Responses to OMB Chapter 5 markup (received 6/9/07)

1.  Comment page 1- the benefits discussions will occur in a separate
chapter.

2.  Comment page 2- this is based on historical data provided in
AirControlNet

3.  Accepted edits page 3, paragraph 2. 

4.  Comment page 4- supplemental controls will not be separated out from
the control costs, as they have been reviewed and deemed adequate for
this analysis.

5.  Comment page 5- Permits are not counted in this analysis, because
they are a portion of the implementation process. 

6.  Comments page 6-16- the EIA has been removed from the document. 

7.  Markups page 16- 26- accepted.

8. Page 26- similar text has been added.

Comments

Spell out and identify the supplement controls, as this would define
what control technologies are being analyzed.

	This information will be provided in the appendix.

As noted in Chapter 3, EPA first modeled a hypothetical control strategy
aimed at attaining a tighter standard of 0.070 ppm in 2020.

Comment:  This reads as if EPA conducted its first model in 2020. 
Reword as ‘Initially, EPA modeled…..for 2020.’

	This change has been made.

Page 5, 5.1.3, Limitations and Uncertainties Associated with Engineering
Cost Estimates:

EPA bases its estimates of emissions control costs on the best available
information from engineering studies of air pollution controls and has
developed a reliable modeling framework for analyzing the cost,
emissions changes, and other impacts of regulatory controls.  

Comment:  Identify the air pollution controls that are analyzed.

	This information will be provided in the appendix.

Page 11, Projected Impacts on Regional Energy-Intensive Industries:

…this analysis presents findings for an East-West split of the United
States

Comment:  Again, if there is a way to incorporate at North-South split
(i.e., four quadrants) this would provide greater depth of analysis.  

The EIA has been dropped from the document.  Where available, national
discussions are preferred over regional discussions. 

Page 26, Examples of Technological Advances in Pollution Control: 

Comment:  This listing of air pollution control technologies needs to be
presented in Chapter 1, where ‘emissions controls scenarios’ are
presented.

	This information is more applicable to the cost chapter.

Question:  On page 3: “The marginal cost curve was analyzed, and there
was a clear break in the curve at approximately $6,000/ton.”  Does
“clear break” mean the marginal cost curve was discontinuous or
kinked?

	This refers to the point at which the slope changes in the curve.

Question:  On page 4 the reference to Appendix 6 – is that supposed to
be a reference to the appendix to chapter 5?

	Formatting will be fixed as the document progresses.

Comment: On table 5.1 EPA refers to annualized costs.  MAS assumes this
means that the costs for the summer months were extrapolated to the
whole year, but this is not made clear in the text, please clarify. 
Also, A-4 interest rates are usually used for making present discounted
value calculations, for example for estimating the present discounted
value of complying with the rule over the next ten years.  Obviously
this is not the case in this exercise.  To avoid confusion, EPA should
clarify in what context they are using A-4 interest rates.

	This has been clarified.

Comment:  The first sentence of section 5.2 is very awkwardly phrased
and very difficult to understand.  

	This sentence has been reworded.

Comment:  In bullet (b) on page 6, the exclusion of extrapolated costs
from estimates of economic impacts invalidates the entire exercise.  EPA
needs to find a way to include them.  They claim that “Since the
extrapolated cost estimates are not associated with specific controls on
specific sectors it is not possible to estimate the economic impacts of
this portion of the cost estimate.”  That is simply not true.  While
it would be helpful to know what sectors bear the burdens, and even more
helpful to know what specific controls would be used, it is by no means
impossible to carry out a reasonably defensible estimate of economic
impacts with an overall estimate of the extrapolated costs.  EPA knows
that lowering ozone standards will directly affect certain manufacturing
sectors that emit ozone precursors, electricity generating units, and
mobile transportation.  Presumably investing in new technology to curb
emissions in these sectors will involve increased capital investment
that does not increase the industry’s output.  Therefore an increase
in extrapolated costs can be modeled as increasing the capital
requirements of the industries for a given unit of output.  The amount
of increased capital requirement for the manufacturing industry can be
set, for example, equal to the total estimated extrapolated cost
multiplied by manufacturing’s share in total value added of the three
affected sectors.

	The economic impact has been deleted from the RIA.

