Health-Based Environmental Standards: Balancing Costs with Benefits

Balancing the pros and cons of a proposed action seems like a commonsense approach to decision-making. But often that is not the approach embodied in environmental legislation. In establishing health-based environmental standards under the Clean Air Act, the Safe Drinking Water Act, and several other major environmental laws, for instance, Congress all but explicitly prohibits the U.S. Environmental Protection Agency (EPA) from balancing the benefits of tighter standards against the attendant costs. Given the 104th Congress's strong interest in using benefit-cost analysis for federal regulation, why have previous legislatures excluded such balancing from the most important standard-setting decisions made by EPA?

Below, we identify two basic arguments that have been put forward for disregarding costs in environmental decisionmaking and raise counterarguments to both. While these arguments and counterarguments require a more thorough analysis than we can devote to them here, our hope is that we will stimulate a more open and enlightened debate about them than we have seen to date.

The right-to-a-safe-environment argument

The right-to-a-safe-environment argument is perhaps the most common response to those (like us) who would seek to balance benefits and costs in standard setting. This argument is, of course, based on the presumption that safe levels of environmental contaminants can be found, a presumption that is apparent in our environmental laws. For instance, the Clean Air Act requires EPA to provide "an adequate margin of safety... requisite to protect public health" in setting National Ambient Air Quality Standards. From our perspective, the right-to-a-safe-environment argument has two flaws—the first scientific, the second philosophical.

From a scientific standpoint, the problem is that no safe level is likely to exist for most, if not all, pollutants. Rather, lower ambient concentrations of a particular pollutant almost always will imply lower risks of an adverse health effect. In the case of air pollution, even very low levels of pollutants pose some risk of adverse reactions in children and the elderly with chronic respiratory disease.

If air quality standards are required by law to provide an adequate margin of safety, and if even weak concentrations of pollutants pose some risk to some individuals, it appears that only zero concentrations could be permitted under the law, for only zero concentrations would provide a "margin of safety" against adverse health effects. But totally eliminating ubiquitous air and water pollutants is impossible in a modern industrial society like ours (and would be impossible even in a primitive society, at least as long as fires were allowed!).

The philosophical problem with the right-to-a-safe-environment argument is whether it makes sense to treat risk-free levels of air and water quality—even if they could be identified—as inalienable rights, such as freedom of speech. Those who oppose a balancing approach to environmental standard setting often argue that we did (or do) no such balancing in establishing and protecting the basic freedoms that are guaranteed in the Constitution.

But elevating environmental quality to the status of a constitutional right, as some have proposed, would remove neither the necessity for nor the desirability of balancing. Even the basic freedoms that are guaranteed in the Bill of Rights have been subjected to a very crude kind of balancing test. For example, we cannot stand up and scream "Fire!" in a crowded theater; libel laws constrain our ability to write whatever we want to write about a person; and other basic rights are constrained in varying degrees. Such restrictions on the basic rights of Americans reflect a clear balancing mentality—that is, a carefully considered view that some extensions of our fundamental rights could create greater problems (read "costs") than the additional freedoms ("benefits") that the extensions would provide. If the authors and guardians of our Constitution made and continue to make qualitative trade-offs concerning our basic rights, then we see no reason why the freedom to enjoy a clean environment would not be similarly qualified, even after the freedom's elevation to "right"-hood.

It could be argued that federal regulators inevitably consider costs in real-world environmental decisionmaking, despite the apparent statutory prohibition against doing so. Nonetheless, some people would assert that we should maintain the principle of excluding costs. This argument has two variants.

According to the first variant, we ignore costs in selecting ambient environmental standards, such as standards for the quality of our air and water, but take them into account in writing discharge standards for individual sources of pollution, such as electricity-generation facilities that often put sulfur dioxide into the air or farms that use pesticides that run off into lakes, rivers, and streams. These discharge standards place limits on the amounts of various pollutants that pollution sources can emit into the environment; the limits are intended to bring air and water quality, for example, into attainment with ambient standards. Typically, the discharge standards direct pollution sources to install the "best available technology," when these technological requirements are "affordable" or "economically achievable." In this sense, costs do come into play, ensuring that unaffordable discharge standards will not be imposed.

But what if the affected pollution sources cannot "afford" the technological requirements that would be necessary to meet ambient environmental goals? Short of extending the deadlines for complying with these requirements, EPA has little choice but to close down the affected sources. In short, costs can be taken into account, so long as the ultimate goals of environmental policy will be met; but those costs mean nothing if health-based standards are not met.

