Chapter 1: Introduction and Background

Synopsis

This document estimates the incremental costs and monetized human health
and welfare benefits of attaining three possible revised primary ozone
National Ambient Air Quality Standards (NAAQS) nationwide.  This
document contains illustrative analyses that consider limited emission
control scenarios that the states, tribes and regional planning
organizations might implement to achieve a revised ozone NAAQS.  In some
cases, EPA weighed the available empirical data to make a judgment
regarding the proposed attainment status of certain urban areas in the
future.  According to the Clean Air Act, EPA must use health-based
criteria in setting the NAAQS and cannot consider estimates of
compliance cost.  This Regulatory Impact Analysis (RIA) is intended both
to provide the public a sense of the benefits and costs of meeting new
ozone NAAQS, and to meet the requirements of Executive Order 12866.  

Background

Two sections of the Clean Air Act (“Act”) govern the establishment
and revision of NAAQS.  Section 108 (42 U.S.C. 7408) directs the
Administrator to identify pollutants which “may reasonably be
anticipated to endanger public health or welfare,” and to issue air
quality criteria for them.  These air quality criteria are intended to
“accurately reflect the latest scientific knowledge useful in
indicating the kind and extent of all identifiable effects on public
health or welfare which maybe expected from the presence of [a]
pollutant in the ambient air.”  Ozone is one of six pollutants for
which EPA has developed air quality criteria.  

Section 109 (42 U.S.C. 7409) directs the Administrator to propose and
promulgate “primary” and “secondary” NAAQS for pollutants
identified under section 108.  Section 109(b)(1) defines a primary
standard as “the attainment and maintenance of which in the judgment
of the Administrator, based on [the] criteria and allowing an adequate
margin of safety, [are] requisite to protect the public health.”  A
secondary standard, as defined in section 109(b)(2), must “specify a
level of air quality the attainment and maintenance of which in the
judgment of the Administrator, based on [the] criteria, [are] requisite
to protect the public welfare from any known or anticipated adverse
effects associated with the presence of [the] pollutant in the ambient
air.”  Welfare effects as defined in section 302(h) [42 U.S.C 7602(h)]
include but are not limited to “effects on soils, water, crops,
vegetation, manmade materials, animals, wildlife, weather, visibility
and climate, damage to and deterioration of property, and hazards to
transportation, as well as effects on economic values and on personal
comfort and well-being.” 

Section 109(d) of the Act directs the Administrator to review existing
criteria and standards at 5-year intervals.  When warranted by such
review, the Administrator is to retain or revise NAAQS.  After
promulgation or revision of the NAAQS, the standards are implemented by
the States.  

 

1.2  Role of the Regulatory Impact Analysis in the NAAQS Setting Process

1.2.1 Legislative roles

In setting primary ambient air quality standards, EPA’s responsibility
under the law is to establish standards that protect public health.  The
Clean Air Act requires EPA, for each criteria pollutant, to set a
standard that protects public health with “an adequate margin of
safety.”  As interpreted by the Agency and the courts, the Act
requires EPA to create standards based on health considerations only. 
Economic factors cannot be considered.  

The prohibition against the consideration of cost in the setting of the
primary air quality standard, however, does not mean that costs or other
economic considerations are unimportant or should be ignored.  The
Agency believes that consideration of costs and benefits are essential
to making efficient, cost effective decisions for implementation of
these standards.  The impact of cost and efficiency are considered by
states during this process, as they decide what timelines, strategies,
and policies make the most sense.  Thus, this RIA is intended to inform
the public about the potential costs and benefits that may result when a
new ozone standard is implemented, but it is not relevant to
establishing the standards themselves.  

1.2.2 Role of Statutory and Executive Orders

There are several statutory and executive orders that dictate the manner
in which EPA considers rulemaking and public documents.  This document
is intended to be separate from the NAAQS decision making process, but
there are several statutes and executive orders that still apply to any
public documentation.  A summary of the pertinent orders is included in
Appendix 1.  The analysis required by these statutes and executive
orders is presented in Chapter 9.

EPA presents this analysis pursuant to Executive Order 12866 and the
guidelines of OMB Circular A-4.   These documents present guidelines for
EPA to assess the benefits and costs of the selected regulatory option,
as well as one less stringent and one more stringent option.

