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Jan 19 -- The Environmental Protection Agency (EPA) invites comments to OMB by February 21, 2023 regarding the Survey to Improve Economic Analysis of Surface Water Quality Changes.

Researchers and analysts in EPA's Office of Research and Development (ORD), Office of Water (OW), and National Center for Environmental Economics (NCEE) are collaborating to improve EPA's ability to perform benefit cost analysis on changes in surface water quality (lakes, rivers, and streams). We are requesting approval to conduct a survey that will provide data critical to that effort. A number of non-market valuation methods can be used to estimate the economic benefits of improving environmental quality, but they often require more time and resources than federal agencies have to complete the regulatory impact analysis. Benefit transfer can provide reasonably accurate estimates of economic benefits under certain conditions with fewer resources and far less time. Federal agencies rely on benefit transfer often when analyzing the economic impacts of environmental regulation. In conducting benefit cost analyses of surface water regulations, however, it has become apparent that there is a lack of data on some features of policy analysis that have forced analysts to make assumptions about the relationships between a number of factors. This information collection is necessary to provide insight on those relationships and improve the EPA's and other federal agencies' ability to perform benefit transfer in regulatory analysis.

Analysts in the Office of Policy, the Office of Water, and the Office of Research and Development have begun work on an integrated hydrological and economic model that will be capable of estimating benefits for a wide range of surface water regulations. The data collected with this survey will inform that effort. Analysts elsewhere in the EPA and other federal agencies may also be able to use the results of this study to improve benefit transfer in other applications. The survey will be administered electronically to a probability-based internet panel. An internet-based survey mode provides several advantages in efficiency and accuracy over other collection modes. It is also necessary to meet several of our research objectives described in the ICR Supporting Statement. Participation in the survey will be voluntary and the identity of the participants will be kept confidential.
When time and other resources are not sufficient for an original study of non-market benefits, benefit transfer can provide reasonably accurate estimates under certain conditions. Benefit transfer involves adapting the results of previously conducted studies to approximate the conditions of the current application. This can be done using just a few studies if there are existing studies that closely match the current application, or it can be done in a meta-analytic framework in which many studies are combined to generate a conditional distribution of estimates. In either case, transferring benefits from other studies may require analysts to parameterize certain relationships that were not included in the original studies. EPA has identified several such relationships for which there are little or no data to inform the parameterization and so analysts must make assumptions to complete the benefit transfer. Below are descriptions of how each of the identified relationships are addressed under EPA’s most recent water quality benefit estimation approach and how this proposed data collection effort would improve EPA’s estimates.

One of the key relationships this information collection will address is that between a household’s willingness to pay (WTP) and the distance to the improved resource. Known in the literature as “distance decay,” (when treated as continuous) or “extent of market” (when treated discretely) this relationship is critical in estimating benefits for surface water improvements. As the extent of market for a given improvement increases (decreases) the number of households with positive WTP could increase (decrease) exponentially and may determine whether population centers are included in (excluded from) the aggregation of benefits. Distance decay, holding all else equal, will determine the magnitude of WTP for households near the edge of the extent of market compared to households closer to the improved resource. The most recent EPA analyses of water regulations (U.S. EPA 2015, 2020) have assumed that households are willing-to-pay for water quality improvements within 100 miles of their home, with no distance decay within that range, but they are not willing to pay for improvements outside of that range.  EPA justifies the 100-mile assumption by noting that households are more likely to be familiar with waterbodies and their qualities within that distance (U.S. EPA 2020, Appendix G p.4). This assumption about extent of market can have a substantial impact on total WTP. Corona et al. (2020) show that increasing the extend of market (with no distance decay) from 62 miles to 100 miles increases total WTP by a factor of four in their case study. It is likely, however, that WTP declines gradually as distance increases because of the increasing availability of substitutes and rising travel costs. It is also possible that WTP is non-zero at greater distances than we have assumed in the past because people may hold existence value for aquatic resources they do not use. This study will collect data that will allow EPA to improve our understanding of distance decay and extent of market.   

