What are the Social Costs and Benefits of EPA's Various Greenhouse Gas Regulations?

Just last week, the EPA sent for OMB regulatory review one of several proposed regulations on greenhouse gas (GHG) emissions (see here). This is another important step in a regulatory process that began on Dec. 7, 2009, when the EPA issued an "Endangerment Finding" for GHGs, which requires their regulation under the Clean Air Act. Among the regulatory proposals already completed or in the pipeline are: (1) a mandatory GHG reporting rule (see here); (2) a "tailpipe" rule to control motor vehicle emissions of GHGs (see here); (3) sequestration rules to govern carbon capture and storage projects (see here); (4) the GHG "Tailoring Rule," to limit the number of stationary sources of GHG emissions subject to regulation under the Clean Air Act (see here); and (5) a  "Scheduling Rule," adopted pursuant to a court settlement according to which EPA must issue final regulations imposing New Source Performance Standards on electric power plants and refineries by the middle of 2012.

Each of these regulations is controversial and entails significant economic costs. And the question OMB will be asking in regulatory review is whether the costs are justified by the benefits. As required by statute and by executive order of the president, EPA must prepare a "regulatory impact analysis" (RIA) for each major rule, and the central feature of the RIA is a cost-benefit analysis (CBA). EPA has not completed RIAs for its "Scheduling Rule" (which, after all, does not substantively regulate emissions) or its proposed "Sequestration Rule." It has, however, published RIAs for its "Tailpipe" and "Tailoring" rules (see here and here).

On the EPA's analysis, the "Tailpipe Rule" will provide around $188 billion in net social benefits over the course of its lifetime, and the "Tailoring Rule" is expected to provide around $193 billion (and perhaps double that, depending on what EPA ultimately decides for the third stage of the phase-in process) in net social benefits. However, the net social benefits of the "Tailoring Rule" have to be taken with several grains of salt because it is entirely about exempting (relatively) smaller emitters of GHGs from regulation. In this respect, the social benefits provided by the "Tailoring Rule" are not benefits stemming from regulation but gross benefits stemming from the lack of regulation that otherwise would be subject to regulation under the Clean Air Act. They are gross, rather than net, benefits because they are not offset against the social costs of the GHG emissions from the sources that the rule exempts. Moreover, one wonders how EPA determined just what the regulatory savings are, as it has yet to prepare an RIA estimating the costs of not-yet-determined regulations on plants that are not exempted by the "Tailoring Rule." As a CBA, the EPA's RIA for the "Tailoring Rule" is neither very informative nor persuasive.

Pending more information about the costs and benefits of the various GHG regulations, it is too early to say that they will, overall, be good or bad for social welfare in the US. So far, about all we can conclude is that, on EPA's own estimates, the "Tailpipe Rule" appears economically sensible; absent any major flaws in EPA's CBA for the rule, the positive outcome should make it difficult for political opponents to overturn it (pursuant to the political-economic analysis of CBA presented in my new working paper, here). The biggest hurdle for the "Tailoring Rule" will not be economic objections but legal ones (lawsuits already have been filed) because of the way EPA has had to de facto amend the Clean Air Act to regulate without over-regulating GHG emissions from power plants.

One development that should assist EPA in preparing future CBAs for its GHG regulations is the federal Inter-agency Working Group's schedule of valuations for the "social cost of carbon," published in 2010. The  central estimate for 2010 (using a 3% discount rate) is $21.40 per ton of CO2eq, rising to $23.80 by 2015, $26,30 by 2020, and $44.90 by 2050. Even though these valuations are on the low side (according to some more recent literature estimating the social cost of carbon), they should help EPA to justify economically its various proposed GHG regulations.

