform regulatory design choices (e.g., policy instrument, level of standard, or degree to which to regulate) Can inform the public regarding impacts of a regulation even when it can’t serve as a basis for setting a standard As an organizing framework Enumeration of positive and negative consequences Lays out all the assumptions regarding science, engineering, risk exposure, costs, etc.

Why Conduct RIA? Statutory and Executive Order Requirements for Conducting Regulatory Impact Analysis Executive Order 12866 (Regulatory Planning and Review ) requires preparation of an RIA for significant rules; OMB Guidance (Circular A-4) is the document that provides RIA framework Executive Order 13563 (Improving Regulation and Regulatory Review) requires periodic (or retrospective) review of existing regulations Regulatory Flexibility Act Some statutes require agencies to base regulatory decisions on benefit cost findings (e.g., Consumer Product Safety Act)

RIA Elements: Statement of Need for Policy Action A clear statement of the need for policy action should be included in economic analysis of policy. The key elements that should comprise the statement of needs are: A definition of the problem to be addressed, An analysis of the reasons existing legal and other institutions have failed to correct the problem: Market failures (externality, market power and symmetric information) A justification of the need for Federal intervention instead of other alternatives.

Regulatory and Non-regulatory Approaches Regulatory Options: Once a Federal action is deemed necessary, policymakers have a number of options at their disposal to influence. In deciding which approach to implement, policymakers must recognize its constraints and limitations It’s also important to account for political and information constraints, imperfect competition or how pre-existing market distortions interact with various policy options. Even when a particular approach is appealing from a social welfare perspective, it may not be consistent with the law, or may generate concerns when considered along with other existent regulations

Regulatory and Non-regulatory Approaches Traditional Command-and-Control Regulation: design versus performance-based Market-Oriented Approaches: Tradeable Permits, Emission Taxes, Environmental Taxes and Subsidies, or Tax-subsidy combination. Non-Regulatory Alternatives: Voluntary Initiatives and Standards

RIA Elements: Defining the Baseline The “baseline” is the reference point that reflects the world without the proposed regulation. Because the economic analysis considers the impact of a policy or regulation in relation to this baseline, its specification can have a profound influence on the outcome of the economic analysis. A careful and correct baseline specification assures the accuracy of benefit and cost estimates. The analyst is responsible for raising questions about baseline definitions early in the regulatory development process to ensure that the analysis is as comprehensive as possible.

RIA Elements: Cost-Benefit or Benefit-Cost Analysis (CBA or BCA) BCA (CBA) is a procedure for comparing alternative course of actions based on the net social benefit produced for the society as a whole. General BCA Process List alternative projects List Stakeholders Select measurement(s) and measure all costs/benefits elements. Predict outcome of cost and benefits into a common currency. Convert all costs and benefits into a common currency. Apply discount rate. Calculate net present value of options Perform sensitive analysis Adopt recommended choice.

RIA Elements: Economic Impact Analysis (EIA) The EIA focuses on traditional classifications of affected entities such as: industrial sector classifications, governments, not-for-profit institutions, and small entities. Provides information to the decision-maker and public about who will be affected by the policy action Certain populations or industries or types of businesses may warrant special consideration Regulatory Flexibility Analysis, Environmental Justice, Impacts on Children are examples To ensure consistency between the EIA and the BCA, the same set of assumptions must be used.

Economic Impact Analysis versus Benefit-Cost Analysis Main differences between BCA and EIA: 1- Total social benefits and total costs are not of primary importance in an EIA as they are in a BCA. Rather, the main focus is the distribution of the total social benefits and costs. 2 – Transfer of Economic Welfare doesn’t simple cancel out in EIA. Taxpayers, consumers, producers, governments, and the many sib-category of these groups are all considered separately. BCA: social benefits and costs EIA: private benefits and costs 3 – Greater need to disaggregate impacts in EIAs.

RIA Elements: Cost Effectiveness Analysis Does not require monetization of benefits but rather divides the costs of a policy according to a particular effect (e.g., number of lives saved). Used to compare costs of alternatives for achieving a given objective Most useful when only one primary outcome or when a statute specifies a level of benefits Evaluates cost per life saved or illness averted across different regulatory approaches The regulation is cost effective when the cost per life saved (or other outcome measure) is minimized Unlike BCA it cannot be used to calculate a single, comprehensive measure of the net effects of a policy changes to the status quo.

RIA Elements: Presentation of Analysis and Results The presentation of the results of an economic analysis should allow the reader to be able to understand: What the primary conclusions of the economic analysis are; How the benefits and costs were estimated; What the important non-quantified or non-monetized effects are; What key assumptions were made for the analysis; What the primary sources of uncertainty are in the analysis; and How those sources of uncertainty affect the results.

Who’s Responsible? The agency issuing the regulation is generally responsible for conducting the RIA. Some agencies have specific offices dedicated to RIA production Depending on the complexity of the problem, agencies often use outside experts