The social cost of inertia: how cost-benefit incoherence threatens to derail U.S. climate action.
I. Introduction A. General Background on the Human Impacts of the Cost-Benefit Analysis Approach to Climate Change Regulation B. How Mistakes in an Arcane CBA Methodological Handbook Fuel Opposition to Climate Change Regulations II. The Amplified Role of OMB Methodological Guidelines on Regulatory Analysis Under President Obama III. Although E.O. 12,866 Is Incoherent, Its Text and History Establish that Regulatory Analyses Were Intended to Address Deontological Concerns IV. Circular A-4 Is Not the Gold Standard for Regulatory Analysis A. Intentional and Unintentional Bias 1. Formality vs. Informality 2. Why A-4 Methodologies Generate "Garbage Out" Results, Even Given Accurate Inputs B. Peer Review and Public Comment V. The Uncomfortable Relationship Between A-4 and the Social Cost of Carbon A. Background on the Social Cost of Carbon B. A-4 Is an Internal Management Document Created by Executive Fiat Under the George W. Bush Administration, and the Obama Administration Can Freely Ignore It C. Criticism of SCC for Not "Following the Rules" of A-4: The Merits of the Substantive Case 1. Discount Rates for Climate Benefits Are, if Anything, Too High a. Reporting Only Rates that Are Lower than 7% Is Correct b. Differential Discounting Within RIAs Is Not "Absurd" 2. Reporting Global Benefits Is Appropriate D. Certain OMG Methodological Guidelines Not Followed Would Have Increased the SCC 1. Lives in Developing Nations Are Valued Less than U.S. Lives Within the Same Regulatory Analysis 2. The Baseline for the SCC a. IWG's Use of an IAM Model that Assumes Regulation Occurs 3. The SCC May Underestimate the Compounding Effects of Major U.S. Climate Change Regulations VI. Conclusion
A. General Background on the Human Impacts of the Cost-Benefit Analysis Approach to Climate Change Regulation
When a powerful storm destroyed her riverside home in 2009, Jahanara Khatun lost more than the modest roof over her head. In the aftermath, her husband died and she became so destitute that she sold her son and daughter into bonded servitude ... She spends her days collecting cow dung for fuel and struggling to grow vegetables in soil poisoned by salt water. Climate scientists predict that this area will be inundated as sea levels rise and storm surges increase.... But Ms. Khatun is trying to hold out at least for a while--one of millions living on borrowed time in this vast landscape of river islands, bamboo huts, heartbreaking choices and impossible hopes. (1)
Human-caused climate change causes tens of thousands of deaths worldwide each year. This death rate, along with rates of other human health impacts, is virtually certain to increase over time. (2) The United States--though recently dethroned by China as the world's largest carbon dioxide emitter--remains among the largest carbon dioxide emitters per capita. (3) Because carbon dioxide pollution can persist in the environment for hundreds or even thousands of years, (4) the United States remains responsible for the largest share of increased carbon dioxide currently in the world's air, oceans, and soil. (5)
The executive branch is attempting to address climate change by pressing a controversial domestic agenda and putting the U.S. on track to take a leadership role at the crucial international negotiations scheduled for Paris in 2015. The Obama administration's relevant proposed and finalized regulations include conservation regulations, fuel economy standards, and limits on pollution from power plants. (6) The administration has also championed subsidies for solar and wind energy, among other non-regulatory energy policy measures. (7)
Stories like that of Ms. Khatun, above, make patent the destruction imposed by the United States and other large-scale emitters onto poor countries that are ill-equipped to cope with these harms; these human scale accounts tend to create an impetus to act. (8) But framing the narrative as one of aggregate risk serves to suppress this instinct, and further reducing estimates of aggregate risks to mere inputs into a larger cost-benefit analysis (CBA) moves the narrative even further away from the human instinct to protect vulnerable people in well-publicized danger and closer to what some argue is a better, more rational position from which to make policy decisions. (9)
For example, in his remarks from the Senate floor criticizing an Environmental Protection Agency (EPA) proposal to reduce emissions of greenhouse gases (GHGs), like carbon dioxide, from existing power plants, Senator John Cornyn said:
I wish to clarify once again that the debate over President Obama's EPA rule is not about the science of climate change; it is a debate about whether massive regulations should be forced to pass a simple cost-benefit analysis. The EPA rule clearly fails that test. (10)
