Common Tragedies

Thoughts on Environmental Economics

Guest post: Michael Livermore on cost-benefit analysis

Posted by Daniel Hall on October 27, 2008

We’ve got a special guest post today from Michael A. Livermore.  He is the Executive Director of the Institute for Policy Inegrity (IPI), and the author, along with Richard L. Revesz, of Retaking Rationality:  How Cost-Benefit Analysis Can Better Protect the Environment and Our Health.

The Perfect Storm

Our next President will face triplet crises on the economy, environment, and energy.  A fiscal crisis teetering on recession, uncontrolled greenhouse gases, and oil-rich dictators profiting from sky-high prices at the pump.  With these three major storm fronts rolling in and threatening to collide, we’d better be prepared with a good plan.  And I don’t think evacuation is an option.

Navigating the course

These problems will not be solved by piecemeal policies. To steer us out of this mess, the next administration will need to use regulation and government oversight.    One interesting by-product of the wreckage on Wall St. is that many folks are taking a second look at regulation. But if we’re going to regulate, no one is going to be interested in a 1970’s redux.  We need smart, nimble, and well-balanced rules to tackle the problems of the 21st century.

In the new policy brief, from the Institute for Policy Integrity, we prescribe a way for McCain or Obama to accomplish this.  Task Number One:  the new administration will seriously need to upgrade the way they do cost-benefit analysis.

Since the days of Ronald Reagan, cost-benefit analysis has been required for all significant regulation.  But over the past three decades, industry and antiregulatory interests have had too much freedom to shape these studies.  Many significant biases now exist in how cost-benefit analysis is used and how it is performed, resulting in lax or a lack of regulation or government oversight.

Our policy brief prescribes specifics on how the next administration can balance the scales.  For example, oftentimes, “countervailing risks” of regulation are given significant attention, while “ancillary benefits” are given short shrift.  For example, the increased risk due to smaller cars is often counted as a cost of fuel efficiency rules, but the reduction in greenhouse gases is ignored or undervalued.  Last year, the Bush Administration lost a legal challenge over its light truck fuel-efficiency rules because it did not count the benefits of climate change reduction.  Failing to account for ancillary benefits results in deflated estimates of net benefits, which ultimately reduces regulatory stringency.

The policy brief also recommends a new procedure that would allow groups that are affected by agency inaction to petition the central reviewer and use cost-benefit analysis to show that the agency should be acting.  In this way, cost-benefit analysis can serve not only as a check on regulation, but also a prod to move agencies forward that are stuck in a rut or overcome with inertia.

One of the most offensive inefficiencies of current usage of cost benefit analysis is that it is often not used in the context of deregulatory decisions.  When the Bush Administration proposed changing how power plants were treated under the Clean Air Act’s new source review program—changes that would have massive economic, public health, and environmental consequences—no cost-benefit analysis was done because the agency claimed the regulations were not “significant.”  Recently, new rules from the Department of Labor that could lead to more toxic workplaces were also not subjected to cost-benefit analysis, although they are likely to have significant consequences over the long term if they are adopted.

Finding safe harbors

With sound use of reformed, fair cost-benefit analysis, the next administration can successfully navigate this storm, leaving ideological decision-making and special interests politics in the dust bin of history.  Smart economic policy, smart energy policy, and smart environmental policy are mutually reinforcing.  And since we literally can’t afford to ignore any one of them, we will need to decide carefully how to address all three together.

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