While climate change legislation works its way toward 60 votes in the Senate, President Obama’s EPA has been quietly working on some serious revisions to the guidelines it uses to conduct cost-benefit analysis. Tweaks they might make to the powerful but low-profile Guidelines for Preparing Economic Analyses could have major impacts on the environment and could spur greenhouse gas reductions if the Senate fails to take action.
The Guidelines is little known outside of EPA, but used regularly by the agency to design every major environmental regulation. Before any rule is adopted, it must go through an economic analysis according to the Guidelines. In the past thirty years, cost-benefit analysis has been often used with an industry bias, weighing the costs of action more heavily than the benefits. The result is that too often, regulators end up erring on the side of not addressing environmental problems.
The draft changes to the Guidelines are under discussion now and will hopefully be adopted this fall. These revisions would create a major shift in the status quo at EPA, ensuring more balanced cost-benefit analysis and leading to stronger levels of environmental regulation. Here is a breakdown of the four most significant changes being considered:
1. Stop Inflating Compliance Costs: Too often, the compliance costs of regulations are over-estimated because worst case scenarios are used to judge how business will be affected. Industry innovation of new, low-cost solutions are not considered so the proposed regulation seems more expensive. The new Guidelines would clarify how environmental regulations can lead to innovations that significantly reduce compliance costs over time.
2. Focus on Climate Change: The old Guidelines focused on “traditional” environmental problems like smoke stack emissions but failed to address the complexities of relatively new problems, such as climate change. The new version would zero-in on these newer problems as the preeminent environmental threats.
3. Measure Ecological Consequences: In the past, the full range of indirect environmental implications of its regulations, especially when it came to climate change, were often ignored. This creates a serious imbalance because the indirect costs of a regulation to industry are considered. The new recommendations warn analysts that focusing only on impacts that can be monetized will often skew towards under-regulation.
4. Look at Under-Regulation: Corrections in the Guidelines would require not only cost-benefit analysis of environmental protections, but also deregulation. This is a major shift. During the Bush Administration, deregulation of everything from air quality controls to mining practices as well as voluntary (read unenforceable) “solutions” to environmental problems went without any economic analysis. Under the new version of the Guidelines, this would not stand; the agency would have to justify their weakening actions with as much rigor as it has to justify its proactive measures.
The combined effect of these changes would be a significantly more balanced approach to the way environmental regulations are judged. They will bring a much needed equilibrium to the cost and benefit sides of the balance sheets and remove economically unjustified impediments to rules.
When used correctly, cost-benefit analysis is a friend to green advocates. There are some who wish that regulations didn’t have to go through an economic test; that agencies could institute new rules without justifying them in terms of dollars and cents. But ensuring that regulations pass cost-benefit muster reduces the risk of serious backlash and prevents environmentalists from getting clobbered as insensitive to the costs of environmental action.
Rather than focus on eliminating cost-benefit analysis, it would be better to work on improving it-for example, there were no recommendations to change how the agency deals with “discounting” benefits for future generations, a practice which can skew regulations designed to avoid passing catastrophic risks to our children. While the proposed changes to the Guidelines are a good start, there is significant progress to be made.
But more than any other reason, greens should advocate for correcting the imbalances in the cost-benefit process because when conducted fairly, the numbers are often on their side. By revising the Guidelines, the EPA is showing an awareness of the fact that economic analysis often justifies strong environmental rules. Environmentalists should be paying close attention.