"Toward a Political-Economy of Cost-Benefit Analysis"

My new working paper of that title is available for download here. Actually, it's not a brand new paper, but a substantially revised and refocused version of a working paper I first posted a couple of years ago, and recently pulled out of mothballs. Here is the abstract:

This is a substantially revised, refocused, and updated version of an earlier draft paper, exploring the significant role Cost-Benefit Analysis (CBA) plays in  facilitating or impeding legislative and regulatory policy decisions. The paper centers around three case studies of CBAs EPA prepared for: (1) Clinton Administration changes to Clean Air Act air quality standards for ozone and particulate matter; (2) President Obama's recent decision to suspend EPA's reconsideration of the Bush Administration's air quality standard for ozone; and (3) the George W. Bush Administration's "Clear Skies" legislative initiative. The first two case studies demonstrate, between them, how well-constructed CBAs can facilitate social welfare-enhancing and impede welfare-reducing rules, even in cases where explicit consideration of costs is legally prohibited. The third case study tells a more complex story of how CBAs can be manipulated either to promote welfare-reducing regulations or impede welfare-enhancing regulations. When that happens, however, the virtuous transparency of CBAs renders those efforts liable to discovery and disclosure, as in the case of the Bush Administration's failed "Clear Skies" initiative. The paper concludes with an assessment of implications of the case studies for our understanding of the role of RCBA in political (both legislative and regulatory) processes, and with a call for more qualitative and quantitative empirical research on the use and abuse of RCBA as a political tool. 

The Social Cost of Carbon at ABA SEER

The American Bar Association's Section on Energy, Environment, and Resources (ABA SEER) is holding its annual meeting in Indy this week. Yesterday, I was on a really fun panel on the social cost of carbon (SCC), which the federal government set at $21.40 per ton for 2010 (rising from that year to nearly $50 per ton by 2050). The only legal significance of the SCC at this point is that federal, executive-branch agencies must use the cost figure in calculating costs and benefits of proposed regulations. This has a salutary effect of forcing agencies to at least confront the problem of climate change in everyday rule-making activities (except to the extent they farm out preparing of CBAs to outside consultancy organizations). But no one on the panel thought that incorporating the SCC into regulatory decisions would significantly shape those decisions; the consensus, on the panel at least, was that the federal government's SCC is too low to do that, and also lower than it should be.

The federal SCC has virtually no current implications for lawyers outside of federal agency/regulatory practice. For that reason, I was somewhat surprised to see that the (fairly large) room was pretty well packed for the panel. During the question/discussion period, it became clear that a number of those in attendance were there just because they were interested in learning more about the problem of climate change and the challenge of climate policy. Of course, some corporate lawyers might have attended because they foresee a time when the SCC will have relevance for their companies, e.g. in the form of a carbon tax.

Here is the outline of my own presentation from the panel:

Presentation on the SCC.aba SEER.oct 2011

This afternoon, I'm heading back to Indy because the I.U. Maurer Law School is hosting a reception for its alums and current students who are attending the conference. (A bit of irony here, as I moved to Bloomington to avoid the commute from Indy. Indeed, I have to go back to Indy a third day in a row on Saturday to pick up my wife at the airport).  

Regulatory Cost-Benefit Analysis and Collective Action

A new, expanded, and improved draft of my paper of that title can be downloaded from SSRN. Here is the abstract:

This updated draft paper explores the significant role Regulatory Cost-Benefit Analysis (RCBA) plays in facilitating or impeding collective action. Through case studies, the paper shows that well-constructed RCBAs have (1) facilitated collective action (including in cases where explicit consideration of costs is legally prohibited) by muting political opposition; and (2) helped to obstruct welfare-reducing rules from being promulgated. RCBAs can of course be manipulated to obstruct social welfare-improving collective action or to promote inefficient policies. However, the fact that RCBAs require transparency makes those efforts liable to discovery and disclosure, as in the case of the Bush Administration's failed "Clear Skies" initiative. The paper concludes with an assessment of implications of the case studies for our understanding of the role of RCBA in the regulatory process, and with a call for more qualitative and quantitative empirical research on the use and abuse of RCBA as a political tool in legislative and regulatory processes.

Obama and Ozone

According to reports in the New York Times (here) and other sources, President Obama is forcing EPA to back down from proposed regulations that would tighten up national air quality standards for ground-level ozone, which is a precursor to smog, much to the consternation of environmentalists. The EPA already had tightened up the ozone standard in March 2008, during the waning days of the Bush Administration, from 0.084 parts per million (ppm) to 0.075 ppm. Shortly after taking office, the Obama Administration announced a reconsideration of the ozone standard based on its belief that the science supported an even more stringent standard than the one the Bush Administration adopted.

