In this class, we’ve studied cost-benefit analysis and how that can be used as a tool for regulatory decision-making. Today we’re going to think carefully about whether and how CBA or other such tools should be used to determine when and how to regulate. To do this, we’re going to focus on a particular court case with far-reaching implications.
The Clean Air Act of 1963 is a federal law in the US intended to control air pollution. It was a landmark piece of legislation, both in the US and internationally, and has been incredibly influential in environmental policy (for example, it was the first environmental legislation in the US to allow citizens to sue to enforce the statute—such “citizen suits” are now common in environmental law). The CAA is administered by the Environmental Protection Agency (EPA), which also administers many other federal government environmental statutes.
In 1990, concern about acid rain, ozone depletion, toxic substances, and other air pollution issues led Congress to pass the Clean Air Act Amendments of 1990. These gave EPA more authority to regulate air pollution, expanding their scope to cover nearly 180 additional kinds of air pollution. The NRDC recently estimated the annual net benefits of the CAA to the US economy to be on the order of $3.8 trillion (the link has a pretty cool map where you can explore how these benefits are distributed, check it out sometime). For context, US annual GDP is on the order of $20 trillion. A large portion of these benefits are health-related, e.g. avoided deaths and illnesses—the EPA has a short summary of these benefits and costs with a similar conclusion, including a sensitivity analysis of uncertain benefits (the range of benefit-cost ratios is 3-90, with central estimate over 30).
Along with the Amendments, Congress also developed procedures directing EPA to study the effects of hazardous pollutant emissions from power plants on public health, and to regulate them if “regulation is appropriate and necessary”. The CAA states that EPA must enforce minimum (“floor”) standards on emissions and must consider costs and other factors when implementing more stringent (“beyond-the-floor”) standards. EPA typically uses the CAA to regulate pollution sources, and interpreted the CAA to include these power plants. The questions then became whether the procedures Congress developed for power plants made such regulation (particularly for coal and oil-fired power plants) “appropriate and necessary”, and whether the CAA should be used to develop/enforce the regulations.
In 1998, EPA concluded that such regulation was, in fact, “appropriate and necessary”. In 2012 they reaffirmed this finding and put forth floor standards to regulate mercury and other hazardous air pollutants due to the health and environmental risks they posed. EPA estimated these regulations would cost regulated power plants $9.6 billion per year, but concluded that “costs should not be considered” when regulating these power plants. They concluded that although they could not “fully quantify the benefits of reducing power plants’ emissions… the Agency estimated that the quantifiable direct benefits were worth $4-6 million per year, with ancillary benefits worth $37-90 billion per year.” These ancillary benefits, often referred to as “co-benefits” in the climate change context, include reductions in particulate matter and sulphur dioxide—pollutants not covered by the procedures Congress put forth, but covered under the CAA Amendments. However, the EPA has conceded that while they accounted for the ancillary benefits in the regulatory impact analysis, that analysis “played no role” in their “appropriate and necesary” finding.
23 states, along with a number of non-profits and corporations, sued and demanded EPA’s finding be reviewed. The US Circuit Court for the District of Columbia upheld the EPA’s decision. This has escalated to the Supreme Court.
This case brings a number of important questions before the Court, perhaps most foundational among them the role of cost-benefit analysis in regulatory decision-making. Proponents argue that using CBA to better understand the costs and benefits of different options can help ensure regulations maximize societal welfare.
Opponents argue that CBA is misleading, in large part because benefits and costs can be highly uncertain and the kind of research necessary to obtain more accurate estimates would needlessly bog down the regulatory process. The opponents also object to putting a dollar value on health benefits (e.g. reductions in morbidity or premature mortality), claiming they either can’t or shouldn’t be monetized. They point to informal, qualitative “weighing of pros and cons” as preferable to formal, quantitative CBA if benefits and costs must be weighed, and alternative approaches like “feasibility analysis” or “cost-effectiveness analysis” as being more appropriate to selecting specific options.
(“Feasibility analysis” involves identifying the most stringent level of environmental protection deemed technologically and economically feasible. The costs are considered in determining economic feasibility, and existing technologies are considered in determining technological feasibility. “Cost-effectiveness analysis” takes a single regulatory goal, e.g. “save a human life”, and compares the costs of achieving that goal under different regulatory options. Neither involves quantifying and monetizing benefits and comparing benefits and costs as in CBA.)
Working in groups, discuss arguments for and against the proposition below:
“EPA should be required to conduct formal cost-benefit analyses in determining whether and how to regulate air pollution, both in the case above and generally.”
Your goal is to improve your collective understanding of the issues involved, not to prove that one or the other position is correct (though you may come to such a conclusion). Consequently, please consider strong arguments on both sides, and actively evaluate where they hold up and where they fall short. Which issues seem key in your analysis, and which seem only incidental?
(To align your incentives with mine: when we return to class you will be asked to present and critique arguments on a randomly-chosen side in a collaborative debate format.)