The Misleading Successes of Cost-Benefit Analysis in Environmental Policy

This Article critically examines the rise of cost-benefit analysis (CBA) in environmental policy and the profound disconnect that has persisted between the actual practice of CBA and its normative grounding. Although CBA is now synonymous with rational decision-making in federal agencies, this has not always been the case. Views about CBA have evolved from bipartisan rejection in the 1970s, to partisan division (Republicans for, Democrats against) during the Reagan-Bush years, to a broad embrace of CBA in the mid-1990s, when centrist legal scholars were instrumental in crafting a new defense of CBA based on a mix of welfare economics and pragmatic institutional claims. The emergence of the new consensus coincided with a string of CBAs prepared by the Environmental Protection Agency (EPA) in which the environmental benefits vastly exceeded the costs. The striking nature of these results bolstered centrist support for CBA and was interpreted as powerful evidence of the potential for new regulatory science to overcome the perceived bias of CBA.

We show that centrist proponents of CBA have drawn the wrong conclusions from this experience because the benefits EPA has calculated for its rules are almost entirely attributable to a single air pollutant—particulate matter (PM)—which accounted for ninety-four to ninety-seven percent of the monetized benefits for the major rules EPA issued during fiscal years 2002 to 2015. In other words, the regulations in which PM benefits figure prominently are the exceptions that prove the rule. PM has a rare combination of characteristics that make it peculiarly amenable to epidemiological study, whereas testing of other pollutants must rely on less direct or much more complex methods. These differences are reflected in EPA’s poor track record of quantifying the benefits from rules regulating hundreds of other pollutants.

The prevailing consensus around CBA is therefore premised on false assumptions about its empirical grounding, its capacity to promote social welfare, and its neutrality in assessing costs and benefits. These inconsistencies are evident in recent controversies over EPA’s heavy reliance on PM co-benefits and federal efforts to estimate the social cost of carbon, which have exposed divisions between conservative and centrist proponents of CBA and stripped away its veneer of methodological objectivity.

Recognizing the shortcomings of CBA opens the door to a broader understanding of decision-making processes informed by the limits that “bounded rationality” places on economic models of welfare maximization. We propose alternative epistemically modest heuristic models for decision-making that are premised on exploiting the available knowledge and information. Many federal environmental laws reflect a similar epistemic pragmatism; yet it is precisely these forms of regulation that CBA’s proponents have challenged and sought to replace. We need to be clear-eyed about the epistemic limits that are endemic to environmental policy. This means designing decision tools to leverage the knowledge and information we have rather than relying on methods that are appealing in theory but require knowledge and data that are often unattainable in practice.