This article is part of a blog series from Resources for the Future (RFF), released weekly in the lead-up to Inauguration Day. In this series, RFF scholars weigh in on key challenges facing the new administration and explore the outlook for climate policy in the coming years. A version of this article will appear in the upcoming issue of Resources magazine.
Resources: In light of our recent history of regulatory rollbacks, you both have expressed concern over the general erosion of trust for science and economic analysis. Looking now toward the prospect of applying science and economics to ambitious federal climate policy, do you think the general public can recover from what’s been interpreted as a recent debasing of economic analysis? Will people make space for scientists and economists again?
Art Fraas: Let’s take benefit-cost analysis as a major example: the whole idea came out of the Reagan administration. The Left has always been skeptical of benefit-cost analysis, even before the outgoing administration, and in about the last 10 years, as the US Environmental Protection Agency (EPA) has been able to generate large net benefits associated with its rules, the Right has become more and more skeptical of benefit-cost analysis as well.
Richard D. Morgenstern: The recent administration has undermined the reputation of benefit-cost analysis by cutting away and attacking the benefit side in particular, but also by overemphasizing the cost side. Benefit-cost analysis by its very nature is a balancing of the two. If you attack one side and focus only on the other, then you've radically undermined the integrity of the discipline.
Having said that, I guess the question is: Is cost-benefit analysis doomed forever, or is there a way forward?
Before we discuss the possible ways forward, I would make the obvious point that EPA statutes are not by any means set up in an ideal way for the use of benefit-cost analysis. Each statute is a little different; there are some opportunities to use benefit-cost analysis in some sections of the Clean Air Act and some parts of the Clean Water Act and so on, but these opportunities are limited. Some court cases in the four or five years preceding the Trump administration actually were favorable to benefit-cost analysis, such as Michigan v. EPA. But it's still not the way decisions are routinely made. The statutes don't require these analyses and don't even invite the analyses in large part.
At the same time, executive orders that have been issued going back to the Reagan era, and reaffirmed by several Democratic presidents since, always take note of the statutory limits but nonetheless establish that benefit-cost analysis can help us more fully understand the nature of the decisions we're making.
So, there's always been this tension. But even though benefit-cost analysis isn’t now and probably never will be the center stage of EPA decisionmaking, there’s still great value in having a high-integrity set of analyses that can guide our thinking about the economic and environmental impacts of regulation.
Is cost-benefit analysis doomed forever, or is there a way forward?
Richard D. Morgenstern
The way forward could be for the new administration to make certain pronouncements, starting out, about benefit-cost analysis. It's a nuanced issue, but pronouncements could establish that benefit-cost analysis has an important role and should return, but with the level of integrity and quality to the analysis that was present before the Trump administration. There are several ways to do that.
One way is to speak publicly about the issues; a complementary way is through hiring. The new administration will be hiring a lot of new presidential appointees, some of whom undoubtedly will be asked at their confirmation hearings what they think of benefit-cost analysis. That’s an opportunity for the administration to go on record and make the case at the very outset, in the course of the confirmation process, for the value of benefit-cost analysis—not to embrace it in a way that departs from history, but simply to turn the clock back to the pre-Trump era.
Issues like co-benefits also clearly need to be revisited by the next administration.
Can any other examples demonstrate the degree to which recent policies and actions might be irreversible?
Richard D. Morgenstern: Benefit-cost analysis, discount rates, and the social cost of carbon are areas in which the outgoing administration has departed from mainstream thinking, and a new administration has the opportunity to fix it. The new administration could start through the appointments process, and then it can find specific rules which demonstrate the importance of these factors. In doing so, the administration would be signaling to the scholarly community, as well as the broader regulatory community, that it’s going to adhere to serious and mainstream economic principles when conducting these analyses. That doesn't obviate the fact that new rules may still be rejected because of certain legal constraints—but analysis should be free of the manipulation and bias that’s been introduced lately.
The social cost of carbon is a direct component of benefit-cost analysis. The only reason you would ever use the social cost of carbon is if you were trying to monetize the long-term benefits of reducing greenhouse gases. And the truth is, we all know that these benefits can extend for decades, a century, or beyond—so how do we treat these policy benefits in an analysis?
The principal mechanism that drives such treatment is the discount rate. The Obama administration set up an inter-agency group that was managed in part by EPA and had full participation from the Council of Economic Advisors, the Department of Energy, and every other major economics-oriented federal agencies. This group came up with an approach called the social cost of carbon, and they laid out several scenarios involving multiple discount rates. The highest discount rate they used was 5 percent. And that was not the central case; the central case was actually 3 percent. (Note that lower discount rates mean larger benefits from reducing carbon emissions.)
Then, the Trump administration came in and specified the use of 7 percent as the highest rate.