While EPA and other agencies have developed regulations on GHGs, and President Obama has pressed other elements of his "Climate Action Plan," many Members of Congress have taken a tack similar to that of Senator Cornyn. They explain that they oppose proposals to reduce GHG emissions, not necessarily because they deny the underlying science or lack concern for people who will be harmed by climate change, but--at least in part--because they are persuaded that CBA shows the proposals will do more harm than good. (11)
There exists an enormous body of scholarship on CBA. (12) To the extent a portion of it, by accident or by design, is currently helping to prop up such arguments against climate action, this scholarship's merits are of deadly serious concern because of what is at stake. According to the latest report from the Intergovernmental Panel on Climate Change (IPCC), if current emissions trends continue, a temperature increase of 4.1[degrees] to 4.8[degrees] C (about 7.4[degrees] to 8.6[degrees] F) by 2100 is likely. (13) Under one plausible reductions scenario, where rates of global carbon dioxide-equivalent emissions are reduced to stay 11% to 17% below 2010 rates through 2050, and then drop to 21% to 54% below 2010 rates from 2050 through 2100, a rise in average mean temperature of 2.6[degrees] to 2.9[degrees] C (about 4.7[degrees] to 5.2[degrees] F) is still predicted. (14)
Even under the latter scenario, IPCC scientists are confident that climate change impacts will include increasing deaths and diseases from devastating heat waves, droughts, floods, wildfires, disrupted food production and water supply, damaged infrastructure, and destroyed human settlements. (15) At issue is real, human devastation on an utterly massive scale. (16) Unfortunately, however, climate change is a policy problem that is particularly incompatible with the United States' current emphasis on CBA in regulatory policy.
The economic foundations of the type of regulatory CBA practiced in the U.S. technically require that it be used only when the projects under evaluation will not have a large impact on the economy. Although the United States has been side-stepping this fundamental principle for years, evaluating major climate regulations using current, standardized regulatory CBA methodologies violates this principle in a more dramatic fashion than ever in our history.
To explain: CBA is a branch of applied microeconomics that--in an effort to enhance welfare, utility, or some similar social objective--applies some of the same economic assumptions applicable to a firm or household more broadly. However, nothing could be larger, more macro, than the global climate. Using microeconomic insights to inform more "macro" regulatory decisions may be attractive when a regulatory alternative (as with a proposal relating to a single firm that has little influence on the larger economy) will have little impact on any factors external to the microeconomic analysis. But the further the actual facts move from this assumption, the less helpful such microeconomic models become to real-world decision makers.
CBAs, because they rely on estimates of "partial equilibrium analyses," assume any factors not under assessment will remain unaffected while the set of moving pieces actually under analysis are evaluated. (17) However, performing valid partial equilibrium analyses (or even making defensible estimates) is not even theoretically possible when the condition of the entire, populated planet centuries into the future is one of the moving pieces. (18) National energy and climate policy seem particularly unsuited for a sort of accounting that depends on a number of external factors to remain the same, no matter what action is or isn't taken. Unfortunately, despite this fundamental incompatibility, CBA is playing a key role in the current debate. Thus, it is necessary to examine the merits of the relevant methodological arguments. For example, is it true that EPA's proposed rule for existing power plant emissions "fail" CBA, as many Members of Congress have claimed? (19) Or does EPA get it right when its CBA estimates that these regulations will result in billions of dollars in net social welfare benefits? (20) Given the number of value judgments involved in producing these assessments, (21) and given the shaky foundation upon which this endeavor rests, (22) there can be no objectively correct answer to these questions. What can be shown, though, and what this article establishes, is that CBA provides no rational justification for putting the brakes on climate change regulations. To the extent these welfare analyses do tell us anything useful, they counsel that we are waiting too long to do too little. To put it back into human terms, the United States' inertia--its attachment to existing, flawed policy and to existing, irrational tactics for regulatory analysis--is imperiling hundreds of millions of lives of real people like Ms. Khatun.
