Failing the cost-benefit test

The R. Gallagher coal-fired power plant in Indiana emits over 50,000 tons of sulfur dioxide per year. Sulfur dioxide is a major component of particulate matter — a form of pollution known to cause adverse cardiovascular and respiratory health effects. Sulfur dioxide also mixes with other pollution in the atmosphere to form acid rain. As a result of these adverse health effects, the Office of Management and Budget estimates that each ton of sulfur dioxide released into the atmosphere imposes $7,300 in costs on the American public. This means that the R. Gallagher facility imposes over $370 million worth of costs each year.

Michael Crichton Environmentalists have fought for years to clean up or shut down dirty power plants like R. Gallagher. According to an analysis by the Environmental Integrity Project, the dirtiest fifty plants account for 40 percent of sulfur dioxide emissions, but only 13.7 percent of the electric generation. If we cleaned up the worst of the worst, we would make tremendous progress in improving the quality of the nation’s air.

What makes the existence of plants like R. Gallagher so galling is that there is absolutely no reason why they should be allowed to pollute the way they do. Given the massive social costs imposed by plants like R. Gallagher, it makes basic economic sense to invest in pollution control technology — or even build an entirely new efficient plant next door and shut the facility down entirely.

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The Bush administration has had almost eight years to fix the problem of R. Gallagher. Despite its professed allegiance to the cost-benefit principles that reveal pollution from the plant as an economic disaster, the administration has done nothing to stop it. Congress, which contains many ostensible fans of cost-benefit analysis as well, hasn’t closed the grandfathering loophole in the Clean Air Act that keeps R. Gallagher in business. When tougher environmental regulation is so clearly backed by sound economic analysis, the only explanation for the policy gap is a failure of the political process. This is not an ideological question; it is not a question of competing values. R. Gallagher, and similar polluting plants, stand as perfect monuments to a political system that has failed the American public.

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Eighty percent of success is showing up

But these dirty plants can also serve as an example of how environmentalist can use economics to forward their agenda. Since Ronald Reagan placed cost-benefit analysis at the center of his deregulatory agenda in 1981, environmentalists have developed a strong allergy to economic analysis. They rarely participate in the debates over how cost-benefit is conducted, and do not place economic analysis at the center of their arguments for new and stronger regulation. On the other hand, antiregulatory groups like trade associations representing industrial polluters and conservative think tanks have embraced cost-benefit analysis. They argue that economic analysis shows deregulation is a good thing.

The asymmetry of participation has had several negative consequences. First, proregulatory interests consistently lose ground before the courts and OBM, which for nearly three decades has reviewed all “significant” regulations. Because OMB and the courts look to cost-benefit analysis, groups that cannot frame their arguments in economic terms are bound to lose.

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Second, cost-benefit itself has become biased against regulation. It has been shaped by antiregulatory interests with little input from proregulatory interests, resulting in the adoption of several flawed techniques that tend to underestimate regulatory benefits and overestimate regulatory costs.

Finally, proregulatory interests have lost public approval as they have allowed themselves to be portrayed as extremists in pursuit of “big government.” This loss of public support saps political will for new and updated regulatory programs.

Environmentalists made a particularly grave error by failing to advocate for more neutral cost-benefit analysis during the Clinton administration. When Bill Clinton took office, many expected him to drop cost-benefit analysis from the process of regulatory review. Instead, he embraced it, and took some steps to make it more transparent and fair. Environmentalists had eight years to try and remove the antiregulatory biases from cost-benefit analysis, but they let the opportunity pass. I served on an EPA committee charged with making recommendations about cost-benefit analysis to the agency, and during all of our meetings — which were always well attended by industry groups pushing an antiregulatory agenda — environmentalist never came. When negotiations are conducted with an empty chair in the room, it is hardly surprising when the results come out skewed.

Cost-benefit biases

Many fallacies have made their way into cost-benefit analysis because of this lopsided participation. For example, it too often accounts for unintended negative consequences of regulations without also accounting for similar positive consequences. When setting fuel efficiency standards, the National Highway Traffic Safety Administration assesses negative consequences — like deadlier auto accidents associated with smaller cars — while ignoring positive side effects — like reduced greenhouse gas emissions. The result is weak regulation.

Another example in debates over environmental regulation is the myth of the “health-wealth” tradeoff — the notion that any economic regulation, by reducing economic productivity, will result in loss of life, because income and wealth is correlated with longer life. However, the assumption underlying the idea of a health-wealth tradeoff — that higher income causes people to be healthier — is contradicted by the most recent research on the subject. This research shows the inverse causation, that better health leads to higher income, and that education causes both higher wages and better health.

These two fallacies are among many others that bias cost-benefit analysis against environmental regulation.

Mending cost-benefit

As a new administration enters office, it is important that environmentalists not miss another opportunity to reform cost-benefit analysis. It is not going away. For nearly thirty-years, cost-benefit analysis has been required of all major federal regulation. It has been embraced by both Republican and Democratic administrations, and it is exceedingly unlikely that any new administration will jettison it altogether — it is simply necessary to anticipate the likely economic effects of large regulatory programs.

Perhaps more importantly, cost-benefit analysis can be used to promote the agenda of environmentalists. As we all know, climate change poses grave risks at a global level. Dealing with those risks will not be easy — or cheap. While all three presidential candidates acknowledge that climate change is a problem, and that controls on greenhouse gases are necessary, there is great distance between a campaign promise and a final rule. In order to convince politicians and the American public to overcome their concerns about the tectonic economic shifts greenhouse gas controls will create, environmentalists will need to muster sound analyses showing that their views are justified by good economics.

The country is also in the midst of an economic slowdown, following on the heels of stagnant growth in wages during the Bush administration. Economic anxiety is growing, as recent focus in the Democratic primary on NAFTA and the price of gasoline demonstrates. Without sound economic analysis showing that strong environmental regulations are needed, a public in the grip of job-losses and economic insecurity will look askew at proposed regulation deemed to be “burdening” the economy.

This time, instead of fighting — futilely — to end cost-benefit analysis, environmentalists should fight to mend it. For the past three years, my co-author Michael Livermore and I have studied how cost-benefit analysis has been used, and abused, in environmental law. These abuses are not inherent in cost-benefit analysis, but have arisen because the debate over how cost-benefit analysis has been dominated by industry trade associations and antiregulatory scholars. The only way to transform cost-benefit analysis into a more neutral tool is to take up the debate, to show where cost-benefit analysis has been twisted to justify and antiregulatory agenda.

That is why New York University School of Law will launch an Institute for the Study of Regulation this summer. The purpose of the Institute will be to correct the antiregulatory biases in cost-benefit analysis and show that smart environmental and public health regulation is justified on economic grounds. We hope to work with other organizations in the environmental and public health community to show that regulation is part of a thriving and efficient economy and that under-regulation can be just as costly in economic terms as over-regulation.

There are many symbols in the history of the environmental movement: Storm King Mountain, TVA v. Hill, the Warren County PCB Landfill. Each represents important steps that were taken in this country towards environmental responsibility. By forging a new cost-benefit environmentalism — one that does not fear economic analysis but instead uses both reason and compassion to justify strong environmental rules — perhaps R. Gallagher can become a symbol of something other than political failure. By using economics to show just how wasteful under-regulation can be, cost-benefit environmentalism can be the key to creating the political coalition necessary to make America richer by regulating more wisely.