Cost-Benefit Analysis and the Problem of Long-term Harms from Environmental Pollution, by Rachel Rothschild
*This post is part of a symposium on Modernizing Regulatory Review. For other posts in the series, click here.
One of the most contentious aspects of using cost-benefit analysis in the regulatory process involves discounting the value of future harms. Based on updated data from U.S. Treasury notes and Inflation-Protected Securities, the Biden Administration’s new Circular A-4 guidance will replace the unreasonably high discount rates of 3% and 7% from the prior 2003 guidance with a single lower rate of 1.7% when assessing a regulation’s effects from the present through 30 years into the future. This post will review why discounting is done in cost-benefit analyses and explain how the new guidance will allow the government to better evaluate the benefits of reducing pollution exposures.
For those unfamiliar with the technical aspects of cost-benefit analyses, these assessments are meant to compare a regulation’s benefits with its costs in order to ensure that the government’s interventions have an overall positive effect on society. One challenge in making such comparisons is that costs and benefits can materialize at different times. Compliance expenses are often immediate, while environmental and public health benefits may appear years or decades later. Climate change is perhaps the most extreme example of this issue, but it also frequently occurs in a host of environmental regulations that prevent long-term health harms like cancer.
Discounting is a technique to try to make “apples to apples” comparisons between costs and benefits that develop at different times by calculating their value in present dollars. It reduces the monetary value of long-term effects based on the idea that people prefer present benefits over future ones – an assumption complicated by behavioral economics research as well as ethical concerns about making this assumption when assessing a regulation’s benefits and costs to future generations.
The new 1.7% discount rate in Circular A-4 is the product of a long process of reforming cost-benefit analysesto ensure that they do not undervalue environmental and public health benefits. The number reflects updated data on the rate of return from personal savings over the last 30 years and adopts a societal perspective on discounting rather than one based on private industries’ preferences. As government regulations should generally reflect effects on societal welfare rather than private interests, this reform is overdue. The revised guidance also suggests that an even lower rate may be warranted when calculating benefits that will affect future generations given the “special ethical considerations” in these circumstances.
The choice of a particular discount rate can have a dramatic effect on the benefits expected from regulations that address future harms. Consider a recently proposed regulation for the toxic chemical methylene chloride, which would ban most uses of the substance. Methylene chloride is extremely hazardous, causing neurotoxicity and immediate death from high acute exposures. However, these outcomes are relatively rare. One of the greatest dangers from methylene chloride is cancer from low, chronic exposures. In the cost-benefit analysis accompanying the proposed rule, averted cancer deaths were thus the major quantified benefit of eliminating most methylene chloride uses. Because of the latency period involved in these cancer deaths, different discount rates had a striking effect on calculating the benefits of the rule. The regulation’s benefits outweighed its costs using a discount rate of 3%, but not using a discount rate of 7%.
Toxic chemical regulations – especially those that prevent cancer deaths – are thus one area where the updated Circular A-4 guidance will vastly improve regulatory decisions. A considerable body of research has linked exposures to toxic chemicals, such as benzene and formaldehyde, to cancer deaths. Some of the most powerful studies on the relationship between toxic chemicals and cancer have come as a result of the September 11th terrorist attacks, which exposed thousands of first responders to chemical carcinogens when the twin towers collapsed. A meta-analysis of cancer rates among rescue workers found a clear association between the amount of exposure to toxins around the World Trade Center and subsequent increases in cancer, with rates among first responders 30% higher than the general population.
These risks deserve much more attention from EPA, as cancer rates for people under 50 have risen over the last several decades. Recent studies have found that children are at especially high risk of developing cancer from toxic chemical exposures, both because of their developmental stage and because they can expect to live longer than adults. While treatment for childhood cancer has improved survival rates, the incidence of childhood cancer – meaning the number of children affected relative to their population size – has increased each decade since at least the 1970s. Cancer is now the leading cause of death by disease for American children under 15 years of age and causes more deaths than any factor, other than injuries, among this group.
Despite amendments to the Toxic Substances Control Act (TSCA) in 2016, chemical pollutants remain severely under-regulated, particularly when compared to environmental threats like smog or acid rain. And unlike other environmental programs where EPA cannot legally consider costs and benefits or has discretion over whether to do so, TSCA requires EPA to weigh the costs and benefits of managing risks from toxic chemicals. The updates to Circular A-4’s discount rates will allow EPA to better assess the value of averted cancer cases from toxic chemical exposures, which are the most frequently quantified and monetized benefit from TSCA regulations. Beyond the importance of the updated guidance for evaluating extremely long-term harms like climate change, then, the revised 1.7% discount rate will significantly improve EPA’s analysis of the benefits from reducing health risks caused by environmental pollution. The Biden Administration should be commended for taking this much-needed step in reforming cost-benefit analysis in order to ensure that the method reflects the latest data and research on discounting long-term harms.
Rachel Rothschild is an Assistant Professor at the University of Michigan Law School.