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Pricing
the Priceless
Cost-Benefit
Analysis of Environmental Protection
By Lisa Heinzerling and Frank Ackerman
Georgetown Environmental Law and Policy Institute
Georgetown University Law Center
EXECUTIVE
SUMMARY
In recent years
the use of "cost-benefit" analysis to set environmental
standards has attracted a large and high-profile group
of supporters. According to its advocates, cost-benefit
analysis offers a way of achieving superior environmental
results at a lower overall cost to society than other
available approaches.
This view is
mistaken. Cost-benefit analysis is a deeply flawed method
that repeatedly leads to biased and misleading results.
Far from providing a panacea, cost-benefit analysis
offers no clear advantages in making regulatory policy
decisions and often produces inferior results, in terms
of both environmental protection and overall social
welfare, compared to other approaches. In order to assess
the pros and cons of any particular regulatory standard,
cost-benefit analysis seeks to translate all relevant
considerations into monetary terms. In cost-benefit
analysis, therefore, both the costs of, say, putting
a scrubber on a power plant to reduce air pollution
and the benefits of doing so, including the saving of
human lives and the prevention of debilitating and painful
diseases, are presented in terms of dollars. The costs
and (particularly) the benefits of regulation often
will be realized in the future; in such cases the numeric
estimates of costs and benefits are "discounted," i.e.
treated as equivalent to smaller amounts of money today.
Proponents of
cost-benefit analysis make two basic arguments in its
favor. First, use of cost-benefit analysis ostensibly
leads to more "efficient" allocation of society's resources
by better identifying which potential regulatory actions
are worth undertaking and in what fashion. Advocates
of cost-benefit analysis also contend that this method
produces more objective and more transparent government
decision-making by making more explicit the assumptions
and methods underlying regulatory actions.
In fact, cost-benefit
analysis is incapable of delivering what it promises.
First, cost-benefit analysis cannot produce more efficient
decisions because the process of reducing life, health,
and the natural world to monetary values is inherently
flawed.
Efforts to value
life illustrate the basic problems. Cost-benefit analysis
implicitly equates the risk of death with death itself,
when in fact they are quite different and should be
accounted for separately in considering the benefits
of regulatory actions. Cost-benefit analysis also ignores
the fact that citizens are concerned about risks to
their families and others as well as themselves, ignores
the fact that market decisions are generally very different
from political decisions, and ignores the incomparability
of many different types of risks to human life. The
kinds of problems which arise in attempting to define
the value of human life in monetary terms also arise
in evaluating the benefits of protecting human health
and the environment in general.
Second, the use
of discounting systematically and improperly downgrades
the importance of environmental regulation. While discounting
makes sense in comparing alternative financial investments,
it cannot reasonably be used to make a choice between
preventing noneconomic harms to present generations
and preventing similar harms to future generations.
Nor can discounting reasonably be used even to make
a choice between harms to the current generation; the
choice between preventing an automobile fatality and
a cancer death should not turn on prevailing rates of
return on financial investments. In addition, discounting
tends to trivialize long-term environmental risks, minimizing
the very real threat our society faces from potential
catastrophes and irreversible environmental harms, such
as those posed by global warming and nuclear waste.
Third, cost-benefit
analysis ignores the question of who suffers as a result
of environmental problems and, therefore, threatens
to reinforce existing patterns of economic and social
inequality. Cost-benefit analysis treats questions about
equity as, at best, side issues, contradicting the widely
shared view that equity should count in public policy.
Poor countries, communities, and individuals are likely
to express less "willingness to pay" to avoid environmental
harms simply because they have fewer resources. Therefore,
cost-benefit analysis would justify imposing greater
environmental burdens on them than on their wealthier
counterparts. With this kind of analysis, the poor get
poorer.
Finally, cost-benefit
analysis fails to produce the greater objectivity and
transparency promised by its proponents. For the reasons
described above, cost-benefit analysis rests on a series
of assumptions and value judgments that cannot remotely
be described as objective. Moreover, the highly complex,
resource-intensive, and expert-driven nature of this
method makes it extremely difficult for the public to
understand and participate in the process. Thus, in
practice, cost-benefit analysis is anything but transparent.
Beyond these
inherent flaws, cost-benefit analysis suffers from serious
defects in practical implementation. Many benefits of
public health and environmental protection have not
been quantified and cannot easily be quantified given
the limits on time and resources; thus, in practice,
cost-benefit analysis is often akin to shooting in the
dark. Even when the data gaps are supposedly acknowledged,
public discussion tends to focus on the misleading numeric
values produced by cost-benefit analysis while relevant
but non-monetized factors are simply ignored. Finally,
the cost side of cost-benefit analysis is frequently
exaggerated, because analysts routinely fail to account
for the economies that can be achieved through innovative
efforts to meet new environmental standards.
Real-world examples
of cost-benefit analysis demonstrate the strange lengths
to which this flawed method can be taken. For example,
the consulting group Arthur D. Little, in a study for
the Czech Republic, concluded that encouraging smoking
among Czech citizens was beneficial to the government
because it caused citizens to die earlier and thus reduced
government expenditures on pensions, housing, and health
care. In another study, analysts calculated the value
of children's lives saved by car seats by estimating
the amount of time required to fasten the seats correctly
and then assigning a value to the time based on the
mothers' actual or imputed hourly wage. These studies
are not the work of some lunatic fringe; on the contrary,
they apply methodologies that are perfectly conventional
within the cost-benefit framework.
Fortunately,
there are many good alternatives to the use of cost-benefit
analysis. In fact, virtually all of the environmental
protections adopted in the United States over the last
several decades were developed without the use of cost-benefit
analysis. Technology-based regulation, market-based
regulation such as pollution trading, and environmental
right-to-know programs all have reduced pollution and
protected the environment without relying on the problematic
method of cost-benefit analysis.
Given the deep
and varied flaws in cost-benefit analysis, given the
fact that a lot of time and money are required to generate
cost-benefit studies, and given that superior, time-tested
regulatory alternatives are available, cost-benefit
analysis should be rejected as a tool for evaluating
environmentally protective regulation.
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Lisa Heinzerling
is a Professor of Law at Georgetown University Law School,
specializing in environmental law.
Frank
Ackerman is an environmental economist and research
director of the Global Development and Environment Institute
(GDAE) at Tufts University.
The Georgetown
Environmental Law and Policy Institute conducts
research and education on legal and policy issues relating
to protection of the environment and conservation of
natural resources.ó For copies of the full report please
contact: Georgetown Environmental Law and Policy Institute,
Georgetown University Law Center, 600 New Jersey Avenue,
N.W., Washington, D.C. 20001, (202) 662-9850 fax (202)
662-9005, gelpi@law.georgetown.edu.
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