The legal basis for the Obama Administration's reconsideration of the Bush Administration's standard is clear. The Clean Air Act requires EPA to set national ambient air quality standards (NAAQSs) to protect the health of the most vulnerable sub-populations in the US, based solely on scientific evidence (Clean Air Act, sec. 109, 42 USC sec. 7409). It cannot consider cost. This understanding of the Clean Air Act's plain language has been consistent since 1970. The US Supreme Court reconfirmed it in Whitman v. American Trucking Assc., 541 US 457 (2001), despite an amicus brief filed by several prominent economists arguing that the agency should not be prohibited from considering costs in deciding whether to adopt or amend NAAQSs.

As a result of its reconsideration of the Bush Administration standard, the Obama EPA proposed (here) reducing the primary NAAQS from 0.075 ppm to somewhere between 0.060 ppm and 0.070 ppm (along with a separate secondary NAAQS based on seasonal fluctuations in emissions). One unusual feature of this proposed rule was its failure to specify a precise numeric target for the ozone NAAQS, which left substantial uncertainty about where on the range between 0.060 and 0.070 it would finally come down. Even if we take it as given that the science supports a reduction in ambient concentration levels, it is difficult to understand why the EPA could not settle on a single number in its proposed regulation.

As noted earlier, EPA is legally barred from considering costs in setting NAAQSs. Nevertheless, it is required both by statute (the 1995 Unfunded Mandates Reform Act) and several Executive Orders to undertake regulatory impact analyses (RIAs) of all major proposed regulations. Thus, the EPA has to prepare cost-benefit analyses for new and revised NAAQSs, even though it is supposed to ignore them when actually setting the standards.

As I argue in a working paper, which I am currently in the process of revising (an older version can be viewed here), it is ludicrous to suppose that EPA does not consider the cost calculations it is legally required to undertake in setting or revising NAAQSs. The Clean Air Act requires EPA to considering revising NAAQSs for all regulated ("criteria") pollutants, including Ozone, every 5 years. If EPA only relied on the best science, it would almost certainly increase the stringency of its regulations every five years. The fact that NAAQS revisions are the exception rather than the rule since 1970, indicates that cost does play a role, if only informally, in EPA's decision-making. (I take this to be a good thing, though many of my fellow environmental law professors would no doubt disagree. It would be even better, in my estimation, if Congress allowed EPA to consider costs formally.)

In the case of the reconsidered Bush Administration revisions to the NAAQSs for ozone, the Obama EPA's supplemental RIA estimates that the Bush Administration's rule, revising the ozone standard to 0.075 ppm, would yield median net social benefits of $3.1 billion, as compared with $1.4 billion for a standard of 0.070 ppm, $0.7 billion for 0.065 ppm, and -4.8 billion for 0.060 ppm (all discounted at a constant rate of 7%). The figure below (from page S1-8 of the RIA) shows the range of costs and benefits under alternative standards. The bottom line is that the Bush Administration's selection of a 0.075 ppm yields higher net social benefits than any of the alternative standards the Obama Administration was considering.

The question that naturally arises, of course, is whether President Obama's decision to retreat from reconsideration of the Bush Administration's ozone standard is related at all (and, if so, to what extent) to the regulatory impact analysis. It would be naive to suppose that the decision had nothing to do with the cost-benefit analysis, especially given the political stakes. As the country approaches a presidential election year with a very shaky (to say the least) economy and high employment, President Obama would find it difficult and highly inconvenient to defend regulatory choices that are not significantly and obviously social-welfare maximizing. The EPA's RIA indicates that a shift from the Bush Administration's 0.075 ppm standard for ozone to a standard somewhere between 0.060 and 0.070 ppm would not significantly nor obviously enhance social welfare.