Perhaps it seems like a small difference between 7 percent and 5 percent, but it turns out to have a huge impact on the calculations. So, the Trump administration introduced this alternative scenario, which reduced the value of preventing each ton of carbon dioxide (CO₂) from entering the atmosphere by about an order of magnitude.
The second thing the Trump administration did is it said that Regulatory Impact Analysis (RIA) guidelines (which, at that point, the administration was touting as something it adheres to) also should specify a scenario based only on the domestic benefits of CO₂ to calculate the social cost of carbon. What the Obama administration had done was to consider global benefits, and the Trump administration reduced the estimates for the social cost of carbon by including a scenario based solely on the domestic benefits. The ultimate figure was reduced from about $45 per ton to a range of $1–$6.
In terms of the climate-related regulations that the outgoing administration has rolled back, and the additional environmental regulations that could have been implemented by a different administration, EPA has lost more than four years.
Art Fraas
On the face of it, considering the domestic benefits of reducing greenhouse gases is a legitimate approach. In general, we take into account the domestic impacts of federal regulations, and it's not unreasonable to do the same thing for climate change—except for the fact that climate policy has massive global benefits, and actions by the United States are likely to have a favorable impact on the decisions of other countries to reduce their own emissions. In that case, Americans would be the beneficiaries of the “international benefits.” It’s a tricky issue, but my sense is that most economists agree that it’s unreasonable to focus so heavily on domestic benefits of greenhouse gas reductions.
Art Fraas: I’ve argued, and will continue to argue, that it's appropriate to present both the global and the domestic effect of these kinds of rules to decisionmakers and to the public, to the extent that the analytical framework will support that.
I think it’s appropriate to consider a range of discount rates, even though most economists feel comfortable with restricting consideration to a lower set of discount rates. It's important to consider a higher discount rate than the consumption rate of interest, generally viewed as 3 percent. (Some argue for focusing on an even lower discount rate.) But I think good arguments have been made for also considering a higher discount rate than those low rates.
Richard D. Morgenstern: The question is: How much higher? Obama’s task force specified 5 percent as their upper limit, and the Trump administration went back to the more traditional long-term number that the Office of Management and Budget has used, which is 7 percent. That's the part that I think is most questionable.
Does 5 percent seem reasonable as an upper limit? What is a reasonable range?
Art Fraas: I think the incoming administration will pull together a committee to come up with estimates for the discount rate, so I would defer to that committee.
How much of these considerations have stood up to peer review?
Art Fraas: The first interagency working group report did not have peer review. A later report had at least a public comment period and maybe some peer review, as well.
Richard D. Morgenstern: And then, the National Academies of Sciences, Engineering, and Medicine appointed a committee, co-chaired by RFF’s Richard G. Newell and Maureen L. Cropper, which produced a report that focused on the limitations of the social cost of carbon and ways of improving the estimates going forward. That was a form of peer review.
Art Fraas: While I think it would be hard to set up, it would be worthwhile to have a third-party institutional review of agency benefit-cost analysis that’s separate from the administration. Economics panels currently don’t tend to comment on the Regulatory Impact Analyses (RIAs) of rules. Maybe a really important rule, like the Clean Power Plan, gets that kind of attention. But a lot of the major rules don't. Most rules get comments from the affected industry or environmental organizations. But there’s no institutional, third-party review of the quality of RIAs.
Richard D. Morgenstern: I hate to disagree with my esteemed colleague, but I think the regulatory development process is already quite complicated. When RIAs were first introduced back in the 1980s, their cost, recognizing inflation, was a couple hundred thousand dollars. Now they cost several, oftentimes multiple, millions of dollars. For big rules especially, these reviews can cost a lot. Since public comment periods happen with these rules, and the OMB conducts reviews, the addition of RIA reviews generally would not be worth the additional time and resources involved.
Art Fraas: Just to defend my idea a bit: I think this kind of third-party review would be separate from the rule development process, and one way to do it could be a National Academy of Sciences effort to take, for example, 20 RIAs to evaluate and critique, suggesting ways to improve the RIA methodology. At one time, the Congress approved but never funded that kind of systematic review in the Government Accountability Office. It's a possible mechanism for keeping the agencies a little more honest.
And going back to the question of the extent to which recent rules and rollbacks are reversible or not: In terms of the climate-related regulations that the outgoing administration has rolled back, and the additional environmental regulations that could have been implemented by a different administration, EPA has lost more than four years. As the new administration comes in, it will take time to develop a new record to support climate-related regulation. And the new rules will have to go through formal proposal, take comments, respond to those comments, and then become a final rule. And there may even be a court review after that. So it may be a delay of at least six years—maybe even more—associated with the four-year interlude of the Trump administration.
