Arrival of the cost-benefit state

When President Ronald Reagan signed an executive order in 1981, requiring federal agencies to analyze the costs and benefits of major regulations in order to ensure that the extra expense for businesses would be justified, environmental activists and congressional Democrats were aghast. They warned that such cost-benefit analyses would favor industry profits over the public good. “They are trying to put into numbers something that doesn’t fit into numbers, like the value of clean air to our grandchildren,” Richard Ayers, a founder of the Natural Resources Defense Council, told The New York Times at the time. “It is deceivingly precise and ignores ethical and moral choices.”

But for more than three decades — no matter which party was in office — the mandate for cost-benefit analyses remained strong. President Obama even expanded Reagan’s order, decreeing that such analyses should be used for minor regulations, too. Agencies routinely calculate what companies likely would spend to, say, install pollution control devices to comply with air quality rules or air bags to meet automobile safety rules. They also assign monetary values to benefits, such as reducing the risk of death, injury or illness. (The Environmental Protection Agency estimates the value of a human life at $8.6 million in calculating the EPA’s mercury rule, for example.)

Less clear is how the Supreme Court views actual environmental law. At times, the court has allowed the EPA to overlook costs, as in a 2001 case concerning air-quality standards for smog and soot. At other times, it has ruled in favor of analysis, as in 2009, when it upheld the EPA’s right to consider costs in regulating how companies extract water from lakes to cool coal-fired power plants. The court now appears to have moved even closer to embracing the use of cost-benefit analysis.

In late June, the court ruled on the EPA’s Mercury and Air Toxics Rule, in a case brought by 21 states, including Arizona, Alaska, Idaho, Utah and Wyoming, as well as by power companies. The 5-4 decision, with the lead opinion written by Justice Antonin Scalia, says the EPA acted irrationally, unreasonably and illegally when it elected to regulate mercury and other toxic air pollution from power plants based entirely on the public health impact, without weighing the costs to industry.

Even more telling was the dissent presented by Justice Elena Kagan for herself and three other liberal judges. Absent a contrary indication from Congress, she wrote, “an agency must take costs into account in some manner before imposing significant regulatory burdens.” Kagan argues that the EPA clearly met this requirement later on in its regulatory process, when it did consider the costs to industry. That’s not how the liberal argument would have been framed 20 years ago. Now, though, as Harvard Law School Professor Cass Sunstein — a former economic guru in Obama’s White House — recently crowed: “The cost-benefit state has arrived.”

“If you were to plot it against time, you would see that the court is gradually developing more cost-benefit friendly decisions,” says Michael Livermore, associate professor at the University of Virginia Law School and co-author of a 2013 book on the subject.

The latest decision suggests that unless Congress says otherwise, the EPA has to consider costs when making regulations. That would at first appear a boon for industry and a hit for environmentalists. But William Pedersen, an industry lawyer, sees it differently. He reads Scalia’s mercury opinion as an invitation for the EPA to consider all the benefits of a regulation. “Scalia opened the door wide for them to use that logic,” Pedersen says. “It would be unwise if they don’t step through it.”

This could help the EPA not only salvage the mercury rule but also defend its Clean Power Plan, due out this summer. The plan, which includes the first-ever limits placed on greenhouse gas emissions for existing power plants, is the centerpiece of Obama’s climate change agenda. The cost is enormous, but the EPA justifies it with the enormous benefits, including better air quality and less premature death and illness.

More broadly, the problem with the ascendancy of cost-benefit analyses is that the EPA, in many instances, lacks the scientific data to prove exactly how dangerous certain chemicals might be. That makes it hard to argue with well-armed opponents, who can say exactly how much — or even exaggerate how much — a regulation will cost the industry.

That has not kept the EPA from trying. For years after Reagan’s executive order, cost-benefit analysis was used to curtail environmental regulation, but over time, the EPA developed techniques to measure health benefits and justify policy. “Cost-benefit analysis has matured as a methodology,” Livermore says. “The costs are lower than many people would think they would be, and the benefits are quite high.”

Still, some legal scholars and environmental activists find the concept anathema to the whole point of environmental policy. “EPA has been pretty clever about turning the weapon around,” says Ayers, now an independent environmental lawyer. “I don’t think it has any more validity when they do it than when the other guys do it.” 

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