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OMB Papers
Towards a Regulatory Budget: Jim Tozzi, ed. 1979. PART 2: COMPLIANCE COSTS BY AGENCY A considerable amount of work has been done that addresses the costs associated with Federal regulations. The available information base ranges from special, one-time studies to ongoing government surveys, from covering the impact of all regulations on the national economy to the impact of single regulations on specific industries. This chapter, which is in two parts, surveys the available cost information. Part A briefly describes some widely cited, recently prepared sources. It is arranged by agency. Part B is broader survey of cost studies. This, section is taken largely from a literature survey prepared for The Department of Commerce which covered regulatory cost research of the past decade. PART A Environmental Protection Agency (EPA) 1. The Cost of Clean Air and Water Report to Congress, August, 1979, by the Environmental Protect Agency (EPA). The estimates reported here are limited to costs associated with Federal regulatory actions resulting from the Clean Air and Clean Water Acts, and do not account for costs voluntarily incurred by polluters required by State or local governments only, or mandated by other Federal laws. The costs reported for the control of air pollution are, for the most part, based on compliance with Federally-approved State Implementation Plans, Federal New Source Performance Standards, and Federal Regulations for mobile sources. The costs reported for the control of water pollution are, for the most part, based on compliance with Federal Effluent Limitations Guidelines, New Source Performance Standards, and Pretreatment Standards. Regulations on hazardous and toxic pollutants are also taken into account. The cost estimates reflect the regulatory framework in existence early in 1978. Amendments to the Acts contain significant changes that will affect the future regulatory picture and the associated cost to industry. A summary of the investment and annual cost estimates is shown in Table 1 at the end of Part A. 2. "Pollution Abatement and Control (PAC) Expenditures in Constant and Current Dollars, 1972-77," Survey of Current Business (February 1979), by the Bureau of Economic Analysis (BEA) PAC expenditures consist of all expenditures for reducing the emission of pollutants, and exclude expenditures for other aspects of environmental protection, such as the conservation of natural resources or the protection of endangered species. PAC spending is defined to include pollution abatement expenditures, which reduce emissions directly, plus expenditures for regulation and monitoring and for research and development, which lead indirectly to the reduction of emissions. Because data are not available, the national estimates exclude expenditures by agricultural business; real estate operators; private medical, legal, educational, and cultural services; and nonprofit organizations. A 1arge portion of PAC expenditures are for compliance with Federal regulations but the size of this portion is not known. PAC expenditures in constant dollars are shown in Table 2. The data base for these estimates is of good quality relative to that which is feasible, although there are still important estimation problems. Current dollar estimates are obtained from a variety of sources and converted to 1972 dollars 1argely with price indexes from or based on those published by the Bureau of Labor Statistics (BLS). Some of the more important sources and a brief description of each are: A. New Plant and Equipment Expenditures Survey (Advanced Annual), by BEA -- In November-December each year BEA asks companies to report capital expenditures for pollution abatement. Sample data from several thousand companies (enterprises) are transformed to comprehensive estimates by a two-step procedure, linking of capital expenditures. Definitions and instructions are an integral part of the survey, and the sample, which includes companies of all sizes, is stratified by industry and size of company. A critical assumption is that certain rates of change (used in linking) and ratios of pollution abatement to all capital (used in linear extrapolation) are representative for companies outside of the sample. B. BLS press releases reporting the dollar value of quality change in products, including quality change in passenger cars due to emission abatement equipment; Facts and Figures, by the Motor Vehicle Manufacturers Association; "Proceedings of the Society of Automotive Engineers (SAE) (September 1973 and October 1976) ," by SAE; National Personal Transportation Study, by the Federal Highway Administration; unpublished estimates for heavy duty vehicles, by EPA -- These sources are the basis for estimates of national expenditures for motor vehicle emission abatement C. Value of New Construction Put in Place (C-30), by the Construction Statistics Division of Bureau of the Census (Census) -- This is the major source for expenditures for public sewage treatment plant and sewer line construction. Construction progress estimates for sewage treatment plant and sewer line construction are based on monthly' samples taken from lists of contract awards as compiled by the F. W. Dodge Company. D. Governmental Finances, by the Government Division of Census -- This is the major source for operating expenditures for sewage treatment plants and for solid waste collection