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The Use of Benefit-Cost Analysis in Environmental Policy Making

Charles Griffiths*

National Center for Environmental Economics, U.S. EPA

Corresponding Author:

Charles Griffiths

National Center for Environmental Economics

Room 4316f EPA East, Mail Code 1809T

U.S. Environmental Protection Agency

1200 Pennsylvania Avenue, N.W.

Washington, D.C. 20460

Phone: 202/566-2288 Fax: 202/566-2338

Email: griffiths.charles@epamail.epa.gov

* Charles Griffiths is an economist in the National Center for Environmental Economics at the U.S. 

Environmental Protection Agency. The views expressed in this paper are entirely those of the author 

and do not necessarily represent the views of the U.S. Environmental Protection Agency.
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Abstract

There are four general areas that constrain the government economist=s ability to conduct more widely 

accepted benefit-cost analysis: legal limitations, institutional constraints, limited resources, and researchrelated issues. Legally, agencies must design regulation to address potential economic, environmental, 

public health and safety, distributive, and equity impacts. In practice, more attention is placed on the 

scientific, technical, and enforcement issues, leading to institutional shortcuts to conduct the economic 

analyses. Previously used benefits transfer methodologies are overused because any new application of 

economic methodologies must be peer reviewed with appropriate time for public comment. 

Additionally, economic analysis almost always occurs last in the rule development process. This is not 

to imply that the benefit-cost analysis at the EPA is substandard, rather it is subject to the same criticism 

leveled against benefit-cost analysis conducted by academics, particularly regarding the use of the Avalue 

of a statistical life@ (VSL) and morbidity values. The inescapable truth is that benefit-cost analysis for 

policy making will always be a constrained exercise, but it is still useful. The increasing complexity of 

both the dimensions considered and values used reflect a desire for more and better benefit-cost 

analysis, not less.

Keywords: Benefit-Cost Analysis, Environmental Policy, Value of a Statistical Life, Willingness to Pay
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Benefit-cost analysis is the tool by which economists determine if there are positive net benefits 

from regulation, and the need for improved analysis has grown over time. If the most egregious 

environmental problems were effectively addressed in early environmental regulation, then the largest net 

benefits have already been captured. Unless either the nature of the environmental problems or 

society=s preferences have changed, standard economic theory suggests that additional regulation will 

produce progressively smaller benefits at progressively larger costs. Benefit-cost analysis measures 

these incremental changes.

Benefit-cost analysis has also gained some opponents. Critics have portrayed benefit-cost 

analysis as the weapon of anti-environmentalists bent on preventing beneficial regulation from being 

passed. Others have pointed to the limitations of the methodology to discount its importance in decision 

making. Chief among these limitations is the inability to monetize all of the benefits from environmental 

regulation. How can net benefits to society from additional regulation be assessed if the benefits are 

only partially measured? In fact, even if total costs and benefits are fully and accurately measured, a 

case can be made that certain environmental actions are morally correct, irrespective of whether costs 

outweigh benefits. The strict utilitarian measure of welfare used by economists can never capture this 

moral imperative.

Into this divide is cast the government=s environmental economist. For all Amajor regulation,@ he 

or she is required to conduct a benefit-cost analysis, but is limited in his or her ability to do so. In 

general, there are four areas that constrain the government economist=s ability to conduct more widely 

accepted benefit-cost analysis: legal limitations, institutional constraints, limited resources, and researchrelated issues. Each of these limitations is discussed below.
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Legal Limitations

While most regulatory agencies have a handful of laws that define their primary responsibilities, 

the EPA is responsible for implementing a plethora of environmental laws. The EPA=s web site states 

that A... more than a dozen major statutes and laws form the legal basis for the programs of the 

Environmental Protection Agency ...@(EPA 2002b). One list cites thirty-three environmental laws 

through which the EPA carries out its mission (Browner 1995). While these laws allow the EPA to 

measure the benefits to health and welfare from regulations passed under these statutes, they do not 

necessarily allow for benefit-cost analysis. This leads to an interesting discussion on interpretation. 