1.2.3 Market Failure or Other Social Purpose

OMB Circular A-4 indicates that one of the reasons a regulation such as
this one may be issued is to address market failure. The major types of
market failure include: externality, market power, and inadequate or
asymmetric information.  Correcting market failures is a reason for
regulation, but it is not the only reason.  Other possible
justifications include improving the functioning of government, removing
distributional unfairness, or promoting privacy and personal freedom.

An externality occurs when one party’s actions impose uncompensated
benefits or costs on another party.  Environmental problems are a
classic case of externality.  For example, the smoke from a factory may
adversely affect the health of local residents while soiling the
property in nearby neighborhoods.  If bargaining were costless and all
property rights were well defined, people would eliminate externalities
through bargaining without the need for government regulation.  From
this perspective, externalities arise from high transaction costs and/or
poorly defined property rights that prevent people from reaching
efficient outcomes through market transactions.

Firms exercise market power when they reduce output below what would be
offered in a competitive industry in order to obtain higher prices. 
They may exercise market power collectively or unilaterally.  Government
action can be a source of market power, such as when regulatory actions
exclude low-cost imports.  Generally, regulations that increase market
power for selected entities should be avoided.  However, there are some
circumstances in which government may choose to validate a monopoly.  If
a market can be served at lowest cost only when production is limited to
a single producer B local gas and electricity distribution services, for
example B a natural monopoly is said to exist.  In such cases, the
government may choose to approve the monopoly and to regulate its prices
and/or production decisions.  Nevertheless, it should be noted that
technological advances often affect economies of scale.  This can, in
turn, transform what was once considered a natural monopoly into a
market where competition can flourish.

Market failures may also result from inadequate or asymmetric
information.  Because information, like other goods, is costly to
produce and disseminate, an evaluation will need to do more than
demonstrate the possible existence of incomplete or asymmetric
information.  Even though the market may supply less than the full
amount of information, the amount it does supply may be reasonably
adequate and therefore not require government regulation.  Sellers have
an incentive to provide information through advertising that can
increase sales by highlighting distinctive characteristics of their
products.  Buyers may also obtain reasonably adequate information about
product characteristics through other channels, such as a seller
offering a warranty or a third party providing information.

There are justifications for regulations in addition to correcting
market failures.  A regulation may be appropriate when there are clearly
identified measures that can make government operate more efficiently. 
In addition, Congress establishes some regulatory programs to
redistribute resources to select groups.  Such regulations should be
examined to ensure that they are both effective and cost-effective. 
Congress also authorizes some regulations to prohibit discrimination
that conflicts with generally accepted norms within our society. 
Rulemaking may also be appropriate to protect privacy, permit more
personal freedom or promote other democratic aspirations.

Setting an air quality standard is a straightforward case of addressing
an externality, in this case where firms are emitting pollutants which
cause health and environmental problems without compensation for those
suffering the problems.  Setting a standard with a reasonable margin of
safety attempts to place the cost of control on those who emit the
pollutants and lessens the impact on those who suffer the health and
environmental problems from higher levels of pollution.

1.2.4 Illustrative Nature of the Analysis

This ozone NAAQS RIA is an illustrative analysis that provides useful
insights into a limited number of emissions control scenarios that
states might implement to achieve a revised ozone NAAQS.  Because states
are ultimately responsible for implementing strategies to meet any
revised standard, the control scenarios in this RIA are necessarily
hypothetical in nature.  They are therefore subject to important
uncertainties and limitations, which are documented in the relevant
portions of the analysis.

The illustrative goals of this RIA are somewhat different from other EPA
analyses of national rules, or the implementation plans states develop,
and the distinctions are worth brief mention.  This RIA does not assess
the regulatory impact of an EPA-prescribed national or regional rule
such as the Clean Air Interstate Rule, nor does it attempt to model the
specific actions that any state would take to implement a revised ozone
standard.  This analysis attempts to estimate the costs and human and
welfare benefits of cost-effective implementation strategies which might
be undertaken to achieve national attainment of new standards.  These
hypothetical strategies represent EPA’s best approximation of one set
of actions that states might consider cost-effective to attain a revised
ozone NAAQS.  Because states—not EPA—will implement any revised
NAAQS, they will ultimately determine appropriate emissions control
scenarios.  State implementation plans would likely vary from EPA’s
estimates due to differences in the data and assumptions that states use
to develop these plans.

