A couple of weeks ago, soon after EPA Administrator Pruitt's announcement to introduce a rule changing the role of cost-benefit analysis in design of environmental regulations, I wrote an op-ed and submitted it to the NYTimes for consideration. They politely declined (by ignoring the submission) so I submitted it to the Washington Post. They too, politely declined (by ignoring the submission). Finally I sent it to The Conversation and they politely declined (for real this time), basically saying I was too slow and Joe Aldy beat me to it.
So although this repeats a lot of what Joe said in his piece for The Conversation, here's my take on why reducing the role of cost-benefit analysis at the EPA is dangerous.
In 1981, President Reagan signed Executive Order 12291 requiring both the costs and benefits of any new major regulation be considered prior to federal implementation. For the decade prior to Executive Order 12291, federal and state environmental regulators struggled to find cost effective ways to implement environmental regulations imposed by the Clean Air and Clean Water Acts of the early 1970’s. Unfunded mandates imposed on states resulted in inertia that saw few environmental improvements during the decade after the Clean Air and Clean Water Acts were passed, and regulatory stalemates were a regular occurrence due to the perceived high cost of implementation. By requiring cost-benefit analysis, Reagan’s Executive Order promised to reduce the cost of regulation by selecting only those regulations that promised to provide benefits in excess of costs, thus promoting environmental improvements without over-burdening economic growth after the lean economic times of the 1970’s.
Those in favor of less costly regulation applauded the use of cost-benefit analysis for regulatory decisions. As a 1981 story in the New York Times put it:
“Administration and business officials and others who applaud the President's decision say that the uniform application of cost-benefit analysis...will stem the tide of unnecessary regulation that they say have been a severe and growing burden to the nation’s economy. “
Opponents of Executive Order 12291 countered that the use of cost-benefit analysis was simply an end-around for those opposing environmental regulation, that putting ‘prices’ on environmental goods diminished the contribution of environmental goods to the collective good, and that comparisons based solely on dollars can be easily manipulated.
Despite the objections, Executive Order 12291 was issued and cost-benefit analysis has become a standard tool for environmental policy analysis. In fact, cost-benefit analysis has been so successful as a tool for policy analysis that every administration since Reagan has endorsed its use.
On June 7, EPA Administrator Scott Pruitt, announced the intent to introduce a new EPA rule for public comment addressing cost-benefit analysis that effectively suggests removing the measurement of many co-benefits in consideration of environmental regulations. In a surprising bit of irony, Administrator Pruitt argues that the measurement of benefits in consideration of environmental regulations has resulted in the implementation of too many costly regulations that harm business and has hampered economic growth—the exact argument that Reagan-era administration and business officials used in favor of cost-benefit analysis in 1981.
What has changed since 1981? The simplest answer is that economists who specialize in the measurement of the benefits of environmental improvements have clearly demonstrated that there are large and measurable benefits to society of improving environmental quality thus providing justification for economically defensible environmental regulations.
Post-executive order 12291, a burgeoning line of academic inquiry emerged for the measurement of the benefits of environmental regulations. Putting benefits on equal footing with costs required the measurement of benefits that are not ‘priced’ in typical markets. Assigning ‘prices’ to non-market environmental outcomes, like the benefits of improved drinking water quality, or the benefits of preventing early deaths from excessive exposure to dirty air proved to be a manageable task, and highly valuable. By measuring the costs AND benefits of proposed regulations, federal agencies, like the EPA, were quickly able to implement low cost environmental regulations that yielded societal benefits that far exceeded the costs of implementation without stifling economic growth. For example, in a 2005 retrospective assessment of the costs and benefits of the sulfur dioxide cap-and-trade program in the EPA’s Acid Rain Program implemented under Title IV of the 1990 Clean Air Act, economists found that the costs of sulfur dioxide reductions from coal-fired electricity generation were half of what was expected, and after including the health, recreation, and aesthetic benefits of reduced sulfur dioxide emissions, the benefits of those reductions exceeded the costs of the Acid Rain Program by a factor of 40!
Since the environmental movement of the 1960’s and 1970’s, economists have largely come down in support of the use of efficient regulation, based on cost-benefit analysis, to address environmental concerns. A 1990 survey of members of the American Economic Association found that 60% of economists surveyed disagree with the statement “Reducing the regulatory power of the Environmental Protection Agency (EPA) would improve the economic efficiency of the U.S. economy.” Only 12% agreed with the statement. These numbers remained largely unchanged when the survey was repeated in 2000. A more recent survey of members of the Association of Environmental and Resource Economists found that 96% of those surveyed disagree with the statement that “Unregulated markets provide public goods in optimal quantities.” This was the single statement that yielded the highest level of agreement among the economists surveyed—a group notorious for being unable to agree with each other. In short, there is a surprising degree of agreement among economists that environmental regulation is not only good for the environment, but when designed properly is defensible on economic grounds and unlikely to limit economic growth.
Contrary to early fears, putting a ‘price’ on the environment has encouraged decision makers to recognize the scarce nature of our natural capital. Rather than reducing “all decisions to simple-minded weighing of dollars,” the pricing of nature has forced everyone to recognize that the alternative to pricing nature is assuming it is free to exploit. Assigning dollar values to the benefits of our natural and environmental resources allows us to use the power of markets and economics to design policies and regulations that benefit all.
The benefits of many environmental regulations and the resulting environmental improvements are large, demonstrable, and economically defensible and cannot be simply willed away.