Richard Revesz responds to Lisa Heinzerling, defending cost-benefit analysis
Cost-benefit analysis, correctly applied to many environmental problems, will show that strong environmental regulation is often economically efficient. Although some environmentalists, including Lisa Heinzerling in a recent post, have expressed reservations about the use of cost-benefit analysis to evaluate environmental rules, rejecting cost-benefit analysis instead of seeking to reform it would be a major strategic error for the environmental movement.
Heinzerling raises some legitimate concerns about cost-benefit analysis as it is currently practiced, but unfortunately she condemns cost-benefit analysis wholesale based on certain flaws that are not inherent to the technique. For example, Heinzerling argues that discounting benefits that accrue to future generations is a mistake, and results in “treating the future as less important than the present.” I couldn’t agree more — discounting benefits to future generations is a major source of anti-regulatory bias in cost-benefit analysis. In fact, my recent book with Michael Livermore, Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health, has a whole chapter attacking the practice of intergenerational discounting.
Such discounting is not a necessary part of cost-benefit analysis, as Heinzerling claims. Instead, it is a flawed methodology currently used in the regulatory process — in part, perhaps, because there have been too few environmental voices in support of cost-benefit analysis that does not use discounting.
Heinzerling also argues that it is the fault of industry and the federal government — not environmentalists — that cost-benefit analysis is biased against regulation. She points to a number of examples where environmentalists have advocated for better cost-benefit methodology. It is true that on several occasions, environmentalists and other pro-regulatory groups have become politically engaged on certain methodological issues.
Perhaps most notable was the successful fight against a practice of the Bush administration to undervalue risk reduction for older Americans, dubbed the “senior death discount” — another methodological fallacy explored in our book. The senior death discount was bad economics, and when environmentalists and others (including the AARP) organized to fight it, they handed the Bush administration an important defeat. This example underscores the importance of the environmental community engaging in the debate over cost-benefit analysis — when they fight on these issues, they can win.
But usually, they have been absent from the regulatory conversations in which the most important decisions on cost-benefit analysis were made. In particular, our book explores at length how the environmental community failed to take advantage of the opportunities provided by the Clinton administration to reform cost-benefit analysis. Instead of seizing the moment and working to counter the antiregulatory biases adopted during the Reagan and Bush Administrations, environmental groups declined to engage either in conversations with the Office of Information and Regulatory Affairs (the key player in the area) or with EPA as it developed its extremely important guidelines for the preparation of cost-benefit analyses.
Responsibility for the current impoverished state of cost-benefit is shared. Industry, in seeking less stringent regulation, favors cost-benefit methodologies that are biased against regulation. Federal regulators may, at certain times, have had anti-regulatory proclivities as well. But if pro-regulatory groups (and scholars like Heinzerling) focused more of their efforts on reforming cost-benefit analysis rather than futilely trying to persuade the federal government to abandon it, there would be fewer biases, and cost-benefit analysis would not be so manifestly anti-regulatory. This does not mean that cost-benefit analysis would be perfect — but it would likely be better.
To be sure, there are non-cost-benefit analysis reasons to regulate. But there are cost-benefit reasons as well, and environmentalists should use those reasons to buttress their arguments. By arguing that cost-benefit analysis is anathema to environmental values, Heinzerling does the environmental community a disservice by encouraging it to drop a potentially powerful set of arguments that could support its policy initiatives. Limiting the political coalition for strong environmental regulation is not a recipe for success in Congress. We need to use every tool in the kit to convince the entire American public that environmental regulation makes sense for everyone — and that environmentalists are not just trying to impose their set of preferences on the rest of the country. Cost-benefit analysis can be used to make this argument convincingly.
Heinzerling also makes an aesthetic case against cost-benefit analysis. She states that because environmentalists “prefer concreteness over abstraction,” they should reject cost-benefit analysis because “the glimpse of the infinite in a summer storm” is “foreign to the cost-benefit mindset.” Both of her premises are incorrect. First, environmentalists come in all shapes and sizes. The environmental movement embraces scientists and organic farmers, evangelical environmentalists and environmental economists. The movement is big enough to incorporate abstract thinkers. Second, even if some environmentalists do prefer the concrete to the abstract, it would be foolish to allow this preference to override the need to use data, models, and analysis — all necessary abstractions — to understand the pressing problems facing our planet.
It would be equally foolish to avoid making common cause with Americans who are not convinced by appeals to “spring’s first warbler” and who prefer hard numbers to back up policy choices. In building the political coalition for strong environmental rules, groups should call attention to the beauty of the natural world, our innate sense of justice, and our moral obligations to each other and the planet. But cost-benefit analysis, and economic arguments generally, fit comfortably among the range of reasons that people believe in strong regulation. As our book discusses, both reason and compassion need to be part of the arsenal of environmental groups.
Most pollutants — including all carcinogens — are no-threshold contaminants. They have adverse health effects at every concentration, though of course the effects are worse at higher concentrations. There is no such thing as a “safe” level. Without understanding the economic consequences of regulation, there is simply no intelligible way to decide how to regulate such contaminants because there will always be some residual exposure (whether one-in-a-million, one-in-a-hundred-thousand, or one-in-a-billion).
Furthermore, the argument that we should take the least costly path to reducing environmental health risks is very compelling — both politicians and the American public recognize that regulations can have benefits, but they are also closely attuned to the costs that are imposed. When environmentalists are reluctant to engage in cost-benefit analysis, they leave themselves open to the characterization that they are insensitive to the economic costs of regulation, and they can lose a great deal of their potential effectiveness in the political process.
As we prepare for the presidential election and the transition to a new administration, the time is ripe for the environmental movement to reevaluate its feelings about cost-benefit analysis. There is a growing awareness of the need to address a second generation of environmental threats like climate change. But the country is also in the economic doldrums, and there will be fear of any new rules that impose costs on the American public or are seen as hampering economic growth. To make much needed progress on environmental issues in this political climate — full of opportunities but also challenges — environmentalists would do well to drop the fight against cost-benefit analysis, and to take up the opportunity to reform it.