Of course, the Obama Administration cannot explicitly defend its decision to abandon its proposed tightening of the ozone NAAQs without violating the clear terms of the Clean Air Act (although Dan Farber, at Legal Planet, argues plausibly that the timing of the Obama proposal, prior to the next mandatory 5-year review in 2013, might exempt it from the Clean Air Act's prohibition on consideration of costs). However, if I am right that cost considerations, as well as practical politics, always play a role regardless of the letter of the law, then it seems much more likely than not that Obama's decision was substantially determined by EPA's RIA. Just as a positive cost-benefit analysis can insulate the EPA from negative political fall-out from new or revised regulations, so a negative cost-benefit analysis can create a political obstruction to regulation, even when costs are not supposed to count.

Between now and November 2012, we should not expect to see any new regulations emerging from the Obama Administration, including the EPA, that do not clearly and overwhelmingly pass a cost-benefit test, regardless of any legal constraints on the consideration of costs.

A FURTHER THOUGHT: The Obama Administration's withdrawal of the ozone NAAQSs from reconsideration opens the door for possible litigation, in which environmental plaintiffs would challenge the Bush Administration's decision to reset the primary NAAQS at 0.075 instead of some lower level. The scientific basis for that lawsuit would be the same as the scientific basis for the Obama Administration's reconsideration of the rule. If they prevail, the court would likely order the Obama Administration to re-open its reconsideration of the rule, which it could then do without having to take as much (if any) political heat for the results.

Indeed, this debacle over the ozone standards is yet another example of political ineptness by the Obama Administration. Lawsuits against the Bush standards already were filed when the Obama Administration took office. Instead of preempting those lawsuits by announcing that it would voluntarily reconsider the standards, the Administration probably should have let the lawsuits proceed before acting.

"Small Government" Made the Tragedy at the Indiana State Fair More Likely

An article in today's Indianapolis Star (here) observes that, in contrast to many other states and cities, neither the State of Indiana nor the City of Indianapolis regulates or inspects concert stages in any way because they are not considered "structures," no matter how large and heavy they are.

In other cities like Chicago, whoever constructs a concert stage must provide the city with detailed calculations, including calculations relating to potential stresses from wind gusts of up to 90 mph, before the stage is constructed. In more libertarian Indiana, we have been (at least to now) willing to put up with an admittedly small risk of numerous deaths and injuries, rather than raise the costs of entertainment on the supposition (similar to former Fed chairman Alan Greenspan's supposition that the financial markets would regulate themselves) that providers of concert facilities would take adequate precautions against what in fact happened in Indianapolis this past week. Of course, concert stage providers are subject to post hoc lawsuits; if a court determines that they failed to take "reasonable" precautions, they may be financially liable to those who were killed or injured - small comfort for those who lost loved ones in the tragedy, but a potentially valuable corrective for future concert-goers.

Indiana Governor Mitch Daniels, who responded emotionally to the tragedy, is a libertarian, who tends to think that more government inevitably is worse government. I wonder how he'll respond to legislative efforts that will surely be forthcoming to create a regulatory and inspection regime for concert venues in Indiana. Such regimes inevitably restrict market freedom, raise costs of doing business, and don't always lead to better outcomes. On the other hand, had such a regime been in place, it is significantly less likely (although the probability always remains above zero) that five people would have been killed and dozens more injured. What's the aggregate value of those lost lives and injuries, compared to the "regulatory burden" imposed on industry? That's not a question a dedicated libertarian would even ask. However, I'm a social-welfare consequentialist (which is hardly inconsistent with a large amount of liberty), rather than a strict libertarian.

What about Mitch Daniels? Well, he's certainly more of a libertarian than am I, but there seem to be limits to his libertarianism. Witness another headline in today's Indianapolis Star (here), with the title, "Governor sees hope for state smoking ban."

When Is an Executive Order Not an Order?

When it merely asks agencies to comply.

Traditionally, presidents have operated on the assumption that they have direct control, via Executive Orders, over the activities of Executive Branch agencies, but not "independent" regulatory agencies established by Congress outside the Executive Branch of government. A few years ago, Bob Hahn and Cass Sunstein, the later of whom is currently head of the Office or Information Regulatory Affairs in President Obama's Office of Management and Budget, wrote a paper (published in 2002 in the Pennsylvania Law Review) in which they argued that the President's could, by Executive Order, bind independent as well as Executive Branch agencies. Today, Mr. Sunstein took a step in the direction of testing  that argument, when the OMB published Executive Order No. 13579 on "Regulatory and Independent Regulatory Agencies."

