Cost-benefit analysis: Do the ends justify the means?

Chapter 9 Case Study: The Fight over the Cost–Benefit Analyses That Authorize Carbon Emission Regulation

Perhaps not many American know that all major regulation proposed by agencies in the United States Federal government must satisfy a cost–benefit analysis. In 1981, President Ronald Reagan originally issued Executive Order 12291 that required all major regulation to be reviewed by the Office of Information and Regulatory Affairs, which operates within the Office of Management and Budget. The executive order defined regulation of “significant effect” as that which will affect the economy by $100 million dollars or more.

In October of 1993, President Bill Clinton amended and replaced Reagan’s executive order with Executive Order 12866. This order specifically requires that a cost–benefit analysis of the proposed regulation be performed and mandates:

Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people.


Agencies must prepare a review of any regulation (submitted to Office of Information and Regulatory Affairs [OIRA]) to determine whether it is significant or not and, if significant, produce a cost–benefit analysis that demonstrates the benefits outweigh the costs. President Obama amended and replaced Clinton’s executive order with 13563. Changes were made, but the cost–benefit analysis requirement is the same, and while President Trump has issued additional executive orders to govern the implementation of the preceding, it remains the case that proposed regulation that has a significant effect on the economy must pass a cost–benefit analysis submitted to the OIRA.

Given that policymakers must justify their proposals on cost–benefit, it comes as no surprise that major political battles occur over how to assess the values at stake in regulations. Nowhere is this more true that the issue of climate change and carbon emissions. The Scientific American reports that under the Obama administration, multiple agencies working together came to the conclusion that emissions of CO2 in the United States cost $121 billion in damage a year. When factoring in how much CO2 is emitted, this means that every ton of carbon emitted into the atmosphere costs the United States about $21. Thus, if regulation limiting carbon emissions costs the economy more than $21 a ton, it fails the cost–benefit analysis.

Assessing the damage is quite imprecise. Everything from flood deaths and damage to reduced crab harvests in Alaska (from increasing levels of carbon in seawater) might be identified as being a result of the increases in CO2 and be tallied in the costs. However, it is unlikely that the federal agencies have identified every cost. And the cost that has been identified does not seem to outweigh the trillions of dollars it would cost to restructure the US energy infrastructure, promote green alternatives, educate the public about habits, etc. An anonymous EPA official said, “$21 doesn’t really justify much,” and estimates from US Global Change Research Program argues that only an assessment of between $36 and $88 per ton would justify the costs of doing what is necessary to reduce carbon emissions so that the world does not pass the 450 part per million threshold. Thus, those wanting to curb CO2 emissions must find ways to assess more damage if they wish to justify more regulation. The Obama administration managed to later get the estimate up to $36 per ton. However, from the other side, the Trump administration issued new assessments, and this lowered the cost per ton to less than $6.

Given the tremendous variables and uncertainties that go into cost–benefit analyses and the ability of concerned parties either direction to manipulate assessments of costs, does it makes sense for cost–benefit analysis to govern federal regulation? Remember that in the Ford Pinto case, many people objected in principle to putting a price on the value of a human life, presumably because it is wrong in principle to put a dollar amount on a human life and because Ford used that number to justify loss of human life. How does Ford Pinto’s use of cost–benefit compare to the EPA’s? Would we want the EPA to exclude consideration of human life from its cost–benefit analysis because it is immoral to put a price on a human life?

Case study by Robert Reed

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