and disposal expenditures by government. Sample data from local governments (about 13,000 to 16,000) are transformed tocomprehensive estimates using certain Census of Governments data available at five-year intervals. E. Pollution Abatement Costs and Expenditures (PACE) Survey, by the Industry Division of Census--In early spring each year Census asks manufacturing plants (establishments) to report capital and operating expenditures for pollution abatement. Questionnaires are mailed to a probability sample of about 70,000 plants selected from a total of about 312,000 plants. The coverage (manufacturing only), sample unit (plant instead of company), and transformation procedure for making comprehensive estimates from sample data differ from the New Plant and Equipment Expenditures (P&E) Survey by BEA (la above). The PACE Survey is virtually the only source for certain information such as operating expenditures for pollution abatement and provides more detail on capital expenditures for pollution abatement than the P&E Survey. Since the design of the questionnaire for the PACE Survey was a joint BEA-Census activity, all definitions and instructions for the PACE Survey are consistent with those for the P&E Survey. F. Annual Housing Survey (H-190), Construction Reports (C-40), Housing Authorized by Building Permits and Public Contracts (C-22), 1970 Census of Housing -- all by Census; other sources -- This group of sources is the basis for estimates of septic system and lateral investment (septic tanks and fields, connectors to sewers). G. Section 52, Circular A-11, by Office of Management and Budget (0MB) -- In the fall each year as part of the budget process 0MB requires that Federal agencies fill out forms requesting pollution abatement expenditures and accompanying regulation and monitoring and research and development expenditures. This survey or circular is the basis for most of the expenditure estimates shown on the Federal line items of Table 2. H. The Industrial Research and Development (R&D) Survey, for the National Science Foundation (NSF), by Census -- The survey, conducted in the early spring, includes pollution abatement expenditures questions. It is the basis for the estimate on line 20 of Table 2, private R&D. The sample size is about 8,000 companies. Cost of Government Regulation Study, for The Business Roundtable, by Arthur Andersen and Company. The Business Roundtable sponsored a one-time experiment in 1978 among member companies willing to try to quantify expenditures that would not have been made in 1977 in the absence of the regulatory requirements of six Federal agencies and programs: the EPA, Department of Energy (DOE), Occupational Safety and Health Administration (OSHA), Federal Trade Commission (FTC), Equal Employment Opportunity (EEO) program, and Employee Retirement Income Security Act (ERISA) program. Forty-eight companies participated in the experiment. Each company identified actions taken in 1977 to comply with a specific regulation of one of the six agencies or programs, determined the cost of the action through reference to accounting or other records, estimated the cost of the alternative action (or non-action) that would have been taken in the absence of regulation, and subtracted the cost of the alternative action from that of the action taken. Thus the Roundtable collected estimates of cost of compliance with Federal regulations, sorted by agency and program and by the industry involved. Sample estimates could not be transformed to comprehensive estimates. The estimates are shown in Figure 1. Costs that The Business Roundtable call incremental costs (see Figure 1) are more properly called compliance costs. Compliance costs are that part of direct costs that would not have been incurred except for the presence of particular regulations (e. g., Federal regulations for pollution abatement). Incremental costs are the excess of costs for a purpose (such as pollution abatement) that would not have been incurred if the level of such costs in a specified year (1967 is often selected in studies pertaining to pollution abatement -- see below) had continued unchanged except as a result of output growth of the economy and price level changes. 4. "Pollution Abatement Programs: Estimates of Their Effect Upon Output Per Unit of Input, l975-78," Survey of Current Business (August 1979). Edward Denison, author of this article, generates comprehensive estimates of incremental costs fore pollution abatement and uses the generated estimates to measure the diversion of input from the production of measured output to pollution abatement activities that do not result in measured output. Dr. Denison's incremental cost estimates, shown in Table 3, depend heavily on his extensions of the BEA series of PAC expenditures back through 1967 and forward through 1978. 5. "Economics", Environmental Quality, annual reports of the Council on Environmental Quality (CEQ). Each year CEQ reports to Congress dollar estimates that are similar to those published by BEA (the category of PAC expenditures called pollution abatement). Unlike BEA estimates:
Table 4 is an example of the CEQ estimates, taken from the CEQ's 9th Annual Report. That which the CEQ calls total pollution abatement expenditures (see Table 4) are more properly called pollution abatement costs. Expenditures refer to outlays; depreciation, which the CEQ includes as expenditures, is not an outlay. (Some analysts argue that depreciation is a measure of annualized expenditures for capital, and therefore they use the term "expenditures" loosely.) The CEQ publishes in reports each year to Congress a second type of dollar estimates, those for incremental pollution abatement expenditures (also more properly called "costs," for the reason just given). Table 5 shows CEQ incremental estimates. BEA does not publish incremental estimates, but the CEQ's and Edward Denison's (and associate director at BEA) incremental estimates are similar. A major difference is that the CEQ generates incremental estimates from its own pollution abatement dollar estimates (Table 4) whereas Dr. Denison depends heavily on BEA pollution abatement expenditures estimates (Table 2). A second difference is "in interpretation." The CEQ writes as if incremental expenditures or costs are the same as compliance expenditures or costs. Dr. Denison recognizes the distinction between the two ideas but assumes that the magnitude and rates of change in the former approximate the magnitude and change in the latter. There is no evidence to confirm nor deny a similarity in magnitude and change. 6. "Regulatory Calendar," by the Regulatory Council, Federal Register (February 28, 1979), page 11388. The Regulatory Council publishes lists of major regulations, the date the regulations are to be promulgated, the first year cost (as estimated by agencies responsible for administration of a proposed regulation and total cost for a regulation or regulatory program. Methods used by agencies in making cost estimates may vary among agencies and even within agencies, as might concepts of "costs" used. Table 6 shows items largely pertaining to pollution abatement and is derived from the regulatory calendar. DEPARTMENT OF LABOR 1. Cost of Government Regulations Study, op cit. The Roundtable's study covered activities of the Occupational Safety and Health Administration and programs of Equal Employment Opportunity and Employee Retirement Income Security (see the earlier discussion of the Roundtable's study and see Figure 1). 2. Press Release on Capital Expenditures for Occupational Safety and Health, by McGraw-Hill Publishing Company. McGraw-Hill asks a sample of companies to report capital expenditures for occupational safety and health, transforms sample estimates to comprehensive estimates by industry, and publishes the results in a press release. McGraw-Hill allows respondents to define, identify, and estimate expenditures, and therefore definitions and procedures may vary across companies. The sample size is not made available to users of the comprehensive estimates. Table 7 shows capital expenditures for occupational safety and health. DEPARTMENT OF ENERGY 1. Cost of Government Regulation Study, op cit. The Roundtable's study covered activities of the Department of Energy (see the earlier discussion of the the Roundtable's study and see Figure 1). 2. Private Sector Costs of Coal-Related Regulations: Summary of the Methodology Implemented for Quantitatively Assessing the Private Sector Costs of Major Coal-Related Regulations, prepared for the Department Commerce by Data Resources Inc. (DRI) The methodology for estimating the private sector costs of regulatory activities was to compute the increased total expenditures on delivered coal due to each rule or regulation. DRI forecast expenditures for coal over the period 1977 through 1990. All forecasts are made with the DRI - Zimmerman coal model within which production and use costs were varied for the different regulatory activities. The model solved for coal expenditures under the different cost conditions. The Base Case forecast incorporated all the regulations of interest. It served as the benchmark for computing the total costs of specific regulations. For each regulation that was quantitatively assessed, another forecast was generated which incorporated exactly the same assumptions as in the Base Case, except that the specific regulation under study was assumed to be nonexistent. By comparing the annual expenditures on coal in the two cases, DRI obtained the total cost of the regulation over the 13-year forecast period. Five regulatory programs were considered by DRI (cases 1 through 5) and the option of not instituting all of the five (case 6). These cases were: Base Case; All Regulations included. Case 1: Reclamation regulations excluded. Case 2: Federal severance taxes on mining to fund the Abandondoned Mine Reclamation Fund excluded. Case 3: Revised New Source Performance Standards (NSPS) excluded. Case 4: Emission standards and revised NSPS excluded. Case 5: Health and safety regulations excluded. Case 6: All quantified regulations excluded. Table 8 shows the cost estimates generated by DRI. It includes costs in addition imposed by the Department of Energy alone. 3. "Regulatory Calendar," op cit. The regulatory actions of a number of agencies affect coal production and use. Table 9 pertains to coal-related regulations regardless of agency. INTERSTATE COMMERCE COMMISSION (ICC) 1. Costs Associated with Government Regulation of the Trucking Industry (approximate title for forthcoming study), for the Office of Regulatory Economics and Policy of the Department of Commerce, by a selected private contractor. The concepts, methods, and preliminary results of this study have been withheld until completion of the study. 