B. How Mistakes in an Arcane CBA Methodological Handbook Fuel Opposition to Climate Change Regulations
The foundation for some of these claims that climate change proposals "fail" CBA--and the corollary claim that these proposals would fail CBA if only agency economists would "follow the rules" of CBA--can be found in an obscure 2003 handbook created by George W. Bush's Office of Management and Budget (OMB). These guidelines, titled "OMB Circular A-4, Regulatory Analysis," (colloquially, A-4) establish methodologies agencies must use in the Regulatory Impact Analyses (RIAs) they must prepare for major rules subject to OMB-supervised regulatory review. (23)
When EPA's claims about the welfare impacts of a rule are inconsistent with A-4, critics argue that EPA's estimates are bogus. (24) For example, in response to a request from Senator David Vitter and Representative Darrell Issa, the U.S. Government Accountability Office (GAO) released a report in July 2014 assessing "how EPA has used economic analyses in its decision making during the rulemaking process and the extent to which EPA adhered to OMB guidance in conducting selected elements of the economic analyses the agency used to support recent rulemakings." (25) To meet this objective, GAO studied seven EPA rulemakings and "assessed them against key principles outlined in OMB Circular A-4," ultimately finding that EPA did not always follow the guidelines contained in A-4. (26) Predictably, this finding that EPA did not comply fully with A-4 has fueled claims that EPA's proposed new climate change regulations are themselves deeply flawed. (27)
There has even been legislation introduced in the House that would specifically require EPA to follow A-4 in new analyses of EPA's Clean Power Plan. The Clean Power Plan sets GHG emissions limits for new and existing power plants. (28)
The cachet of A-4 is bolstered by continued favorable treatment by many in the legal academy, including such prominent CBA scholars as Professors Cass Sunstein (29) and Kip Viscusi (30) (who also happen to have been among the seven peer reviewers of A-4). (31) While this scholarly work may not support climate inaction directly--Cass Sunstein was personally involved in approving some of the GHG regulations and policies at issue in the current debate (32)--academic support for applying flawed A-4 directives to regulations, including GHG regulations, is lending credibility to overtly political antiregulatory rhetoric that relies on A-4. (33)
Much of the current confusion over the appropriate way to conduct a regulatory CBA derives from the executive order that spawned A-4, an executive order that is impossible to comply with literally (see discussion in Part IV, below). This still-operative Clinton-era order, Executive Order 12,866, "Regulatory Planning and Review," requires executive agencies to prepare regulatory impact analyses (RIAs) for a centralized review overseen by OMB's Office of Information and Regulatory Affairs (OIRA). (34) When George W. Bush's OMB initially issued Circular A-4 in 2003, this represented a move away from considering deontological values in RIAs (explicitly required under President Clinton's executive order), and a shift toward giving heavier weight to formalistic CBA results.
The stated purpose of A-4 is to implement the language in E.O. 12.866 that calls for assessing projected costs and benefits. (35) But E.O. 12.866 also requires evaluating and optimizing numerous other considerations, some of which are incompatible with even this "soft" CBA decision criterion. The Order sets out a series of irreconcilable "max/min" problems with no common solution, a series of directives to do the impossible, i.e., to identify the single solution that maximizes or minimizes multiple competing variables all at once. For analysts producing RIAs under A-4, it creates a conundrum that, over and over again, is resolved in favor of maximizing quantifiable, monetized "net benefits" (to the extent this is consistent with the agency's mandate), at the expense of promoting other conflicting yet also important duty- and rights-based factors that the text of the executive order puts on equal footing with the consequentialist concerns addressed by CBA.
This problem was exacerbated when, in one of his first major moves after becoming OIRA Administrator in 2009, Professor Cass Sunstein issued a memorandum to agencies calling for even more rigid adherence to A-4 than was required under the George W. Bush administration that created it. (36) The increasing ascendancy of A-4 results in E.O. 12,866-implementation in a way that gives insufficient influence to the ethical, deontological concerns expressly recognized as deserving protection by the language of that executive order.