Another important relationship for which EPA analysts lack data is that between WTP and the quantity of water affected by a regulation. EPA regulations that affect water quality usually impact waters across large regions of the US and economic theory is clear that the quantity of waters impacted should influence WTP for a given set of improvements. EPA estimates the marginal willingness to pay (MWTP, the WTP for a one-unit improvement in the WQI) using a meta-analysis of 65 SP studies. None of those studies, however, address water quality changes at a national scale and most of the studies value improvements within a single state (U.S. EPA 2020). To address this data gap, EPA captures the quantity of water improved through a ratio of the affected reach miles to the total number of reach miles present in the original studies’ sampling area (the sub proportion variable). To estimate economic benefits from surface water regulations, that proportion is then calculated for each census block group impacted by the regulation and those values are used for benefit transfer.  Proxying for quantity in this way not only obscures the direct relationship between WTP and the amount of water improved but also the tradeoffs that SP survey respondents make between the magnitude of the quality changes and the amount of water affected. This study will be one of the first to directly model the relationship between willingness to pay for water quality improvements and quantity of water improved, and the only SP study to do so at a national scale. In each choice situation, this study will give respondents information on both the size of the water quality change and the amount of water affected by the change. This will allow direct estimation of WTP for large scale improvements and how respondents trade off quality and quantity. The information collected under this study will allow EPA analysts to better estimate this relationship and improve the accuracy of benefit transfers.   

The third key relationship this information collection will address is between use values, such as those motivated by recreation, and existence value related to aquatic biological condition. There are at least two reasons that these two sources of value should be considered separately when estimating benefits of water quality improvements. First, as described above, economic theory implies that use values should decline with distance from a resource, while there is no such implication for existence values.  How existence values change as distance from the resource increases is thus an empirical question that has not been addressed in the literature. Secondly, the underlying biophysical drivers of the quality of recreational experiences at a resource and the ecological health of that resource are different. For example, fecal coliform can create human health hazards through water contact recreation; it has no impact on the aquatic biological condition, however. So, the two sources of value may not be affected in the same way under a given set of water quality changes. EPA’s current approach to estimating water quality benefits relies on a single indicator, the water quality index (WQI, e.g., U.S. EPA 2015, 2020). The meta-analysis on which EPA’s benefit function is based uses the WQI as the common metric to synthesize the findings of the underlying studies and the only quantitative measure of water quality in the WTP function. While this is a necessary assumption given the current body of valuation literature, its implications on total WTP are unknown because no suitable stated preference study has estimated use and existence values separately. EPA economists, ecologists, and environmental assessors have identified an appropriate metric of aquatic ecological condition for stated preference valuation through focus group testing. This data collection effort will use two separate water quality indicators on the survey to capture use and existence values in a separable way.  The data collected with this survey will provide insight to the relationship between use and existence values and the implicit assumption that they can be captured with a single indicator of water quality.  

The project is being undertaken pursuant to section 104 of the Clean Water Act dealing with research. Section 104 authorizes and directs the EPA Administrator to conduct research into subject areas related to water quality, water pollution, and water pollution prevention and abatement. This section also authorizes the EPA Administrator to conduct research into methods of analyzing the costs and benefits of programs carried out under the Clean Water Act. The data collected under this request will help EPA and other practitioners better inform assumptions regarding the above relationships when conducting benefit-cost analyses.  

This research effort could be used to inform future benefit-cost analysis of surface water improvements. The current approach, while representing the current state of the science, makes either explicit or implicit assumptions to fill data gaps. The data collected with this survey and the subsequent analysis will provide empirical insights for those relationships. The data collected with this effort will be useful to the academic research community by addressing research questions that have not received enough attention in the published literature. EPA is collaborating with several research teams that received STAR Grants to develop our respective studies in such a way to perform external validity tests and cross-validation studies.    
EPA submission to OMB: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202301-2090-001 Click IC List for information collection instrument, View Supporting Statement for technical documentation. Submit comments through this webpage.
FRN: https://www.federalregister.gov/d/2023-00972

For AEA members wishing to submit comments, "A Primer on How to Respond to Calls for Comment on Federal Data Collections" is available at https://www.aeaweb.org/content/file?id=5806

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