National Center for Environmental Economics

**Overview of Economic Analysis at the EPA** When our nation's policy-makers decide how to protect human health and the environment, their choices often are influenced by the work of economists at the U.S. Environmental Protection Agency, who assist the Agency in applying sound economic science to important policy decisions. EPA uses economic analysis to meet statutory obligations and Congressional mandates. National decision-makers increasingly request economic information prior to making important regulatory decisions. EPA strives to improve the environment without imposing unreasonable costs on society by grounding its policy proposals in sound economic analysis. Cost-effectiveness and market-based incentives are critical when developing regulations and policies. Underlying these efforts is the recognition that a thorough and careful economic analysis is an important component in informing sound environmental policies. Preparing high-quality economic analysis can greatly enhance the effectiveness of environmental policy decisions by providing policy makers with the ability to systematically assess the consequences of various actions. An economic analysis can describe the implications of policy alternatives not just in terms of economic efficiency, but also in terms of the magnitude and distribution of an array of impacts. Economic analysis also serves as a mechanism for organizing information carefully. Thus, even when data are insufficient to support particular types of economic analysis, the conceptual scoping exercise can provide useful insights. It is important to note that economic analysis is but one component in the decision-making process and under some statutes it cannot be used in setting standards. Other factors that may influence decision makers include enforceability, technical feasibility, affordability, political concerns, and ethics, to name but a few. Nevertheless, economic analysis provides a means to organize information and to comprehensively assess alternative actions and their consequences. Provided early in the regulatory design phase, economic analysis can help guide the selection of options. Ultimately, good economic analysis based on sound science should lead to better, more defensible rules. Economic analyses should always strive to be transparent by acknowledging and characterizing important uncertainties that arise. In addition, economic analyses should clearly state the judgments and decisions associated with these uncertainties and should identify the implications of these choices. When assumptions are necessary in order to carry out the analysis, the reasons for those assumptions must be stated explicitly and clearly. Analysts must take care to avoid double counting of benefits and costs when there are overlapping regulatory initiatives. Further, economic analyses of environmental policies should be flexible enough to be tailored to the specific circumstances of a particular policy, and to incorporate new information and advances in the theory and practice of environmental policy analysis.