Furthermore, A-4 is deeply flawed even when considered only as a tool for achieving its consequentialist objective to identify regulatory options that maximize net social welfare. It instructs agencies to use a set of estimation procedures that, on the whole, are biased against protective regulations, especially regulations whose benefits accrue in the future and which are harder to quantify. (37) For example, A-4 requires that regulatory benefits that will accrue in the future must be reported using a very high discount rate, one that commentators almost universally describe as too high even while OMB specifies more correct, lower rates to be used in other types of analyses. (38) One might ask why OMB would not just allow but actually mandate CBA methodologies that are fringe positions in the field of mainstream welfare economics (excluding the un-peer reviewed, self-published work produced by regulatory think tanks, much of it funded in some way by regulated industry itself)? The answer may lie in the fact that many of the erroneous and subjectively biased methodologies now enshrined in A-4 date back to the Reagan era, when the preferred methodologies of overtly anti-regulatory interests were promoted by OMB and imposed to varying degrees on agencies for the express purpose of slowing them down. (39)
Unfortunately, despite all A-4's defects and limitations, over time it has come to be regarded by many as the "worldwide gold standard" of applied regulatory analysis. (40) Supporters of robust agency CBA requirements, including former OIRA administrators under Republican and Democratic administrations, endorse A-4 as being produced under rigorous peer review and a public comment process. (41) They also claim it reflects the mainstream consensus among relevant experts. (42)
However, the process by which A-4 was prepared did not include "notice and comment" in the sense that phrase is traditionally used for rulemakings under the Administrative Procedures Act (APA). A crucial difference is that in APA rulemakings the rulemaking agency must provide a reasonable, non-arbitrary response to commenters or face possible legal consequences for moving forward in the face of commenter criticism. (43) Here, no such requirement was imposed.
Similarly, its proponents claim A-4 is reliable because it is "peer reviewed," but the process used was grossly inadequate. Though the peer reviewers were well-regarded scholars, they represented a very narrow set of viewpoints, and many of them had real or apparent conflicts of interest. (44) Furthermore, there was never a requirement that Circular A-4 actually had to satisfy these peer reviewers. (45)
As the Obama administration implements its "Climate Action Plan," it will rely on A-4 methodologies to complete CBAs of major climate regulations. To incorporate the monetized value of climate benefits and costs into these CBAs, agencies will rely on the administration's controversial Social Cost of Carbon (SCC) estimates. The oft-repeated criticism that the SCC is too high because it arguably was derived in a way inconsistent with two A-4 methodological guidelines (ones that would have reduced the SCC by reducing the weight given to future beneficiaries and to people outside the United States) is flawed in substance since these are legitimate concerns for regulatory analyses. This critique is also procedurally flawed to the extent it assumes any executive agency obligation to comply with this flawed set of OMB guidelines that were never officially promulgated as a rule or enacted as a law. Moreover, had the SCC been derived using certain other, more reasonable OMB methodologies that were not followed--such as the requests to use appropriate values for human lives and to use a logical baseline--the SCC estimates would have been even higher.
Part II of this article describes regulatory analysis, including the enhanced role of A-4, under the Obama administration. Part III explains why E.O. 12,866 is incoherent; I argue, however, that even given the impossibility of literally implementing all of E.O. 12,866's inconsistent directives, OIRA errs in emphasizing CBA to the extent it does. Part IV contends that A-4 contains substantive methodological flaws that have a significant impact on regulations and explains how A-4 was created through a flawed process. Part V argues that the legal scholars, lobbyists, and government policy makers (including some Members of Congress) who criticize the SCC for considering the impacts of externalizing emissions onto other countries and for its failure to use an after-inflation (real) discount rate of 7%, err in claiming that these SCC numbers are illegitimate for not "following the rules" as laid out in A-4. It also identifies OMB guidelines not followed that would have increased the SCC. Part VI concludes that A-4 is producing misleading results and that compliance with A-4 should no longer be a required part of the regulatory review process for any regulation, especially regulations targeting climate change.
II. The Amplified Role of OMB Methodological Guidelines on Regulatory Analysis Under President Obama
Professor Sunstein, who is among the most cited and respected legal scholars in the United States, served as President Obama's first "regulatory czar." In that position he established an architecture of regulatory review for this administration. While there are competing narratives on the subject of how intrusive President Obama's OIRA has become in the rulemaking process, there is agreement on the point that A-4 has become significantly more influential than it was under the George W. Bush administration that created A-4. Required adherence to formalistic methodological requirements has significantly increased since President Clinton issued E.O. 12,866 in 1993.
