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Environmental Policy

Class 21 : Cost Benefit Analysis CofC Fall 2010. Environmental Policy. Econ Analysis of Enviro Issues. 1.5-2.5% of GDP in Enviro Protection; 1.5% of federal spending (compare with military, SS, Medicare EPA est that CAA provides 4 times benefit over cost

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Environmental Policy

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  1. Class21: Cost Benefit Analysis CofC Fall 2010 Environmental Policy

  2. Econ Analysis of Enviro Issues • 1.5-2.5% of GDP in Enviro Protection; 1.5% of federal spending (compare with military, SS, Medicare • EPA est that CAA provides 4 times benefit over cost • Controversial as economic analysis is “flawed by inefficiency, irrationality, and contradiction.” (p162) • Controversy focuses on 2 issues • Use of benefit-cost analysis (BCA) • Effectiveness of market based incentives (rather than C&C) (NOTE: Covered this for midterm)

  3. BCA: History & Context • Def’n: compare the net benefits to the proposed costs of action (usually a regulatory law), and benes must outweigh costs • Controversy stems (since 1970s) over Congressionally mandated procedures for setting envirostnds are insensitive to costs. • CAA & OSHA forbid BCA • All Presidents have included BCA in their analysis, with Reagan being the most aggressive (including an exec order) requiring a BCA in the form of a regulatory impact analysis (RIA). • Controversy: Order undermined Congress’ power/mandates on enviro regulation vs. sensible remedy because of costs and inefficiency • Clinton relaxed RIA stnds, but Congressional Republicans changed this to make RIAs permanent part of the process by time W. Bush took office. • W. then went further with an exec order that specifically mandated ALL agencies to have BCA as part of their environmental calculi. • Yet, standards and form of implementing BCA can and does vary, and to what degree, creating more controversy.

  4. Case for BCA • Meets Goal: achieve the given environ quality standard at the lowest possible cost • Ease: With “costs” as part of the calculi, should be able to parse which regulations are most desirable • Transparency:  accountability • Highlights missing information  can at least point in the right direction • Problem is incompetent analysis and exaggerating enviro benefits (over costs) • Excessive enviro costs hurt business/economy

  5. Case Against BCA • Easily distorted (often to advantage of regulated interests), who can exaggerate costs to undermine enviro protection • No attention to “learning curve”: As those in field gain experience & expertise, they can more fully identify where to save $$ • Benefits often underestimated b/c hard to calculate benes from river, forest, stream, etc. • Some Benefits shouldn’t have a cost  hazardous and toxic substances and waste • E.g. soot, threshold change from 15micrograms to 14, would save 24,000 lives but at cost of $1.9b. • Ignores equity: BCA lacks social conscience and not concerned with WHO bears the costs and benefits. • Reduces Environment to a Commodity: putting a price on air, water, and soil—it is valued only “instrumentally”

  6. Consequences • Paper Tiger (minimal impact): b/c hard to implement, even exec orders require a threshold amt of regulatory costs to trigger, some regulations prohibit BCAs • Often, agencies prepare BCAs but lack confidence in them and turn on other criteria • Reagan and W. Bush used BCAs to stifle environ protection. • OMB (Office of Mgmt & Budget) controlled by White House to create oversight of BCA process  critics argue this was designed to stall, prevent or reject enviro protection • Continuing Problems: $$ on human life, $$ on benefits, regulatory costs often inaccurate, econ assumptions, “cooking BCAs”,

  7. Lessons • 1. no substantial evidence that regulatory costs are so excessive that must be routinely included in ALL enviro regulation programs • 2. BCA may suggest better solutions than otherwise • 3. Matter WHO is calculating  politics • 4. Congress needs to identify criterion with specificity in methods/calculation & weight • 5. costs can be reduced not by BCAs but through incentives in market

  8. Problem of Valuation • Environmental Accounting: putting a price on nature/environment. • Contingent Valuation: monetary value is assigned to enviro amenity whose use or destruction would deprive others of its future availability. • E.g. haze over grand canyon, pollution of Alaska or Gulf waters by oil spills. • Critics assert can’t accurately assess value in the passive use of an enviro amenity • Environmental Risk: Substitute “risk” for $$, avoiding the need to monetize enviro amenities. • can compare risks of losing enviro amenity to risks in preserving it. • E.g. open national park to oil/gas exploration -> compare gov’t royalties to risks to endangered species, land use alternatives, pollution generated, etc.

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