Does the absence of an explicit call for a comparison of benefits and costs mean that it is not 

permissible? Morgenstern (1997) reprints a table suggesting that benefit-cost analysis is Aallowable@

only under the Safe Drinking Water Act, the Toxic Substances Control Act, and the Federal 

Insecticide, Fungicide, and Rodenticide Act. It is questionable if it is allowed under the Clean Water 

Act, the Resource Conservation and Recovery Act, and parts of the Clean Air Act. If fact, the 

Supreme Court has recently ruled that while the Clean Air Act requires the EPA to promulgate national 

ambient air quality standards (NAAQS), these standards must be set to attain and maintain public 

health. Further, it ruled, the law A... does not permit the (EPA) Administrator to consider 

implementation costs in setting NAAQS@ (Whitman v. American Trucking Assns., Inc. 2001), 

effectively disallowing benefit-cost analysis as a tool for setting the primary NAAQS. Obviously, an 

analysis can always be done, but it has been eliminated as a decision making tool.
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Even when benefit-cost analysis is allowed and required, it is more complicated then simply 

promulgating regulation when benefits exceed costs. In 1993, President Clinton issued Executive Order 

12866 with a mandate to propose regulation A... upon a reasoned determination that the benefits of the 

intended regulation justify its costs.@ This might have been an explicit desire to promote regulation even 

if it imposed more costs on society than benefits, or it may have been a more implicit recognition that not 

all benefits can be monetized in a benefit-cost analysis. Certainly economists were consulted in its 

drafting because it included a number of economic concepts such as marketable permits, user fees, and 

information provision. It also encouraged the rule makers to move away from design-based standards 

and Aspecify performance objectives, rather than specifying the behavior or manner of compliance that 

regulated entities must adopt@ (President 1993).

Executive Order 12866 also split the focus of the government economist by encouraging 

agencies to choose the option that maximizes net benefits A... including potential economic, 

environmental, public health and safety, and other advantages; distributive impacts; and equity.@ 

Furthermore, agencies were to design regulation in the most cost-effective manner, considering 

Aincentives for innovation, consistency, predictability, the costs of enforcement and compliance (to the 

government, regulated entities, and the public), flexibility, distributive impacts, and equity.@ This was a 

sign of things to come. Before the end of his term, President Clinton would sign four more executive 

orders that added directives for benefit-cost analysis, requiring agencies to address issues of 

environmental justice; include an evaluation of the impact on the health and safety of children; and 

requiring consultation and collaboration with affected American Indian tribal governments and state, 

local, and American Indian tribal governments. In addition, benefit-cost analysis must include 
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requirements specified in the Unfunded Mandates Reform Act of 1995 and the Regulatory Flexibility 

Act of 1980 as amended by the Small Business Regulatory Enforcement Fairness Act of 1996. Each 

additional legal requirement broadens the scope of economic analysis beyond merely comparing benefits 

and costs, and thus makes the results of the analysis more equivocal.

Institutional Constraints

Before any regulation is made effective, it must be Aproposed@ in the Federal Register and 

public comment must be sought. During the period of public comment, anyone can either comment on 

the proposed rule or submit data for consideration. If the data submitted is sufficient to potentially affect 

the decision made about the rule, then it must be published in the Federal Register as well, with another 

public comment period. During this process, any public meetings regarding the rule must be also be 

announced. Finally, the text of the final rule must be published, making the rule effective within a certain 

number of days and becoming part of the Code of Federal Regulations (CFR).

Obviously, the Federal Register notices do not include everything that is used in the decision 

making process, and generally do not include the complete benefit-cost analysis. This is usually 

contained in a supporting document. All supporting documents, however, must be cited in the Federal 

Register notices and made available to the public. In addition, paper copies of everything that was used 

or even considered in the rule making process must be contained in an official docket and open to the 

public for inspection and contribution.

All of this can be a time consuming process. An internal EPA database report (EPA 2002a) 
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indicates that the average time that it takes from when an office begins working on a rule to the 

publication of the proposal is 486 days. This is an underestimate because the start time is counted from 

the internal Astart action notice@ issued by a program office to the Agency=s Steering Committee, and 

advance work must be done prior to this. The average time from proposal to the final rule is 748 days. 

 This means that it takes three or more years to a create new regulation.

Three or more years would seem to be more than enough time to conduct a rigorous benefitcost analysis. The problem is that economics is but one of the issues that must be addressed. Early in 

the regulation making process, each program office is encouraged to write an AAnalytic Blueprint@ for 

the rule, where it lays out all of the things that need to be accomplished and how they will be done. Of 

the many items that need to be addressed, the economic analysis is but one. In practice, more attention 

is placed on the scientific and technical issues and legal and enforcement issues than on the economic 

analysis.

