Non-market Values in the Draft Update of Circular A-4, by Shi-Ling Hsu
*This post is part of a symposium on Modernizing Regulatory Review. For other posts in the series, click here.
The Office of Management and Budget, and in particular the Office of Information and Regulatory Affairs (OIRA) must be praised for undertaking a long, long overdue update of Circular A-4. Given the progress in techniques and changes in societal attitudes over the last several decades on cost-benefit analysis (CBA), it has been a significant omission for this key policymaking document to remain stagnant.
While this update is welcome, an improved Circular A-4 should expand its guidance on non-market costs and benefits. The measurement of non-market costs and benefits has improved substantially over the past several decades. Applied economists working in this area have made significant advances in recognizing the circumstances under which valid estimates of non-market goods can be made. And importantly, studies of non-market values have, over the course of decades of study been able to reproduce their results, a key indicator of validity. With improvements in technique, there should be higher expectations for the quality of research. But there should also then be broader, more confident application of these improved techniques, expanding use of these methods to capture values of non-market goods in CBA.
Non-market costs and benefits remain a fraught aspect of CBA. Health, safety, and environmental benefits of regulation are usually unpriced, and their monetization can seem like a political act, increasing the likelihood of regulation that imposes costs upon producers and sellers. Some economists import a deregulatory ideology into their views on CBA, taking a dim view of costs and benefits that are not measured by formal transactions. Skepticism even pervades the ranks of non-ideological economists, still unaccustomed to the kind of research required to derive values of non-market goods.
Against this backdrop, it is necessary to reinforce and even expand the case for non-market costs and benefits, and the update to Circular A-4 should go further than this draft. Markets are ubiquitous, but the extent of unpriced non-market goods at every time and geographic scale is staggering. Environmental regulation alone still suffers from huge market failures. Emissions of air pollutants, especially fine particulate matter, is largely unpriced, despite accounting for hundreds of thousands of deaths in the United States. Water pollution from agricultural runoff has created “dead zones,” swaths of ocean that are so low in oxygen that they support almost no marine life. One dead zone that occurs annually at the mouth of the Mississippi River is about 6,500 square miles, larger than Connecticut. And another area in which knowledge of harm severely lags the rollout of a harmful product, ubiquitous per- and polyfluorinated substances, or “PFAS” or “forever chemicals,” has raised alarms in many circles. The fact that there are approximately 4,000 different types of PFAS, about which the EPA knows only a small amount about a small fraction – and what it knows is very concerning – is reason to suspect that this is large unpriced risk. Of course, PFAS have introduced benefits, as they have been applied to nonstick cookware, water-repellent and wrinkle-free clothing, stain-resistant fabrics and carpets, and firefighting foams, but these benefits must be weighed against costs.
The draft update to Circular A-4 notes the progress of best practices for estimating non-market costs and benefits, and the guidance is more explicit about what constitutes good practice. After much improvement over the past two decades, it is appropriate to expect more from economic researchers than previously; hence the longer list of study techniques that should be considered when evaluating the quality of a stated-preference study. But this step-up in quality expectations should be accompanied by some stronger wording compelling federal agencies to undertake estimates of non-market costs and benefits, and to place increased reliance upon these modern, better estimates.
For example, the draft update contains more illustrative examples than the 2003 document, so an updated Circular A-4 could elucidate specific examples of proper deployment of non-market valuations. One such case is when pollution causes harm to wildlife. Harm to wildlife is especially difficult to price, but given past estimates, could represent very large welfare losses. The 2010 Deepwater Horizon explosion that spilled 4 million barrels of oil into the shallow Gulf of Mexico – enough to render the entire Gulf one part per 5 billion crude oil – clearly imposed a wide variety of harms, broader in both scale and time than reflected in depressed fishing and recreation markets. Harm to the wildlife of the Gulf of Mexico was extensive. A decade after the spill, an extensive study of the effects of the spill on fish in the Gulf was unable to find a single fish without oil residue. Regulations aimed at reducing pollution with serious effects on wildlife must be evaluated with techniques to value non-market costs and benefits.
A second area of non-market costs and benefits that might benefit from guidance is in the area of climate change. Here, a good bit of OIRA’s work has already been done, as estimation of the “social cost of carbon” (SCC) – damages from emitting greenhouse gases – has been an ongoing project since 2010. The Biden Administration is considering a near-quadrupling of the current figure, but for the time being it stands at $51 per ton of CO2 or CO2-equivalent. That temporary figure incorporates many outdated assumptions, so it captures just a fraction of the known costs of climate change. But even at that low figure, the almost completely unpriced cost of greenhouse gas emission for all U.S. emitters is $323 billion per year. CBAs can thus readily estimate the social cost of emitting greenhouse gases, but which emissions? If an export terminal transporting natural gas to Europe requires a CBA, would the CBA have to include the cost of emissions from the exported natural gas? Would it be fair to assume that such a terminal would stimulate natural gas production that would not have occurred otherwise? Confusion over which emissions to count or not count has taken place in the context of the National Environmental Policy Act (NEPA), which does not require CBA, but does require the identification of significant environmental impacts. Several federal courts have ruled that greenhouse gas emissions could have “significant” environmental impacts. But which? Classifications under NEPA of “direct,” “indirect,” and “cumulative” impacts suggest the counting of emissions at different stages of production, transportation, and consumption. Courts ultimately determine what NEPA means, but that does not preclude OIRA from issuing directives on how federal agencies should count greenhouse gas emissions.
These updates arrive at a time in which trust in the federal government is extremely low. It may seem Sisyphean to try and help repair the image of the federal government by issuing carefully crafted updates to the practice of CBA by the federal government. But what else can be done, except to push forward? These updates are all a giant step in the right direction. For the estimation of non-market costs and benefits, however, the step should be even larger.
Shi-Ling Hsu is the D’Alemberte Professor of Law at the Florida State University College of Law.