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On the Environment

Wednesday, October 31, 2012
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Another Look at Cost Benefit Analysis

By Josh Galperin, Associate Director

Cost benefit analysis (CBA) is a much touted and much debated tool for environmental policymaking. At its foundation, the premise is simple; CBA uses analytical formulas to determine whether the monetized benefits of a proposed regulation outweigh the monetized costs. Where the benefits outweigh the costs, the policy proposal should become a reality. It is the seeming objectivity of CBA that makes it attractive to its proponents. 

One such proponent is Professor Ben Trachtenberg of the University of Missouri School of Law. In an article forthcoming in the November/December issue of the Environmental Law Institute's Environmental Forum, Professor Trachtenberg argues that CBA has flaws, but that they are superficial flaws, which can be addressed through tweaks to the process. Specifically, Professor Trachtenberg looks to the way that the value of future human lives are discounted when conducting a CBA. Discounting is based on the economic understanding that people value money more today than in the future. For instance, if I offered $100 in 1 year, or $94 today, most people would accept a smaller sum today. Thus, if an environmental regulation will save a human life not today, but in the future, we need to calculate the value of that life and then discount it to its present value. 

Professor Trachtenberg's article argues that CBA would more accurately reflect the costs and benefits of environmental policy if the discount rate were lower, that is, if the value of future lives were reduced less when converted to present value. To support this argument Professor Trachtenberg point to two items: increasing healthcare costs and increasing gross domestic product. As people are willing to pay more to avoid death and as future generations become richer, their theoretical lives become more valuable. Where future lives are more valuable, they should be discounted at a lower rate.

Professor Trachtenberg's assessment is accurate. However, Professor Kysar and I co-authored a brief response, forthcoming in the same issue of the Environmental Forum in which we argue that efforts to mend rather than end CBA in environmental policymaking will not ultimately result in better environmental governance. Efforts such as Professor Trachtenberg's are arguments for changing CBA, but more importantly they are demonstrations of how fragile CBA is.

While CBA is proffered as an objective tool, the tweaks that Professor Trachtenberg identifies are just two among many potential changes, all of which can be subjectively used and abused to change the outcome of a given analysis. CBA, therefore, creates a veil of objectivity over yet another subjective process. This sort of marginal effort will work to marginally improve policy, but it will also work to solidify the role of CBA, for better or worse. In other words, those who strive to give future generations more consideration in environmental rulemaking should take care not to relinquish alternative tools, which rest on more principled grounds, in exchange for temporary relief from the limited capabilities of CBA. 

Posted in: Environmental Law & Governance

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