This may be because most of the people involved in rule making are non-economists and do not 

understand some of the more detailed economic concepts. For example, whereas the theoretically 

correct measure of the cost of a rule includes the firm=s compliance costs, the government=s regulatory 

costs, transitional social costs (e.g., temporary unemployment), and the loss in consumer and producer 

surplus, most regulations only measure the compliance and regulatory costs. This is because these are 

visible, easy to understand, and easier to estimate. Discussions of demand elasticities and social welfare 

measures have a tendency to be lost on those without economic training. Similarly, discussions of 

economic benefits tend to focus on easily understandable items, such as health effects and loss of life. 

The concepts behind other non-market benefits are often harder to understand for non-economists.
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Because of the lengthy and complicated process of forming a rule, certain institutional behavior 

has developed to deal with the economic analysis. The benefit-cost analysis usually is evaluated only at 

the national level rather than more regionally or locally. It rarely includes a measure of the inefficiency of 

the chosen option relative to equivalent pollution reduction by the lowest compliance cost firms. 

Because review by OMB is required but does not generally derail a rule, this review is viewed as a 

hurdle to get past rather than a check to make sure that the best regulation has been designed and the 

best option has been chosen. This leads to an overuse of techniques and willingness to pay values that 

have been previously accepted by OMB and EPA management, whether or not they are most 

appropriate, because they are likely to be approved again.

Limited Resources

Beyond the institutional constraints, the government economist faces the traditional resource 

constraints of limited time and money. In the EPA=s 2003 budget request, economic analysis is 

considered to be part of Goal 8, the sound science section (EPA 2002c). This goal, of the ten listed, 

commands 4.2 percent of the budget, but economics is only a small part of this. In fact, benefit-cost 

analysis is alluded to only twice in the entire budget request and none of the budget categories include 

economics in its description. The practical reality is that economic analysis is not a goal itself, but rather 

an ancillary activity in the mission of the Agency. This is also reflected in the number of economists 

hired by the agency. Morgenstern (1997) cites data showing that law was the most common advanced 

degree at the EPA in 1996, followed by biological science, engineering, and physical science. These 
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four disciplines made up 64% of EPA employees with doctorates, masters, or juris doctorates at that 

time. Economists made up a mere 1.7% of the total. Although things have changed since then, the 

current percentages are probably similar.

Individual benefit-cost analyses are funded as part of each regulation development process. 

Generally the analysis is done by outside contractors, although in-house economic analysis is becoming 

more frequent. It almost always involves benefits transfer, where the willingness to pay estimates from a 

previous study are used for the policy scenario. It is explicitly recognized in the EPA=s Guidelines for 

Preparing Economic Analyses (2000a) that this is not the optimal situation, but conducting an original 

study for anything but the largest regulation is almost an impossibility. This is due to the fact that any 

new contingent valuation (CV) or revealed preference survey or any novel application of existing 

economic methodologies must be peer reviewed if it is to be accepted for regulation development, 

which requires both time and money.

The process of conducting a survey is particularly burdensome. Under the Paperwork 

Reduction Act of 1995, an agency must acquire OMB approval if it collects the same information from 

ten or more non-Federal respondents. This AInformation Collection Request@ (ICR) must justify the 

need for the data, estimate the time and cost burden placed on the public, and must be published in the 

Federal Register twice, with an appropriate public comment period. The EPA=s Office of Economic 

Information (OEI) estimates that this process takes a minimum of 180 days to complete.

With more than three years in rule development, however, even the ICR burden and peerreview process would be surmountable if it were not for the fact that the economic analysis almost 

always occurs last in the rule development process. This is not a bias against economics, but occurs 
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because all other components of the rule must be known before they can be valued. For example, 

before a CV survey can be done, the pollutant loadings (both baseline and the counterfactual), exposure 

scenario, and the regulatory options must be known. However, these are almost never known until 

management is ready to make its final decision on the rule. This means that economics cannot inform 

the decision unless a valuation technique is in place that can be run at the absolute last minute. This, 

inevitably, means some form of benefits transfer.

Research-Related Issues

This is not to imply that the benefit-cost analysis at the EPA is substandard. In fact, great care 

is taken to follow the economics literature properly. This, then, subjects it to the same criticism leveled 

against benefit-cost analysis conducted by academics. A particularly contentious issue is the Avalue of a 

statistical life@ (VSL). Following standard economic practice, EPA economists monetize the changes in 

risk of death. Using the wage premium that workers require to take on risky jobs or using CV surveys, 

one can obtain the value that one would pay to reduce the risk of death by, say, 1 in 100,000. 