The illustrative attainment scenarios presented in this RIA were
constructed with the understanding that there are inherent uncertainties
in projecting emissions and controls.  Furthermore, certain emissions
inventories, control, modeling and monitoring uncertainties inhibit
EPA’s ability to model full attainment in all areas.  An additional
limitation is that this analysis is carried out for the year 2020,
before some areas are required to reach the current ozone standard. 
Section 1.3.1 below explains why EPA selected the analysis year of 2020.
 Despite these limitations, EPA has used the best available data and
methods to produce this RIA.

Overview and Design of the RIA

This Regulatory Impact Analysis evaluates the costs and benefits of
hypothetical national strategies to attain several potential revised
primary ozone standards.  The document is intended to be straightforward
and written for the lay person with a minimal background in chemistry,
economics, and/or epidemiology.  Figure 1.1 provides an illustration of
the framework of this RIA. 

 

Figure 1.1: the process used to create this RIA

1.3.1 Baseline and years of analysis

The demonstration year provided in this analysis is 2020, because it is
anticipated that nearly all states will be required to reach attainment
of an alternative standard by that time.  A few areas may not be
required to attain by 2020 but these are areas with more significant air
quality problems and the analysis would not significantly change for the
rest of the nation by extending it beyond 2020.  We separately analyze
those few areas with more significant air quality problems as part of
this analysis.  

The methodology first estimates what ozone levels might look like in
2020 after confirming controls that would be needed to establish the
baseline (current standard -- .08 parts per million – effectively
.084ppm using current rounding conventions), and then models how ozone
levels would be predicted to change following the application of
additional controls to reach a tighter standard.  This allows for an
analysis of the incremental change between the current standard and an
alternative standard.  This timeline is also consistent with expected
attainment in 2020 of the revised Particulate Matter (PM) NAAQS covered
in the PM NAAQS RIA issued in September 2006.  As explained in Chapter
2, since one of  the principal precursors for ozone, NOx, is also a
precursor for PM, it is important that we account for the impact on
ozone concentrations of  NOx controls used in the hypothetical control
scenario used in the PM NAAQS RIA, so as to avoid double counting the
benefits and costs of these controls.

1.3.2 Control Scenarios considered in this RIA 

A hypothetical control strategy was developed for an alternative ozone
standard of 0.070 ppm, in order to illustrate one national scenario for
how such a tighter standard might be met.   First, EPA modeled the
predicted air quality changes that would result from the application of
emissions control options that are known to be available to different
types of sources in portions of the country that were predicted to be in
non-attainment with 0.070 ppm in 2020.  However, given the limitations
of current technology and the amount of improvement in air quality
needed to reach a standard of 0.070 ppm in some areas, it was also
expected that modeling these known controls would not reduce ozone
concentrations sufficiently to allow all areas to reach the more
stringent standard.  This required a second step to calculate the number
of tons of emission reductions that would be needed to reach full
attainment.  This required calculating a conversion factor to quantify
the esimtated tons of emissions that needed to be reduced to generate a
particular change in air quality concentrations of ozone (in ppm).  This
factor, coupled with the estimated remaining increment (in ppm) of ozone
necessary to reach the alternative standard in each area, allowed for an
extrapolation of how many tons of additional emissions reductions were
estimated to be needed to reach the alternate standard.

1.3.3 Evaluating Costs and Benefits

Applying a two step methodology for estimating emission reductions
needed to reach full attainment enabled EPA to evaluate nationwide costs
and benefits of attaining a tighter ozone standard.  Costs and benefits
are presented in this RIA in the same two steps that emissions
reductions were estimated.  First, the costs associated with applying
known controls were quantified, and presented along with an estimate of
their economic impact.  Second, EPA estimated costs of the additional
tons of extrapolated emission reductions estimated needed to reach full
attainment.  The analysis of the benefits of setting an alternative
standard included both mortality and morbidity calculations matching the
costs of applying known controls and then the benefits of reaching full
attainment.  The costs and monetized benefits were then compared to
provide an estimate of net benefits nationwide.

