In New Articles, Member Scholars Highlight Costs of Cost-Benefit Analysis

Imagine you're in the market for a new furnace. You decide to buy a more fuel-efficient system — even though the price tag is higher — because it will lower your monthly heating bills. Another selling point: The fuel-efficient furnace emits less carbon into the atmosphere — a benefit you can't quite quantify but that you value nonetheless for its small salubrious effect on the planet.

Policymakers go through a similar — though much more complex — process when implementing laws. But an obscure federal mandate known as cost-benefit analysis renders them unable to fully account for costs and benefits that are difficult to measure in dollars and cents, like the large-scale value to society of federal rules that protect public and environmental health.

Despite its name, a true analysis of a rule's full benefits is impossible.

I mean, really: How can public officials put a price on a stable climate or clean air, water, and soil, now or in the future?

To put a finer point on it, how can economists at the U.S. Environmental Protection Agency (EPA) quantify the cost of the labored breath of a child who lives across the street from an underregulated power plant spewing clouds of toxic pollution into the air? And how can officials in a back office at the White House weigh that — not to mention its beyond-exponential effects on people and planet — against the costs to power companies of controlling their pollution?

More broadly, what precisely is the collective economic value of health, safety, and equity — and continued life on a habitable planet — to our country, and who should pay the price? Economists answer this question in part through the so-called "value of a statistical life," an accounting gimmick that is absurd on its face and – shocker! – deeply discriminatory.

Regardless of who should pay the price, we all know who actually does: low-wealth people of color, no thanks to centuries of systemic oppression and ongoing discriminatory policies.

Dan Farber, a law professor at the University of California at Berkeley and a Member Scholar at the Center for Progressive Reform, raises these types of concerns about the controversial practice in a new cover story in The Environmental Forum, a flagship publication of the Environmental Law Institute. In his piece, Farber tells the little-known tale of this arcane rulemaking process over the last four decades, since Ronald Reagan first ordered executive branch agencies to make it a major part of their decision-making process in 1981.

He also weighs the pros and cons of the procedure, known as cost-benefit analysis. Though the analysis is at times useful, he ultimately concludes that its, errr–, costs ultimately outweigh its benefits, at least in current practice.

"There is a case to be made for retaining cost-benefit analysis as part of the decisionmaking process," he writes, especially to determine whether a given rule's costs and benefits are "too far out of alignment" or "outside the zone of reasonableness."

A 'Pipedream'

But the notion that the analysis can boil down all relevant information into a single, definitive number is a "pipedream," he writes: "The monetized results will never be able to include everything relevant to social policy and will always incorporate judgment calls about uncertain parameters."

In a related opinion piece, CPR Member Scholar Amy Sinden, who teaches law at Temple University, goes further, calling cost-benefit analysis a false promise. "The idea that we can just plug numbers into a mathematical formula that will spit out objectively determined, welfare-maximizing public policy prescriptions" is alluring – but apocryphal, she argues.

Sinden cites a 2019 study she published that identified pervasive data gaps that prevent EPA from fully accounting for the benefits of controlling numerous pollutants, let alone the value of dignity, equity, and human suffering. Ultimately, she concludes, cost-benefit analysis doesn't yield much insight — but does have a chilling effect on public protections.

"EPA personnel are afraid to propose rules with unquantifiable benefits that prevent the cost-benefit math from coming out right — for fear of reprimand by the bean counters at the White House Office of Information and Regulatory Affairs," she writes, referring to the executive branch office charged with reviewing agency rules.

Farber, for his part, urges public officials to stop using cost-benefit analysis as a litmus test and instead take a variety of factors into account, including unquantifiable benefits, risks, and implications for employment and equity, when developing and issuing new rules.

That said, he cautions against abandoning the practice altogether. Estimating the social cost of carbon, for example, may be difficult but nonetheless offers a helpful guidepost regarding justifiable costs, consistency in rules across agencies and administrations, and market valuations of carbon emissions. "Something important would be lost if we substitute a dashboard of qualitative information for this quantified estimate."

[Unfortunate note: A federal court recently ruled against consideration of the social cost of carbon in federal rulemaking, prompting the Biden administration to warn about delays to executive actions.]

Sinden, meanwhile, says "scrappy, street-smart tools" like feasibility studies, cost-effectiveness analysis, and multifactor balancing support rational decisionmaking. Ultimately, she writes, the Biden administration should "resist the false allure" of cost-benefit analysis "and instead reaffirm the primacy of federal agencies and their statutory mandates in regulatory decisionmaking."

Wise words indeed.

For more, read Farber and Sinden's pieces in The Environmental Forum, subscribe to our email list, and follow us on social media.