Will Cost-Benefit Analysis Become the Law of the EPA?, by Jonathan Masur
Last month, in a step that received relatively little attention, the EPA issued an Advanced Notice of Proposed Rulemaking soliciting comments on its use of cost-benefit analysis. As the Notice explains, the EPA is required by a series of executive orders to conduct a cost-benefit analysis (“CBA”) each time it promulgates a major rule. (For the most part, the rules classified as “major” are those with economic impact greater than $100 million.) The manner in which the EPA—and other agencies—conduct CBA is informed by guidance documents issued by the Office of Management and Budget and the agency itself. Nonetheless, the practice of cost-benefit analysis has typically been inconsistent both across agencies and within agencies. Some of these inconsistencies stem from differences in agency policies and approaches. For instance, the EPA and the Department of Transportation use different values of life when conducting CBA. Other inconsistences stem from the many different statutes under which each agency regulates. Under the Clean Water Act, for instance, the EPA is variously directed to mandate the use of the “best available technology economically achievable,” the “best conventional pollutant control technology,” and the “best practicable control technology,” depending upon the type of pollution source being regulated. The Clean Air Act supplies a panoply of different standards as well. This has led the EPA to treat costs and benefits differently in different regulations, depending upon the statutory section that provides it with regulatory authority.
In its Notice, the EPA requests comments regarding “how the Agency considers costs and benefits in rulemaking.” In particular, the EPA proposes to define the terms used in regulatory statutes—“practicable,” “reasonable,” “conventional,” “best available,” and so forth—according to cost-benefit metrics. In other words, “practicable” might be defined to mean that a particular regulatory standard passes some cost-benefit threshold; “best available” might be given a slightly different meaning. Relatedly, the EPA suggests that it might try to narrow some of the inconsistencies in how it conducts CBA while maintaining fidelity to the various statutory frameworks under which it regulates.
Though it is couched in the not-so-sexy language of internal agency procedure and cost-benefit analysis, the EPA’s proposed rule is potentially a very big deal. Most significantly, the EPA could be on its way to creating a regulatory requirement that it conduct CBA when it engages in rulemaking. To date, every CBA mandate within the administrative state has sprung from an executive order or an internal guidance document. Because of this, courts have generally treated agency CBAs as though they were judicially unreviewable, and they have typically refrained from scrutinizing those CBAs in any detail. Eric Posner and I have argued that courts should treat agency CBAs as judicially reviewable and should strike down regulations that fail CBA, and we have suggested that administrative law doctrine seems to be moving in that direction. But this type of judicially-driven evolution is necessarily a slow and uncertain process. The EPA’s regulation offers the possibility of short-circuiting that process and creating judicially reviewable standards right away (at least for the EPA). That would be a dramatic and welcome change in the law, for reasons that Posner and I have explained.
Moreover, the EPA is proposing not only to create a legal requirement that the agency conduct CBA, but also that it might define what it means for a rule to satisfy cost-benefit analysis. Defining terms such as “practicable” or “reasonable” in cost-benefit terms would fundamentally change how the agency operates and how courts review EPA regulations. It would bind the agency to a particular set of cost-benefit standards. The agency would know in advance which sorts of rules were legally permissible, and the courts would be able to hold the EPA to those standards. The legal significance of this development cannot be overstated, particularly given that the EPA seems poised to enact a number of major rules that would fail a cost-benefit test.
For nearly forty years, the administrative state has operated under a type of “shadow” cost-benefit mandate. Agencies have been required to conduct cost-benefit analysis when regulating, but only the executive branch itself had the authority to judge the quality and outcome of those CBAs. Only the executive branch could reject regulations that fell short. The EPA’s proposed rule would bring these processes into the sunlight. It is axiomatic that government should do more good than harm when it acts—via regulation or otherwise. Courts should have the authority to reject agency actions that fail this basic requirement. As always, the devil will be in the details, and it is always possible that the EPA’s final rule will contain only modest technical guidance. But this proposed rule represents an opportunity for the EPA to instantiate CBA as the law of that agency. The regulators charged with safeguarding clean air and water, the judges charged with reviewing their regulations, and the American citizens who breathe the air and drink the water would all benefit from such a move.
Jonathan Masur is the John P. Wilson Professor of Law, David and Celia Hilliard Research Scholar, and Director of the Wachtell, Lipton, Rosen & Katz Program in Behavioral Law, Finance and Economics at the University of Chicago Law School.