OIRA has been criticized on multiple fronts since acquiring its current role in the regulatory review apparatus in the 1980s. OIRA has been likened to a regulatory black hole that often delays and rejects proposed regulations before the public even has an opportunity to review them. OIRA has also been attacked for requiring agencies to engage in analyses that serve as a "one-way ratchet," systematically weakening public health and environmental regulations. (46)
OIRA-overseen regulatory review, if cynically used to enable a president to avoid direct accountability for his or her unwillingness to let an agency proceed, has few--if any--defenders on public policy grounds. The legal legitimacy of this OIRA action does have defenders. (47) But OIRA qua rational regulatory reviewer, on the one hand, and centralized inter-agency policy coordinator, on the other, finds numerous champions in the literature. (48)
When it is performing this more widely-accepted "regulatory analysis" role, OIRA insists agencies follow the cost-benefit methodologies enumerated in Circular A-4.49 In describing the regulatory review process, Professor Sunstein writes:
[T]he most difficult problems appear quite rarely, and when they do, the executive branch usually has standardized methods for handling them. These methods are often captured in authoritative documents that are both meant and understood to bind executive agencies even though they lack the force of law (in the sense that they set out purely internal requirements and hence cannot be used in court). The Office of Management and Budget's Circular A-4, issued in 2003, is the formal, binding guidance document that governs the analysis of regulatory impacts, and it outlines many of those standardized methods. (It is noteworthy that Circular A-4 was issued in the George W. Bush Administration and continues in the Obama Administration; its longevity attests to its technical character.) (50)
But A-4 is not merely a "technical" document. The methodological prescriptions within it reflect decades of lobbying and political wrangling. (51) Choices that were controversial in 1981 may appear more settled in 2014; this is because proponents of a certain variety of cost-benefit analysis won a political battle, not because there has been a true meeting of the minds on strictly technical matters after a robust debate in the relevant literatures. (52) Entrenched is not the same as correct.
In 2011, President Obama issued a new executive order on regulatory review, E.O. 13,563, which explicitly re-affirms and does not amend E.O. 12,866. (53) The key rules at issue in the suite of rules that will comprise the Obama administration's climate regulations will be "significant regulatory action[s]" (the trigger for mandatory OIRA cost-benefit review under the Order) within the meaning of E.O. 12,866. (54) Interestingly, however, most rules reviewed by OIRA today are not in any obvious way "significant regulatory action[s]" that require OIRA review at all. (55) This appears to go against President Clinton's intention when he initially signed E.O. 12,866 and explained that regulatory review would be "dramatically different" and that many fewer regulations would be subjected to a review. (56)
Since leaving his post as OIRA Administrator, Professor Sunstein has produced a flurry of scholarship describing and defending the OIRA-overseen regulatory review process. (57) The window into the inner workings of OIRA that Professor Sunstein's recent writings provide is valuable to OIRA watchers both inside and outside academia, because key portions of the review process are closed to any external would-be monitors. For example, the crucial first centralized regulatory review of an inchoate rule--including any substantive revision to the proposed rule that occurs during this process--generally happens before the public has any opportunity to comment on (or even see) the agency's original regulatory proposal. (58) And the public often has no idea whether a decision to hold up a rule came from an OIRA desk officer or the White House Chief of Staff--the process is that impenetrable. (59)
While Professor Sunstein has been writing about OIRA-overseen centralized regulatory review and revision, additional windows into how this process functions under the Obama administration have appeared. The first was a critique by Professor Lisa Heinzerling (former head of EPA's Office of Policy and Planning), who provides a first-hand account of a deeply dysfunctional process, a narrative fundamentally at odds with Professor Sunstein's apologetics. (60) More recently, Curtis Copeland produced a report for the Administrative Conference of the United States that offered numerous accounts from anonymous sources inside the administration that--taken as a whole--also undermine Professor Sunstein's narrative of a lightly flawed but basically well-functioning regulatory review apparatus. (61)
Centralized review in the Obama administration prioritizes the use of CBA in the regulatory decision-making process and has created increased pressure on agencies to follow A-4 requirements when assessing and reporting regulatory costs and benefits. (62) According to Professor Sunstein, the Obama administration's focus on compliance with A-4 represents an "unprecedented commitment to quantification of both costs and benefits." (63)