To streamline this RIA, it refers to several previously published
documents, including two technical documents EPA produced to prepare for
the ozone NAAQS proposal.  The first was a Criteria Document created by
EPA’s Office of Research and Development (published in 2006), which
presented the latest available pertinent information on atmospheric
science, air quality, exposure, dosimetry, health effects, and
environmental effects of ozone.  The second was a “Staff Paper”
(published in 2007) that evaluated the policy implications of the key
studies and scientific information contained in the Criteria Document,
as well as presented a risk assessment for various standard levels.  The
Staff Paper also includes staff conclusions and recommendations to the
Administrator regarding potential revisions to the standards.  In
addition to the Criteria Document and Staff Paper, this ozone RIA relies
heavily on a 2006 RIA for particulate matter (PM).  Many of the models
and methodology used here are the same as in the PM RIA.  This RIA
identifies methodologies used to generate data, but refers readers to
the PM RIA for many technical details.  The focus of this RIA is to
explain in detail how the approach or methodologies have changed from
the PM RIA previous analysis, and to present the results of the
methodologies employed in this analysis, which compares attainment of
tighter levels of the ozone standard to the baseline of the current
standard.

Ozone Standard Alternatives Considered

Per Executive Order 12866 and the guidelines of OMB Circular A-4, this
RIA presents analyses of the range of standards proposed by the
Administrator in the Notice of Proposed Rulemaking (0.070 – 0.075
ppm), as well as one more stringent option (0.065 ppm).  The less
stringent option is the baseline, or the current primary standard for
ozone (0.08 parts per million (ppm), calculated as the 3-year average of
the annual fourth-highest daily maximum 8-hour average ozone
concentration measured at each monitor within an area -- effectively
0.084 ppm using current data rounding conventions).  

The EPA Administrator received recommendations to revise the current
primary ozone standard from both the Clean Air Act Scientific Advisory
Council (CASAC) and EPA staff.  Both CASAC and staff expressed the view
that the current standard was not adequately protective of human health
and should be tightened to provide additional public health protection. 
Specifically, CASAC recommended that “…the current primary ozone
NAAQS [should] be revised and that the level that should be considered
for the revised standard be from 0.060 to 0.070 ppm.”   In the Staff
Paper, EPA staff suggested a slightly broader range, recommending
“that consideration be given to a standard level within the range of
somewhat below 0.080 ppm to 0.060 ppm.”   Both of these
recommendations encourage maintaining the same averaging time and form
as the current standard.  Additionally, both recommendations suggested
it was appropriate to specify the level of the standard out to three
significant digits.  

In the concurrent ozone NAAQS proposal, EPA proposes to revise the
8-hour standard to a level within the range of 0.070 to 0.075 ppm to
provide increased protection for children and other sensitive
populations against an array of ozone-related adverse health effects
that range from decreased lung function and increased respiratory
symptoms to serious indicators of respiratory morbidity including
emergency department visits and hospital admissions for respiratory
causes, and possibly cardiovascular-related morbidity as well as total
nonaccidental and cardiopulmonary mortality.  The EPA also proposes to
specify the level of the primary standard to the nearest thousandth ppm.
 

This RIA presents benefit and cost estimates for both ends of the
proposal range of 0.070 to 0.075 ppm.  It also assesses the costs and
benefits of attaining one more stringent standard option (0.065 ppm). 
Since EPA is not considering loosening the standard, the less stringent
alternative to the proposed range is the current standard itself.  Since
this RIA presents an analysis of the costs and benefits incremental to
the current standard, retaining the current standard would have no
additional incremental costs or benefits.  

For the secondary standard, EPA proposes to revise the current 8-hour
standard with one of two options to provide increased protection against
ozone-related adverse impacts on vegetation and forested ecosystems. 
One option is to replace the current standard with a cumulative,
seasonal standard expressed as an index (called the W126) of the annual
sum of weighted hourly concentrations, cumulated over 12 hours per day
(8:00 am to 8:00 pm) during the consecutive 3-month period within the
ozone season with the maximum index value, set at a level within the
range of 7 to 21 ppm-hours.  The other option is to make the secondary
standard identical to the proposed primary 8-hour standard in all
respects.  This RIA provides a limited discussion of an alternative
secondary standard showing the number of additional counties with
monitors which may violate the standards depending on the level of the
secondary standard.  Costs and benefits of attaining the different
levels of the secondary were not estimated in this RIA; this analysis
focused on the health benefits of the primary standard.  An analysis of
a separate secondary will be include in the final RIA as appropriate.
Hereafter, any reference to the ozone standard will be assumed to be the
primary standard, unless otherwise noted.