Insisting on effective discharge standards is appropriate if truly important health values, ecological values, or both would be compromised. But suppose that all the firms in a particular industry could afford to install the most sophisticated—and, therefore, the most expensive—pollution-control equipment made. Not everyone would agree that they should be required to do so simply because they can afford it—particularly if the health benefits of installing the equipment were deemed to be of marginal significance (that is, would reduce risk very little). While several of our current environmental statutes imply that any affordable environmental goal should be required, we suspect that many people would disagree. And they might ask whether these same statutes are creating a disincentive to succeed by requiring profitable, well-managed firms to meet stringent technological discharge standards, while treating leniently firms or industries that are on the brink of bankruptcy.

We do not intend to suggest that establishing ambient environmental standards should be set on the basis of a formal quantitative benefit-cost analysis alone. Several considerations hinder an attempt to do so.

First, despite great progress in understanding how individuals value better health, reduced risks of premature mortality, aesthetic amenities, and other environmental benefits, economists are still a long way from pinning down precisely the marginal benefits associated with proposed changes in ambient environmental standards. In particular, great uncertainty surrounds estimates of how many lives such changes will save, how many illnesses they will prevent, and how much ecosystem protection they will provide.

Second, the costs associated with tighter standards are much harder to estimate than the public—and even some economists—realize. One reason is that regulations can impose costs even when no one must make out-of-pocket compliance expenditures. This would be the case if a regulation led, for example, to the withdrawal from the market of a useful product. Another reason is that regulated parties often cannot foresee technological advances that will reduce their compliance costs.

Third, even if we knew the marginal benefits and costs associated with alternative environmental quality standards, we still would not know whether equating the two would result in the "right" standard. Among other things, we might wish to know just who the winners and losers would be under new standards. For instance, suppose that only millionaires benefited from a tighter air quality standard, while the poor paid all the costs. Even if the added benefits from the tighter standard greatly exceeded the costs, we might resist adopting the new standard unless we could find a way to redistribute some of the net gain. In short, distributional considerations and other nonquantifiable factors having nothing to do with economic efficiency also matter a lot in standard setting.

Objecting to formal benefit-cost analysis as the sole basis for public decisionmaking is easy enough. Determining how such analysis should be used is far more difficult. We believe, however, that an analogy drawn from decisionmaking in the private sector can be useful in making this determination.

Before making an important investment decision, a good corporate manager will gather reports on the financial soundness of the venture and the expected future profits. Rather than slavishly basing a final decision on these reports alone, the good manager will temper the analytical information with his or her own judgment and experience. The manager may decide, for example, to overrule an apparently unfavorable financial projection out of a conviction that the long-run health of the company requires entry into new markets that will not pay off for some time. Or he or she may decide that the profit potential does not outweigh the risks of the project. In short, the manager understands that analytical information will rarely be complete or accurate enough to base decisions entirely on it. Giving due weight to and acting on information from all sources is the essence of good decisionmaking, and one of the private sector's strengths is its ability to recognize and reward good decisionmaking.

In the public sector, decisionmaking differs in ways that may make the use of formal benefit-cost methods both more difficult and, arguably, even more important. First, benefit-cost analysis in the public sector will probably be neither as complete nor as precise as its private-sector counterpart. Second, the public manager may have to weigh additional objectives, such as the distribution of benefits, that do not easily fit into a formal benefit-cost analysis. Finally, success and failure in the public sector are much harder to identify, making any need to take corrective action that much more difficult to discern.

Refusing to admit the need to consider costs may result from our collective desire to believe that difficult trade-offs need not be made. Well, we can't have it all. After more than twenty years of concerted efforts to meet our nation's environmental quality goals, we are still short of the mark in many areas. Moreover, since we now have acted upon the least expensive opportunities to reduce pollution, the remaining options are generally quite costly. Thus, providing all the protection we would like to provide is even less likely than it was two decades ago.

Nothing is wrong with wanting to provide maximum environmental protection to all citizens, just as we would like to provide all the other comforts of a happy and prosperous life. But something is wrong with denying that resources are scarce relative to our prodigious wants and that we must, accordingly, accept unpleasant trade-offs. Since in public rulemakings we openly acknowledge that we cannot find safe levels of environmental contaminants and since we admit the importance of economic considerations, shouldn't we revisit those portions of our environmental statutes that prohibit even the consideration of costs in standard setting? While economic considerations should never take primacy over public health or ecological concerns in policymaking, we believe that the answer to this question is an unambiguous yes.