2. National Transportation Policies, by the National Transportation Policy Study Commission (NTPSC) It is difficult to list new regulations which govern the operations of the ICC since in large part its new regulatory actions are from case-by-case determinations based on existing policies. The NTPSC lists the major economic policies which guide the operation of the ICC. The NTPSC also recommends a series of actions to be taken to reduce the alleged economic loss of ICC regulation. There are many variants of the concept of economic loss and still more ways of generating estimates. The NTPSC presents estimates of economic loss presented in a variety of studies. Table 10 shows the estimates. 3o "Regulatory Calendar," op cit. The regulatory actions of a number of agencies affect the transportation sector. Table 11 pertains to regulatory actions affecting the transportation sector regardless of agency. FEDERAL TRADE COMMISSION (FTC) 1. Cost of Government Regulation, op cit. The Roundtable's study covered activities of the FTC (see the earlier discussion of the Roundtable's study and see Figure 1). ALL OTHER AGENCIES The identification and description of data in this residual category has not been attempted. Table 1- Cost of Air and Water Pollution Control Table 2- National Expenditures for Pollution Abatement and Control in Constant (1972) Dollars Table 3- Incremental Pollution Abatement Costs That Reduce National Income Per Unit in Nonresidential Business Table 4- Estimated Total Pollution Abatement Expenditures, 1977-86 Table 5- Estimated Incremental Pollution Abatement Expenditures, 1977-86 Table 6- Regulations Administered by the EPA Table 7- Plans For Investment in Employee Safety and Health Table 8- Total Cost of Coal-Related Regulations Table 10- Summary of Estimates of Costs of Regulation Table 11- Regulations Which Affect Transportation PART B Part B surveys the existing literature on the costs of government regulations. This material is taken from "Costs and Benefits of Regulation: A Survey of Studies" prepared by Synergy, Inc. for the Department of Commerce (DOC). The complete study appears in Regulatory Reform Seminar: Proceedings and Background Papers published by DOC. The study is best characterized as a reference document which allows the reader to acquire a feel for the breadth and depth of existing knowledge regarding the benefits of regulation. The range of studies is summarized in the following tables: Table 1: Impact of All Regulations on the National Economy Table 2: Impact of Multiple Regulations on the National Economy Table 3: Impact of Multiple Regulations on a Specific Group or Industry Table 4: Impact of a Single Regulation on the National Economy Table 5: Impact of a Single Regulation on a Specific Group or Industry Table 6: Data Sources The studies represent a wide range of research methodologies, data generation and manipulation, and conclusions about the costs of government regulation on the economy. Estimation techniques range from informed guesses to the evaluation of regulatory costs through the most sophisticated macroeconometric forecasting models available. The level of sophistication and hence, quality of information provided, extends over a wide range, with most studies employing fairly elementary statistical techniques. A brief survey of the tables indicates that the impact of all regulations on the national economy has not received much research attention. This type of study is quite difficult because of the need for comprehensiveness. Studies of the impact of multiple regulations on the national economy are more common and present a far greater breadth and depth of coverage by industry and regulation, than do the studies of the impacts of all regulations on the national economy. Studies which assess the impact of multiple regulations on a specific group or industry are largely confined to environmental regulations, especially air and water pollution. More common are studies which assess the impact of a single regulation on the national economy. Here, in addition to environmental regulations, studies on the regulation of transportation, both air and surface, and agricultural regulations receive much research emphasis. Table 5 shows the impacts of single regulations on specific groups or industries, but this information is deliberately kept to a few selected examples. This category contains the overwhelming majority of studies done on the impacts of regulations. Space permits a presentation of only a few studies as an example of the type of analysis and cost estimates developed. Table 6 on Data Sources reveals that data sources on pollution abatement costs comprise most of the available data on the costs and benefits of regulation. If any conclusions can be drawn from the information presented herein, they must center around the notion that research on the impacts of government regulation is in its infancy. Much additional work in the areas of model development and data generation is sorely needed. Different studies undertaken to assess the impact of government regulation on the same industry present difficulties in making comparisons. Table 1- Impact of All Regulations On The National Economy Table 2- Impact of Multiple Regulations on the National Economy Table 3- Impact of Multiple Regulations On A Specific Group Or Industry Table 4- Impact of A Single Regulation On the National Economy Table 5- Impact of Single Regulations On A Specific Group or Industry Table 6- Data Sources
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