 EO 13579 orders that independent agencies should promote the goal of producing a regulatory system that protects "public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation." The quoted language is from EO 13,563, which the OMB applied to Executive Branch agencies earlier this year. The new EO says that independent agencies should comply with the requirements of that earlier EO "to the extent permitted by law," and should produce a plan to do so within 120 days.

As a matter of principle, I support efforts to improve regulatory (and de-regulatory) decision making. But the new EO raises important interpretive questions, which, depending on how they are settled, could generate constitutional issues for judicial review.

Using words like "should" suggests that the White House is urging, but not requiring, the cooperation of independent agencies. On the other hand, an EO is by definition an "order." So, the question is, does the EO really impose obligations on independent agencies? The only way we'll find out, I suppose, is if one or more independent agencies declines to do what the new EO says they should do. If that happens, and the OMB tries to enforce the provisions against them, a constitutional separation-of-powers issue would arise for the courts to resolve.

UPDATE: Michael Livermore sent me the President's cover letter accompanying EO  13759, which would clarifies that the EO is not, in fact, obligatory on independent agencies. After noting what Executive  Branch agencies are "required" to do, the President goes on to write: "With full respect for the independence of your agencies, I am asking you today to join in this review and produce your own plans to reassess and streamline regulations" (emphasis added). Apparently, then, the new Executive Order is not an order at all, but a request, which seems a very odd use for an EO. Why didn't the President choose instead to issue less formal memorandum agency heads? My best guess (and it is only a guess), based on Hahn and Sunstein's 2002 article, is that this is a first tentative step toward a bolder assertion of presidential authority over independent regulatory agencies.

VSL in Regulatory Policy

Today's New York Times has an interesting story (at least for policy wonks) on changing and differing valuations of the Value of a Statistical Life (VSL) for purposes of regulatory cost-benefit analysis. Vanderbilt's Kip Viscusi, who has been working on this issue longer than anyone, is quoted in the article as supporting the increased valuations, as do I. However, I also agree with John Graham, Dean of the School of Public and Environmental Affairs at IU-Bloomington (and former head of the Office of Information and Regulatory Affairs at OMB under President Bush) that there is little justification for allowing different agencies to use different VSLs. Under current OMB rules, agencies are free to use any value between $1 million and $10 million, with $5 million as the recommended central estimate. That central estimate is clearly too low, and the range is too broad. It would be better if OMB would establish a figure for all Executive Branch agencies to use.

UPDATE: Dan Farber also agrees with the increase in the VSL (see here).

New Executive Order on Regulatory Impact Analysis

President Obama signed a new Executive Order (EO) today (available here), which does not replace but supplements the existing Executive Order 12866. The most significant  addition of the new EO is its requirement of regular post hoc regulatory reviews. Until now, federal executive branch agencies have only been required to prepare ex ante regulatory impact analyses (a form of cost-benefit) analysis for newly proposed regulations. This new requirement forces agencies to go back and periodically examine existing regulations to ensure that they are, and remain, cost-effective. It is a very sensible addition to the regulatory review process.

Unfortunately, the new EO does not address the issue of social discounting - the process whereby future streams of costs and benefits are expressed in present dollar values. I, for one, had been hoping that the new EO might adjust downward the current baseline discount rate of 7%, which is quite high especially for regulations with intergenerational effects.

Revised Report on Principles & Standards for Benefit-Cost Analysis

Richard Zerbe (Evans School, Washington) has published a revised draft of "Toward Principles and Standards in the Use of Benefit-Cost Analysis." The most significant alteration in this draft, prepared on behalf of the Benefit-Cost Analysis Center at the University of Washington, with funding from the MacArthur Foundation, is that, at my request, my name has been removed from the list of members of the Scientific Committee, who commented on early drafts of sections of the report. I wanted my name removed because, as noted in previous blog posts (here and here), the Scientific Committee did not get to see or comment on the report's recommendations for social discounting prior to publication. Those recommendations struck me as much higher than warranted by the literature, including the various white papers Professor Zerbe commissioned for this project.

