The Use and Abuse of Cost-Benefit Analysis in Regulatory Decision-Making

Introduction

In 1997, the Environmental Protection Agency reported to Congress on the costs and benefits of the Clean Air Act from 1970 to 1990. The agency concluded that for a mere half-trillion dollars in compliance costs, the act generated economy-wide benefits of between $6 trillion and $50 trillion. It settled on an estimate of $22 trillion, attributable to lower levels of air pollutants. In other words, the analysis revealed a 40-fold rate of return, equal to nearly 18 percent of GDP at the time. Had Richard Nixon not had the foresight to sign the Clean Air Act, the EPA implied, not only would the air have been much dirtier, but the country would have been much poorer.

Two years later, in 1999, the EPA published an analysis of the impact of the 1990 Clean Air Act Amendments from 1990 to 2010. “Using a sophisticated array of computer models,” the agency claimed the act generated benefits of $110 billion at a cost of $27 billion, a four-fold return. The study was updated in 2011 to estimate the benefits by 2020, which will purportedly be even higher: $2 trillion in benefits for a mere $65 billion in compliance costs—a 30-fold rate of return for the U.S. economy. According to the agency, the 1990 amendments generated about 8.6 percent of GDP during the current decade—more modest than its 1970 predecessor, but still an economic bonanza.

There is a major problem with these claims: Except for Ponzi schemes, it is impossible to find investments that assert to deliver such stellar returns year after year. Could an environmental statute really generate such astronomical economic benefits? It is difficult to put much confidence in these numbers. The way cost-benefit analysis is employed by regulatory agencies today often renders it little more than a political tool to justify federal regulations. Many agency calculations add questionable “market values” to the benefits ledger of proposed rules, even in cases where no market exists for the benefits claimed. This is especially true for environmental regulations, in which generous monetary values are often assigned to benefits such as air quality improvements.

This PERC Policy Brief examines the use and abuse of cost-benefit analysis by regulatory agencies, focusing specifically on environmental regulations. It explores how cost-benefit analysis evolved to enable federal agencies to justify nearly any proposed regulation by claiming they produce widespread economic benefits. At the end, several policy recommendations are offered on how to improve regulatory analysis.

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