The Pitfalls of Consistent Cost-Benefit Analyses

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A one-size-fits-all approach to cost-benefit analysis won’t necessarily ensure better policy.

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The U.S. Environmental Protection Agency’s (EPA) recent advance notice of proposed rulemaking rule, “Increasing Consistency and Transparency in Considering Costs and Benefits in the Rulemaking Process,” claims it is raising important issues about the use of cost-benefit analysis in regulatory policymaking. But the advance notice also raises the questions of whether those issues are truly crucial, why this is the time to address those issues, and whether EPA under its current leadership is capable of adjudicating them objectively.

Although the use of cost-benefit analysis now permeates all areas of regulatory policy, nowhere is the history of this use as long and as controversial as it is in environmental policy. It can also be argued that nowhere has the use of cost-benefit analysis been as successful either. When President Ronald Reagan issued Executive Order 12,291, critics voiced many concerns about applying cost-benefit analysis to the valuing of environmental goods. The economics profession—including many talented economists at EPA—responded by developing techniques to evaluate environmental amenities and measure the impacts of different types of environmental regulations. Now the regulatory impact analyses issued by EPA are among the most sophisticated done in the U.S. government, and the United States has been a leader in exporting cost-benefit analysis to the world.

Advocates of cost-benefit analysis have long argued that the first condition for regulatory action is the existence of a problem that the regulation is intended to fix. In the case of cost-benefit analysis at EPA, the recent advance notice does not claim that such analyses have reached incorrect conclusions or led to poor policy choices. Instead, EPA argues—as is evident in the title of the advance notice—that there is a need for greater consistency and transparency in their cost-benefit analyses. Neither consistency nor transparency necessarily means better analysis or better policy outcomes.

Based on my work on the use of analysis to make policy across government, I have concerns about the desire for consistency, but I do feel that EPA could benefit from increased transparency.

Cost-benefit analysis for regulatory policy does not take place in a vacuum. It is constrained by politics, law, bureaucracy, and the epistemic uncertainty inherently present in analysis itself. These constraints make consistency an impossible goal to achieve. In the case of environmental policy, law and epistemic uncertainty place particularly stringent limits on the use of cost-benefit analysis.

EPA acknowledges as much in its advance notice. The agency notes that although “most statutory provisions require or allow some consideration of cost and benefits when setting regulatory standards,” there can still “be a significant variation in terminology and specificity provided in each law regarding the nature and scope of cost and benefit considerations.”

This variation is not an accident. These laws were passed by different Congresses, signed by different Presidents, under different conditions. Aspiring to graft consistent standards for cost-benefit analysis onto a wide panoply of statutes is not only challenging, it would also open regulations—or deregulatory efforts—to court challenges under these varied laws.

The second problem with consistency is the nature of economics itself. Economic methods evolve. Consider the explosion of work on—and the multiple Nobel prizes awarded for—behavioral economics. Policies that say we should always assume rational behavior would be consistent but they would also be wrong. So, for that matter, would be policies that say we should ignore the results of models based on rational behavior. In areas such as environmental economics, where work continues to evolve, consistency enshrined in a regulation is extremely counterproductive. The only consistency that EPA should strive for is to use the best available economics to inform its decisions.

When it comes to transparency, however, there is room for improvement in EPA analysis. Christopher Carrigan and I found that regulatory impact analyses have become consistently longer over the past few decades. In our article, we outlined one possible way to make analyses both more accessible and useful, which we call “back of the envelope analysis.”

The two most important enhancements to transparency in our view involve the meaningful comparison of alternative policy options and the simple presentation of the tradeoffs between these alternatives. The basic idea is that for a benefit-cost analysis to truly be informative and transparent, there should be a simple presentation of costs and benefits of alternatives that differ at the relevant margins.

Too often, regulatory impact analyses run thousands of words long and compare two alternatives that are unrealistic—such as “do nothing” and “regulate to an infeasible level”—with the option that is chosen. If the agency wants to make an argument that emissions of a particular chemical should be 5 parts per million (ppm), they should tell the public the additional costs and benefits of requiring levels of 4 ppm and 6 ppm, and even 3ppm and 7 ppm. This agency can bolster its analysis with additional complexity if necessary, but there should be a “bottom line” that the public can evaluate. In addition to clearly explaining how the estimates were derived, thoughtfully presenting the impacts of multiple alternatives will greatly enhance the transparency of regulatory impact analyses.

One concern remains with EPA’s advance notice. In recent months, EPA has come under widespread criticism for its cost-benefit analyses supporting the repeals of the Clean Power Plan and the Waters of the United States regulation, among others. In both these cases, critics have raised the concern that analysis is being manipulated to justify deregulatory outcomes.

It is worth asking whether EPA’s cost-benefit analysis proposal is a part of this effort. Perhaps the new Administrator at EPA will move in a different direction than his predecessor and emphasize the integrity of analysis. Even if this is the case, however, EPA should tread very carefully in establishing a possible one-size-fits-all approach to cost-benefit analysis in an area of policy where different approaches may be best.

Stuart Shapiro

Stuart Shapiro is a professor and associate dean of faculty at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.

This essay is part of a series, entitled Consistency and Transparency in Environmental Cost-Benefit Analysis.