All of the white papers can all be viewed here. None of them focuses predominantly on the issue of social discounting; only three of the papers even discuss social discount rates. Importantly, not one of those three papers supports the high discount rates recommended in Professor Zerbe's report. Joseph H. Cook's white paper "On Principles and Standards for Benefit-cost Analysis of Public Health Preparedness and Pandemic Mitigation Policies" finds "considerable agreement in the health evaluation field to use a real discount rate of 3%, and this rate has been codified in several cost-effectiveness guidelines" (p. 20). Lynn A. Karoly's white paper "On Principles and Standards for Benefit-cost Analysis of Early Childhood Interventions," observes the use of discount rates from 3 to 4 percent (p. 27). Finally, the white paper on "Behavioral Economics and Benefit-Cost Analysis" by Lisa A. Robinson and James K. Hammitt recommends hyperbolic discounting, with discount rates that decline over time, in stark contrast to the final report's recommendation of a single, high discount rate.

Mueller and Stewart on the Real Risk of Death from Terrorism

Here, in Foreign Affairs. Excellent stuff. I particularly like the table below, which ranks annual risks of death from various causes, including terrorism.

Preliminary Program of the Allied Social Science Associations Annual Meeting

You can view it here. The agenda contains hyperlinks to a fair number of the papers, including this excellent paper by Scott Farrow and Kip Viscusi, which provides a superior starting point for any serious effort to identify "best-practice" standards for Cost-Benefit Analysis.

I Prefer OMB's Current Approach to Discounting

Under current rules, the President's Office of Management and Budget (OMB) requires federal agencies to discount streams of future costs and benefits of regulations at alternative 7% and 3% discount rates. The reason for this is made clear in Circular A-4 (see here):

As a default position, OMB Circular A-94 states that a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent rate is an estimate of the average before-tax rate of return to private capital in the U.S. economy. It is a broad measure that reflects the returns to real estate and small business capital as well as corporate capital. It approximates the opportunity cost of capital, and it is the appropriate discount rate whenever the main effect of a regulation is to displace or alter the use of capital in the private sector. OMB revised Circular A-94 in 1992 after extensive internal review and public comment. In a recent analysis, OMB found that the average rate of return to capital remains near the 7 percent rate estimated in 1992. Circular A-94 also recommends using other discount rates to show the sensitivity of the estimates to the discount rate assumption.

                                                       *     *     *

The effects of regulation do not always fall exclusively or primarily on the allocation of capital. When regulation primarily and directly affects private consumption (e.g., through higher consumer prices for goods and services), a lower discount rate is appropriate. The alternative most often used is sometimes called the "social rate of time preference." This simply means the rate at which "society" discounts future consumption flows to their present value. If we take the rate that the average saver uses to discount future consumption as our measure of the social rate of time preference, then the real rate of return on long-term government debt may provide a fair approximation. Over the last thirty years, this rate has averaged around 3 percent in real terms on a pre-tax basis. For example, the yield on 10-year Treasury notes has averaged 8.1 percent since 1973 while the average annual rate of change in the CPI over this period has been 5.0 percent, implying a real 10-year rate of 3.1 percent.

For regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent.

New recommendations (here) from the Benefit-Cost Analysis Center at the University of Washington, sponsored by the MacArthur Foundation and authored by Professor Richard Zerbe, make the requirements of Circular A-4  seem almost liberal (something OMB critics could hardly imagine). Professor Zerbe validates  OMB's 7% base discount rate; as noted in a previous blog post (here), he recommends a range of discount rates from 6% to 9% (coming close to OMB's old baseline discount rate of 10%). However, Professor Zerbe recommends using only a single discount rate in any BCA, without the flexibility currently provided in Circular A-4 for alternative calculations using 3% discount rates in cases where the opportunity-cost of capital is less of an issue than present-versus-future rates of consumption.

In Professor Zerbe's view, the opportunity-cost-of-capital approach to discounting is the only correct approach, despite recent work by many other economists supporting consumption-based discounting (which generally implies lower social discount rates).