Comment:  On page 7, in bullet (d), EPA speculates that including the
increase in worker productivity resulting from lower ozone exposure
could possibly offset the small decrease in output.  This is extremely
unlikely.  Reductions in ozone exposure will not be limited to the
immediate environment surrounding manufacturing facilities that emit
ozone precursors – the entire surrounding urban area will be affected.
 While it is possible the overall increase in worker output nationwide
will, at the macro level, offset the decrease in output of the affected
industries, the production declines of the affected industries relative
to the rest of the economy would still hold.

The economic impact has been deleted from the RIA

Comment:  Throughout the chapter, the effects on the economy are
characterized as “small” compared to the overall level of economic
activity.  This is a counterfactual analysis – the analysts construct
a snapshot of the base scenario and the policy scenario and compare the
changes between the two – and the appropriate comparisons are
therefore on the margin.  How do the changes in output compare to
historic output growth?  EPA has used the same framework before, most
recently in the PM NAAQS analysis.  How do the outcomes of the analysis
compare to these other studies?

	The economic impact has been deleted from the RIA

Comment:  EMPAX is not a general equilibrium model because it ignores
international effects.  If the United States imposes strict ozone
precursor emission requirements on U.S. manufacturing firms only, one of
their options is to move operations abroad where they will not face such
requirements.  Presumably all firms have already taken environmental
compliance costs into account when making their location decisions. 
Unilaterally imposing additional costs will then cause manufacturing
facilities that are on the margin to change their location decisions. 
Excluding the extrapolated costs from the economic impact analysis is
particularly problematic if international effects are incorporated.

	The economic impact has been deleted from the RIA

Comment:  EPA goes to great lengths to explain that technological
advances have occurred in the past and their compliance costs may
therefore be overestimated.  Nevertheless, it would still be useful to
provide a scenario where no additional technological advances occur, at
least to provide an upper bound for compliance cost scenarios.  If there
are no technological solutions to lowering ozone precursor emissions,
then the only alternative is to lower economic activity that results in
emissions.  On mobile sources, appropriate “control technologies”
would then include taxes on fuel that are high enough to discourage
transportation.  For EGU’s, taxes on electricity consumption, and on
manufacturing, output taxes.  It would be very informative to see how
much economic activity would have to be reduced to achieve the ozone
targets set by EPA, assuming no technological advance, particularly if
the costs of this approach are less than estimates of extrapolated
costs.

	The economic impact has been deleted from the RIA

Comment:  Page 18, section 5.3.1.2.  It would be helpful to have access
to the data used for these regressions.  During our telephone
conversation the EPA expert who carried out the regressions claimed that
the estimated elasticity for the pooled data was very small.  I would
like to see the data and method used for the two estimates of marginal
costs, because I suspect some sort of econometric error may have
occurred.

	The data will be provided in the docket. 

Comment: (Chapter 5) Cost Estimates:  Has any consideration been given
to the impact on competitiveness of attaining the alternative more
stringent levels for the ozone primary standard, especially for
manufacturing companies?  U.S. manufacturers compete in a global economy
and the potential increased costs of complying with the more stringent
standard could make them significantly less competitive than some of
their foreign competitors.  In the short run, some U.S. manufacturers
could be driven out of business by foreign competition or forced to
relocate their plants to other countries.  The economic impact on local
economics of a plant shut down could far exceed the benefits accrued
from cleaner air.  The potential cumulative economic impact on the U.S.
economy, of a large number of plants or companies shutting down, needs
to be factored into the calculations.   In the long run technological
innovations could significantly reduce the cost of attaining the
alternative more stringent levels for the ozone primary standard, but it
will not help companies which in the short run are forced out of
business. 

	The economic impact has been deleted from the RIA

It is very reasonable to believe that in the long run technological
advances in pollution control would significantly reduce the costs of
complying with alternative more stringent levels for the ozone primary
standard.   Unfortunately technological innovation have research and
development costs associated with it.  But if all parties were forced to
invest in technological innovations as a means of complying with the
standard; individual companies, cities and states would not be put at a
significant disadvantage verses their competitors by having to invest in
measures to comply with the standard.

 

Question:  Would the costs of complying with a more stringent standard
have such an adverse impact on U.S. cement and glass manufacturers so as
to force them out of business as a consequence of increased competition
from foreign manufacturers?

	These specific sectors were not included in our analysis. 

Question:  What higher costs of production would manufacturers possibly
incur that would impact their competitiveness vis-à-vis foreign
manufacturers?

This analysis is on a national scale, not including foreign emissions or
manufacturers.

