Global Policy Forum

By Lisa Heinzerling and Frank Ackerman

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 non-economic 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.

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 (G-DAE) 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. 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, This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

A full version is available online from the Global Development and Environment Institute

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