1.5 References: 

Henderson, R. 2006. October 24, 2006Letter from CASAC Chairman Rogene
Henderson to EPA Administrator Stephen Johnson, , EPA-CASAC-07-001.

U.S. EPA. 1970. Clean Air Act. 40CFR50.

U.S. EPA. 2006 .Air Quality Criteria for Ozone and Related Photochemical
Oxidants (Final). U.S. Environmental Protection Agency, Washington, DC,
EPA/600/R-05/004aF-cF, 

U.S EPA. 2007. Review of the National Ambient Air Quality Standards for
Ozone: Policy Assessment of Scientific and Technical Information. OAQPS
Staff Paper. North Carolina. EPA-452/R-07-003

 Pertinent Statutory and Executive Orders

1. Executive Order 12866: Regulatory Planning and Review 

  HYPERLINK
"http://www.archives.gov/federal-register/executive-orders/pdf/12866.pdf
" 
http://www.archives.gov/federal-register/executive-orders/pdf/12866.pdf 

2. Paperwork Reduction Act, 44 U.S.C. 3501 et seq

  HYPERLINK
"http://www.archives.gov/federal-register/laws/paperwork-reduction/" 
http://www.archives.gov/federal-register/laws/paperwork-reduction/ 

3. Regulatory Flexibility Act, 5 U.S.C. 601 et seq.

  HYPERLINK
"http://www.archives.gov/federal-register/laws/regulatory-flexibility/" 
http://www.archives.gov/federal-register/laws/regulatory-flexibility/ 

4. Unfunded Mandates Reform Act, Public Law 104-4

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publ
ic_laws&docid=f:publ4.104.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publi
c_laws&docid=f:publ4.104.pdf  

5. Executive Order 13132: Federalism, Executive Order 13132

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1999_register
&docid=fr10au99-133.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1999_register&
docid=fr10au99-133.pdf  

6. Executive Order 13175: Consultation and Coordination with Indian
Tribal Governments 

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2000_register
&docid=fr09no00-167.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2000_register&
docid=fr09no00-167.pdf  

7.  Executive Order 13045: Protection of Children from Environmental
Health & Safety Risks 

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1997_register
&docid=fr23ap97-130.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1997_register&
docid=fr23ap97-130.pdf  

8.  Executive Order 13211: Actions that Significantly Affect Energy
Supply, Distribution or Use 

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register
&docid=fr22my01-133.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2001_register&
docid=fr22my01-133.pdf  

9. National Technology Transfer Advancement Act, Public Law No. 104-113,
§12(d)

  HYPERLINK
"http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publ
ic_laws&docid=f:publ113.104.pdf" 
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_publi
c_laws&docid=f:publ113.104.pdf  

10. Executive Order 12898: Federal Actions to Address Environmental
Justice in Minority Populations and Low-Income Populations 

  HYPERLINK
"http://www.archives.gov/federal-register/executive-orders/pdf/12898.pdf
" 
http://www.archives.gov/federal-register/executive-orders/pdf/12898.pdf 


 U.S. Office of Management and Budget. Circular A-4, September 17, 2003.
Found on the Internet at <  HYPERLINK
"http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf" 
http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf >. 

 (Henderson, 2006c, p. 5).  Henderson, R. (2006c) Letter from CASAC
Chairman Rogene Henderson to EPA Administrator Stephen Johnson, October
24, 2006, EPA-CASAC-07-001.

 Staff paper

 PAGE   

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Estimate Extrapolated Human Health Effects and Dollar Benefits

Estimate Extrapolated                  Control Costs

Extrapolate Tons to Reach Full Attainment and Compare pre-and post-
extrapolation air quality

Determine Post-Control Air Quality and Compare pre- & post-control
strategy air quality 

(partial attainment in most areas)

Estimate Modeled Human Health Effects and Dollar Benefits

Estimate Economic Impacts

Estimate Modeled                    Control Costs

Select Control Strategies

Identify Areas Projected to Exceed Alternate Standard and  Calculate
Needed Reduction Targets

Model 2020 Baseline Air Quality

Estimate 2020 Emissions

