In-Class Case Study: Clean Air Regulation Scott Matthews Lecture /

New Type of Problem zHandout of Tables included zWhat happens when we cannot/will not monetize all aspects of a BCA? yExample: what if we are evaluating policies where a benefit is lives or injuries saved? yHow do we place a value on these benefits? yAre there philosophical problems?

In-Class Case Study zConsider this ‘my example’ of how to do a project for this class (if relevant) zTopical issue, using course techniques zAs we discuss, think about whether you would do it differently, be interested in other things, etc. zMetrics for this case are ugly (literally): morbidity and mortality for human health zEffectively I ‘redo’ a published government report with different data

Background of CAA zEnacted in 1970 to protect and improve air quality in the US yEPA was just being born yHad many sources - mobile and stationary yCAA goal : reducing source emissions yCars have always been a primary target yAcid rain and ozone depletion zAmended in 1977 and 1990 y1990 CAAA added need for CBA (retro/pro)

History of Lead Emissions zOriginally, there was lead in gasoline zStudies found negative health effects zTailpipe emissions (burning gas) were seen as a primary source of lead zRegulations called for phaseout of lead yWe have also attempted to reduce lead/increase awareness in paints, etc. zToday, new cars must run on ‘unleaded’ gasoline (anyone remember both?)

Construction of Analyses zEstimate emissions reduced since 1970 yFor major criteria pollutants (SO2, NOX,…) yEstimated ‘no control’ scenario since 1970 yEstimated expected emissions without CAA yCompared to ‘actual emissions’ (measured) yFound ‘net estimated reduced emissions’ zAssumed no changes in population distribution, economic structure (hard) zModeled 1975/80/85/90, interpolated

Analyses (cont.) zEstimated costs of CAA compliance yDone partially with PACE data over time yAlso run through a macroeconomic model zWith reduced emissions, est. health effects yLarge sample of health studies linking ‘reduced emissions of x’ with asthma, stroke, death,.. yUsed ‘value of effects reduced’ as benefits y26 ‘value of life studies’ for reduced deaths yDoes a marginal amount of pollution by itself kill?

Value of Life Studies Used zActually should be calling these ‘studies of consumer WTP to avoid premature death’ yFive were ‘contingent valuation’ studies yOthers estimated wage/risk premiums zMean of studies = $4.8 million (1990$) yDifferent than “Miller” from earlier yStandard dev = $3.2 million ($1990) yMin $600k, Max $13.5 million ($1990)

Putting everything together zHad Benefits in terms of ‘Value from reducing deaths and disease’ in dollars zHad costs seen from pollution control zUse min/median/max ranges zConvert everything into $1990, get NB zMedian estimated at $22 trillion ($1990)! y$2 trillion from reducing lead y 75% from particulates zIs this the best/only way to show results?

‘Wish List’ - added analysis zDisaggregate benefits and costs by pollutant (e.g. SO2) and find NB yCould then compare to existing cost- effectiveness studies that find ‘$/ton’ zDisaggregate by source- mobile/stationary yCould show more detailed effects of regulating point vs. non-point sources yHas vehicle regulation been cost-effective? zWhy did they perhaps NOT do these?

My Own Work zI replicated analysis by using only median values, assumed they were exp. Value zIs this a fair/safe assumption? zSee Table 3

Implied Results

Recall Externality Lecture zExternal / social costs yA measure of the costs borne by society but not reflected in the prices of goods zCan determine externality costs by other methods - how are they found? ySimilar to health effects above, but then explicitly done on a $/ton basis

Compare to other studies zLarge discrepancies between literature and EPA results! zUsing numbers above, median NB = $1 T

Source Category Analysis zUsing ‘our numbers’, mobile and stationary source benefits (not NB) nearly equal ($550B each in $92) zSee Tables 12 and 13 for costs and NB zUp to 1982, stationary NB > mobile zAfter 1982, mobile >> stationary

Final Thoughts zEPA was required to do an analysis of effectiveness of the CAA zTheir results seem to raise more questions than they answer zThe additional measures we showed are interesting and deserve attention zQuestions intent of EPA’s analysis

Other Uses - Externality “Adders” zDrop in as $$ in the cash flow of a project zDetermine whether amended project cash flows / NPV still positive

Mutiple Effectiveness Measures zSo far, we have considered externality problems in one of 2 ways: y1) By monetizing externality and including it explicitly as part of BCA y2) Finding cost, dividing by measured effectiveness (in non-monetary terms) zWhile Option 2 is preferred, it is only relevant with a single effectiveness

MAIS Table - Used for QALY Conversions Comprehensive Fatality / Injury Values Injury Severity1994 Relative Value MAIS MAIS MAIS MAIS MAIS Fatality1.0

Single vs. Multiple Effectiveness zRecall earlier examples: yCost per life saved yCost per ton of pollution zWhen discussing “500 Interventions” paper, talked about environmental regs yHad mortality and morbidity benefits yVery common to have multiple benefits/effectiveness yUnder option 1 above, we would just multiply by $/life and $/injury values.. yBut recall that we prefer NOT to monetize and instead find CE/EC values to compare to others

Multiple Effectiveness  In Option 2, its not relevant to simply divide total costs (TC) by # deaths, # injuries, e.g. CE 1 = TC/death, CE 2 = TC/injury zWhy? yMisrepresents costs of each effectiveness zInstead, we need a method to allocate the costs (or to separate the benefits) so that we have CE ratios relevant to each effectiveness measure

Options for Better Method zUse “primary target” as effectiveness yAllocate all costs to it (basically what we’ve been doing) zAdd effectiveness measures together yE.g., tons of pollution yIs as ridiculous as it sounds (tons not equal, lives not equal to injuries)

Improved Method zIn absence of more information or knowing better, allocate costs evenly yE.g., if 2 pollutants each gets 1/2 the cost yEasy to make slight variations if new information or insight is available zCould use our monetization values to inform this (e.g., external cost values, $/life values, etc.)

Recall from previous lecture

Another Option zFor each effectiveness, subtract marginal cost/benefit values of all other measures from total cost so that only remaining costs exist for CE ratios yAgain could use median $ values on previous slide to do this yExamples..

Wrap Up zThere is no “accepted theory” on how to do this. zHowever when we have multiple effectiveness measures, we need to do something so we end up with meaningful results.