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Smith A.E.,NERA Economic Consulting
Journal of the Air and Waste Management Association

In 2012, the U.S. Environmental Protection Agency (EPA) considered setting a secondary National Ambient Air Quality Standard (NAAQS) for particulate matter (PM) to maintain urban visual air quality (VAQ) above the level that EPA believes results in adverse effects on public welfare. EPA is relying on a type of survey it calls a "VAQ preference study" to determine this level. Individuals are shown photographs of the same vista under a range of different visibility conditions and asked to state whether the VAQ in each photograph is "acceptable" or "unacceptable." EPA considers the effect on public welfare to be adverse at the VAQ level that at least 50% of respondents deem unacceptable (the "VAQ cutpoint"). Given its central role in setting a NAAQS, the scientific validity of this method is an important question. This study tests the robustness of the VAQ preference study method by replicating the survey instrument from a prior VAQ preference study, and by applying two variants in which the only change was use of a different range of VAQ levels. Tested on split samples, these three variants produced statistically significantly different VAQ cutpoint estimates. In contrast, all three variants produced comparable results for a calibration task at the start of each survey in which respondents were asked to rate the VAQ in each photograph on a scale of 1-7 (without any opinion on the acceptability of each level). The significantly different estimates of VAQ cutpoints across survey variants cannot be attributed to inability on the part of respondents to discern whether they were being shown the entire range of actual visibility conditions. This suggests that VAQ preference surveys do not actually estimate individuals' enduring preferences regarding VAQ, because absolute preferences would not be influenced by the particular levels of VAQ over which their preferences are elicited. In setting its particulate matter secondary National Ambient Air Quality Standard for urban visibility, the U.S. Environmental Protection Agency is relying on a survey method that has people rate a range of urban visibility levels as "acceptable" or "unacceptable." A test of that survey method using split samples finds its results are not robust to variations in the range of visibility it shows to respondents. This implies that the visibility preference survey method needs more scientific evaluation before it can be assumed to be measuring individual preferences for visibility in a valid manner. © 2013 Copyright 2013 A&WMA. Source

Kaufman N.,NERA Economic Consulting
Climatic Change

U.S. environmental regulations are increasingly influenced by cost-benefit analyses that are performed based on the guidance of the Office of Management and Budget (OMB). The OMB's Circular A-4 directs Federal agencies to assume "risk neutrality" in conducting regulatory analysis, and in important instances, this guidance is not supported by economic theory. Risk neutrality is computationally convenient, and it can be justified when only the costs and benefits of regulations themselves are uncertain, because these risks are spread across a large population. However, the Circular A-4 does not distinguish between regulations that cause uncertainty and those that reduce pre-existing (i.e. baseline) uncertainty, such as the potential for catastrophic climate change. Basic economic theory shows that risk aversion should be incorporated into evaluations of policies that reduce pre-existing environmental uncertainty. Regulatory analyses generally ignore these risk-reduction benefits, leading to misinformed policymaking. Quantifying risk premiums is difficult and controversial, but no more so than discounting future costs and benefits to present value terms. Similar to how OMB has established discount rates for use in regulatory analyses, a method for when and how to incorporate risk aversion into policy evaluations should replace the blanket guidance for risk neutrality. © 2014 Springer Science+Business Media Dordrecht. Source

Hensher D.A.,University of Sydney | Shore N.,NERA Economic Consulting | Train K.,University of California at Berkeley
Applied Energy

A key feature of many regulatory reviews is determination of the amount of expenditure that should be reflected in the revenue requirement for a service provider. An increasingly important driver in determining the appropriate level of this expenditure is the desired level of service quality and requisite service targets which are incorporated in the 'regulatory bargain'. Willingness to pay (WTP) evidence can be used in the regulatory bargain to establish such targets. In this paper we study households' WTP to avoid specific restrictions on service supply quality (especially reliability) in residential electricity, using stated choice experiments to reveal the set of preferences required to calculate WTP. Using a sample of residents in Canberra, Australia, we find that residential customers value reliability of the electricity service; in particular, frequency and the duration of outages are important to customers, and customers value incurring fewer and shorter outages, compared to more frequent and longer outages. The average WTP to avoid a common set of events such as outages, power surges and flickers in electric current vary from $60 per customer per event for an 8-h electricity outage when it occurs once a year through to $9 per event for a flicker in electric current. © 2013 Elsevier Ltd. Source

Gans W.,NERA Economic Consulting | Hintermann B.,University of Basel
Environmental and Resource Economics

Are private voluntary environmental actions by firms a sign of mismanagement, or a profitable "win-win" replacement for regulation? Empirical evidence is decidedly mixed. In this study, we use 19 years of monthly stock price returns, from 1991 to 2009, to examine the profitability of participation in CCX, a large voluntary greenhouse gas mitigation program. After controlling for systemic market risk as well as industry-specific shocks, we find statistically significant and positive excess returns for firms that announce their decision to join CCX. In addition, the progress of proposed greenhouse gas legislation (the Waxman-Markey bill) had a positive and large impact on excess returns for CCX member firms, suggesting that a major incentive for firms to join CCX may be to prepare for future regulation. Marginal abatement costs (proxied by the carbon price), on the other hand, were unrelated to excess returns. Our results imply that voluntary approaches should play a role in combating climate change, but that relying on them alone is not enough. © 2013 Springer Science+Business Media Dordrecht. Source

Smith A.E.,NERA Economic Consulting
Risk Analysis

This article describes inconsistencies between health risk analyses that the U.S. Environmental Protection Agency (EPA) uses to support its decisions on primary National Ambient Air Quality Standards (NAAQS), and in the associated Regulatory Impact Analyses (RIAs) that accompany each NAAQS rulemaking. Quantitative risk estimates are prepared during the NAAQS-setting deliberations using inputs derived from statistical associations between measured pollutant concentrations and health effects. The resulting risk estimates are not directly used to set a NAAQS, but incorporated into a broader evidence-based rationale for the standard that is intended to demonstrate conformity with the statutory requirement that primary NAAQS protect the public health with a margin of safety. In a separate process, EPA staff rely on the same risk calculations to prepare estimates of the benefits of the rule that are reported in its RIA for the standard. Although NAAQS rules and their RIAs are released simultaneously, the rationales used to set the NAAQS have become inconsistent with their RIAs' estimates of benefits, with very large fractions of RIAs' risk-reduction estimates being attributed to populations living in areas that will already be attaining the respective NAAQS. This article explains the source of this inconsistency and provides a quantitative example based on the 2012 revision of the fine particulate matter (PM2.5) primary NAAQS. This article also demonstrates how this inconsistency is amplified when criteria pollutant co-benefits are calculated in RIAs for non-NAAQS rules, using quantitative examples from the 2011 Mercury and Air Toxics Standards and the currently proposed Clean Power Plan. © 2015 Society for Risk Analysis. Source

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