We can only hope that the MacArthur/Benefit-Cost Analysis Center recommendations on discounting do not influence OMB policy (or policies of similar state-level agencies). Otherwise, the consequences for socially beneficial environmental, health and safety regulations could be severe.

I Dissent

As a charter member of the Society for Benefit-Cost Analysis (SBCA), I presented a paper at the Society's very first meeting (subsequently published here), in which I recommended that responsibility for instituting principles and best-practice standards for benefit-cost analysis (BCA) should be removed from the agencies who produce and consume them. It would be better, I thought, if principles and standards were established outside the beltway by a group of independent economists, policy analysts, and even legal scholars.

Over the past few years, the SBCA, led by my friend Richard Zerbe of the University of Washington, has taken up the mantle, with financial support from the MacArthur Foundation. This week, Professor Zerbe has published a final report, "Toward Principles and Standards in the Use of Benefit-Cost Analysis: A Summary of Work." I was a member of the Scientific Committee and reviewed the report in draft, which did not at that point include a specific recommendation on the social discount rate.

While there is much to admire in the final report, I am dismayed at the section on discounting, which recommends the use of a single social discount rate of 6%-9%, validating the OMB's current baseline discount rate of 7%. Until I read the final report, I did not believe any serious economist outside of OMB or industry still believed that 7% is an appropriate rate at which to discount the future streams of benefits and costs of environmental, health and safety regulations. Moreover, I don't believe the analysis presented in the report is nearly sufficient to support that recommendation. Therefore, I strongly dissent.

In my view, the social discount rate for assessing the future costs and benefits of environmental, health and safety regulations should be half or less of Professor Zerbe's recommended 6%-9% rate. My view is consistent with the UK Treasury's schedule of discount rates (here), Marty Weitzman's findings in his article, Gamma Discounting (here), and recent recommendations to the Canadian government by Anthony E. Boardman, Mark A. Moore, and Aidan R. Vining (here).

Rose-Ackerman on Cost-Benefit Analysis

The always astute Susan Rose-Ackerman, the Henry R. Luce Professor of Jurisprudence in the Law School and Political Science Department at Yale (from which she also possesses a PhD in economics), has an interesting new paper, "Putting Cost-Benefit Analysis in Its Place: Rethinking Regulatory Review." Here is the abstract:

Policymakers need to reassess the role of cost-benefit analysis (CBA) in regulatory review. Although it remains a valuable tool, a number of pressing current problems do not fit well into the CBA paradigm. In particular, climate change, nuclear accident risks, and the preservation of biodiversity can have very long-run impacts that may produce catastrophic and irreversible effects. This article seeks to put cost-benefit analysis in its place by demonstrating both its strengths and its limitations. The Obama Administration should rethink the use of CBA as a way to evaluate regulatory policies and develop procedures to restrict its use to policy areas where its underlying assumptions fit the nature of the problem.

I don't think the paper breaks much new ground on the methodological or practical problems of CBA, but it does include an interesting discussion of an alternative called Impact Assessments (IA), which is widely used in the European Union and elsewhere. However, none of the various alternatives for CBA avoids the biggest problems, which include the valuation of non-market goods, the impossibility of  making unambiguous interpersonal utility comparisons, and the setting of social discount rates. Professor Rose-Ackerman is obviously correct, however, that CBA is a tool of only limited utility that should not be elevated to the role of decision rule in social or regulatory policy. She also usefully points out when cost-effectiveness analysis may be more suitable than CBA.

Finally, it's not obvious to me that creating a new organization within (or without) the White House on policy integrity would solve any of the problems she identifies. How would such an organization differ in structure, mission, or political orientation from the current White House Office of Information and Regulatory Affairs in the Office of Management and Budget? It's clear that government CBAs, among other kinds of analysis, require greater consistency in methodology and application. To that end, the Society for Benefit-Cost Analysis is in the process of developing "best practice" standards, which the White House Office of Information and Regulatory Affairs or reviewing courts might one day adopt (as I have recommended in earlier writings, e.g., here). But it's not clear to me that a brand new bureaucracy would improve the situation.