Multiplying this value by 100,000 then produces the VSL.1 Using the twenty-one wage-risk studies and 

five stated preference studies reported by Viscusi (1992), the EPA estimated a mean VSL of 4.8 million 

1990 dollars and a standard deviation of $3.24 million (EPA 1997). Inflated to 1999$, this $6.1 million 

VSL used in most benefit-cost analysis at the EPA (EPA 2000a).

This number has been roundly criticized. Most commonly, it is noted that the wage-risk studies 

used to estimate the VSL are based on the risk premiums for middle aged males in blue collar 
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occupations in the 1970s and 1980s. Environmental risks affect a more affluent general population 

today. If the VSL changes with income, as is reasonable to expect, then the EPA's value should be 

updated for both cross-sectional and temporal income variations. For example, Revesz (1999) suggests 

adjusting for the 22.7% higher median income of the general population over the workers in the wagerisk studies, and others (EPA 2000b) have suggested accounting for the average 1.5% real income 

growth. Since income elasticities for this type of adjustment range widely, from 0.08 to 1.0 (IEc 1999), 

sensitivity analysis is clearly warranted. Additionally, if it is the very old and very young that are at 

particularly at risk, then the VSL could be adjusted to account for how preference change with age. 

Jones-Lee, et. al. (1993) suggests that the VSL may peak around 40-45, but other research contradicts 

this (Krupnick et. al 2002).

While corrections for income and age are controversial, they are possible. More problematic 

are factors that economists know affect the VSL but for which there is no method to take them into 

account (EPA 2000b). For example, wage-risk studies capture the risk premium of workers who 

accept riskier jobs. Economic theory, however, suggests that the workers with the lowest risk premium 

(that is, those who demand the least increase in their wage) are the ones who will fill the riskiest jobs. 

This suggests that the VSL is too low, but by an unknown amount. Additionally, the nature of the risk 

may be important to willingness to pay values. For example, the degree to which the risks have been 

accepted voluntarily and can be controlled are important to individual's behavior and perceptions of risk 

and, therefore, may affect the VSL. Cancer risk is particularly troublesome since it is accompanied by 

fear and dread that may affect the individual's willingness to pay. Finally, some have suggested that 

individuals of compromised health may have a different VSL from more healthy individuals, although 
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support for this hypothesis is mixed. Each of these factors suggest that the VSL should be modified, but 

is unclear by how much and in what direction.2

There are problems beyond those associated with mortality risk as well. Morbidity valuations 

are also controversial. While there are almost an indescribable number of ways that one might become 

sick from environmental hazards, robust willingness to pay values exist for a very limited number of 

conditions, such as chronic bronchitic and asthma attacks (EPA 1997). Absent these values, economists 

are forced to use the cost-of-illness as a proxy. These measures are considered to be a lower bound of 

the individual's true willingness to pay, but even this is not certain because of insurance and other 

distortions (EPA 2000a). All that is known for sure is that, conceptually, the cost-of-illness numbers do 

not reflect the true willingness to pay values.

Facing Facts

The sum of these limitations make things look quite bad for both benefit-cost analysis and the 

economist. The inescapable truth is that benefit-cost analysis for policy making will always be a 

constrained exercise. This is not to say that it is not useful. The increasing complexity of both the 

dimensions considered and values used reflect a desire for more and better benefit-cost analysis, not 

less. Extreme critics aside, benefit-cost analysis has been widely embraced as an important input in the 

regulatory process. For most, its results are controversial only to the degree that economists question 

that they are comprehensive. We must assure ourselves that all aspects of the problem have been 

accurately addressed, and any missing components publicly confessed. 
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The limitations detailed above should not imply that benefit-cost analysis for policy making is not 

done well. Admittedly, some regulation has been proffered with bad benefit-cost analysis, but OMB 

has served its function to assail the deficiencies and send the analysis back for improvement. Rather 

than impeding good regulation, this has only strengthened the EPA=s resolve to honestly and accurately 

report benefits and costs. Furthermore, when freed from the constraints of the regulatory process, 

governmental environment economists have produced well respected, high quality work, such as the 

two benefit-cost analyses of the Clean Air Act (EPA 1997, 1999). In addition, the EPA=s National 

Center for Environmental Economics is working on research to advance valuation techniques that may 

be useful in Agency rule making. In general, benefit-cost analysis in policy making has been steadily 

improving and will continue to serve a useful function in decision making

Finally, we must remember that benefit-cost analysis is but one input into any good regulatory 

decision. Ultimately, certain intangibles may never be fully captured by economists. Nevertheless, the 

comparison of benefits that society might enjoy from additional environmental regulation to the 

associated costs will always be valuable to decision makers.
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References

Browner, Carol M. 1995. AThe Earth is in Your Hands@ EPA Journal. 21(1)(Winter). EPA175-N-95-001. Retrieved March 13, 2002, from 

http://www.epa.gov/docs/epajrnal/winter95/04.txt.html

Industrial Economics, Incorporated (IEc). 1999. "Recommended Approaches to Adjusting WTP 

Estimates to Reflect Changes in Real Income.'' Memorandum to Jim DeMocker' Ofice of 

Policy Analysis and Review, Office of Air and Radiation, U.S. EPA, prepared by Naomi 

Klecker and James E. Neumann, June 3.

Jones-Lee, M.W., D. O'Reilly, and P.R. Philips. 1993. "The Value of Preventing Non-Fatal Road 

Injuries: Findings of a Willingness-to-Pay National Sample Survey,@ TRL Working Paper, WP 

SRC2.

Krupnick, Alan, Anna Alberini, Maureen Cropper, Nathalie Simon, Bernie O=Brien, Ron Goeree, 

and Martin Heintzelman. (2002). AAge, Health and the Willingness to Pay for Mortality 

Risk Reductions: A Contingent Valuation Study of Ontario Residents,@ Journal of Risk 

and Uncertainty, 24, 161-186

Mogenstern, Richard D., ed. 1997. Economic Analysis at EPA. Washington, D.C.: Resources for the 

Future.

Revesz, Richard. 1999. "Environmental Regulation, Cost-Benefit Analysis, and the Discounting of 

Human Lives," Columbia Law Review, 99(4): 941-1017.

President. 1993. AExecutive Order 12866 of September 30, 1993: Regulatory Planning and Review.@ 

Federal Register. 58, no. 190 (October 4): 51735.
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U.S. Environmental Protection Agency. 1997. The Benefits and Costs of the Clean Air Act: 1970-

1990. Prepared by the Office of Air and Radiation and the Office of Policy, Planning and 

Evaluation. EPA-410-R-97-002.

U.S. Environmental Protection Agency. 1999. The Benefits and Costs of the Clean Air Act: 1990 to 

2010. Prepared by the Office of Air and Radiation and the Office of Policy. EPA-410-R-99-

001.

U.S. Environmental Protection Agency. 2000a. Guidelines for Preparing Economic Analyses. 

Prepared by the Office of the Administrator. EPA 240-R-00-003.

U.S. Environmental Protection Agency. 2000b. Valuing Fatal Cancer Risk Reductions. draft white 

paper reviewed in Science Advisory Board report no. EPA-SAB-EEAC-00-013.

U.S. Environmental Protection Agency. 2002a. AAverage Time Consumed in Rule Development.@ In 

Rule and Policy Information Development System (RAPIDS) [database online]. 

Washington, D.C. [updated March 13, 2002; cited March 13, 2002]. 1 screen. Restricted 

database available to EPA employees.

U.S. Environmental Protection Agency. 2002b. Major Environmental Laws. Retrieved March 12, 

2002, from http://www.epa.gov/epahome/laws.htm

U.S. Environmental Protection Agency. 2002c. Summary of the EPA=s Budget: FY 2003. Retrieved 

March 13, 2002, from http://www.epa.gov/ocfo/budget/budget.htm

Viscusi, W. K. 1992. Fatal Tradeoffs: Public and Private Responsibilities for Risk, New York, 

N.Y.: Oxford University Press.

Whitman v. American Trucking Assns., Inc. 2001. 531 U.S. 457 (Supreme Court, February 27).
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Endnotes

 

1. Note that this is never interpreted as the value place on one life, it is the value placed on a marginal 

change in risk and offered to an appropriate number of individuals so that, statistically, one life would be 

saved.

2. While the EPA is aware of these issues, the Agency=s Environmental Economics Advisory Committee 

of the Science Advisory Panel has recommended using the current VSL figure.