This increased emphasis on compliance with A-4 in rulemaking and this policy focus on an especially rigid, formalistic CBA represent a giant move away from the intentions of E.O. 12,866. Here, then-Professor Elena Kagan describes the general intention of the Order:
[E.O. 12,866] suggested a generally more positive attitude toward regulatory efforts, particularly on health and safety matters. In addition to reciting language about the potential benefits of regulation, the order eased the mandate that agencies use cost-benefit analysis as the basis of decision-making by authorizing the agencies to incorporate in this analysis "equity," "distributive impacts," and "qualitative measures." (64)
A comparison of regulatory analyses under the Clinton and Obama administrations is illustrative of how far in the direction of formal, quantitative cost-benefit analysis regulatory review under E.O. 12,866 has drifted. For example, in its 2000 rulemaking on health privacy standards, the Department of Health and Human Services declined to place a monetary figure on the intangible value of privacy, explaining that:
Benefits [of the rule] are difficult to measure because people conceive of privacy primarily as a right, not as a commodity.... However, it is possible to evaluate some of the benefits that may accrue to individuals as a result of proposed regulation, and these benefits, alone, suggest that the regulation is warranted. Added to these benefits is the intangible value of privacy, the security that individuals feel when personal information is kept confidential. This benefit is very real and very significant but there are no reliable means of measuring [the] dollar value of such benefit. (65)
Yet when the Department of Justice recently issued regulations that were intended to control sexual abuse of prisoners, DOJ was required to submit a CBA of the proposal to OIRA, following the guidelines of A-4. (66) In a chilling report, forcible rape of an adult prisoner was assigned a monetary value of -$310,000 or -$480,000, while "contacts with a staff member that only involved touching of the inmate's buttocks, thigh, penis, breasts, or vagina in a sexual way" were assigned a value of -$600 per incident. (67)
This willingness to monetize even rape represents a major shift from Clinton-era implementation of E.O. 12,866. OIRA originally permitted the rulemaking agency to abstain from monetizing significantly lesser invasions of privacy and dignity, respecting the general understanding that some regulations protect rights that defy commodification.
III. Although E.O. 12,866 Is Incoherent, Its Text and History Establish that Regulatory Analyses Were Intended to Address Deontological Concerns
Textbooks on policy analysis tend to use the phrase "cost-benefit analysis" to refer very specifically to a formal economic analysis in which, among other things, the present value of social welfare gains and losses are identified, quantified, and expressed in the same units. (68) Historically, the analyses produced by agencies arguably have not been true "cost-benefit analyses" within the narrow, technical definition used in CBA textbooks, although they have indeed been analyses that considered costs and benefits and are generally referred to as "cost-benefit analyses." (69) Instead, these prior CBAs might include narrative descriptions of costs and benefits, with overt policy discussions finding their way into the CBA weighting along with the monetary estimates. (70)
Most of the CBAs produced under the Reagan and George H.W. Bush administrations under Executive Order 12,291, E.O. 12,866's principal predecessor, in this way were quite different from the high-theory CBAs described in public policy texts. This practical result is inevitable, regardless of an administration's attitude toward health, safety, and environmental regulation. The insurmountable difficulties in quantification, monetization, and risk assessment prevent real world agency analyses from resembling formal, textbook models. (71)
E.O. 12,866's predecessor, E.O. 12,291, provided: "Regulatory action shall not be undertaken unless the potential benefits to society for the regulation outweigh the potential costs to society [...]" (72) E.O. 12,866 was intended to soften the rigid CBA requirements of the Reagan-era E.O 12,291 by removing the absolute requirement that benefits outweigh costs to the extent permitted by law. As we have seen, even E.O. 12,291 was not so rigid in its adherence to "hard" CBA that the analyses it generated were limited to consideration of only quantified and monetized inputs.
In its "regulatory philosophy" statement, E.O. 12,866 provides:
In deciding whether and how to regulate, agencies should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating. Costs and benefits shall be understood to include both quantifiable measures (to the fullest extent that these can be usefully estimated) and qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider. Further, in choosing among alternative regulatory approaches, agencies should select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity), unless a statute requires another regulatory approach. (74)
The only way to read the language above as communicating anything intelligible is to read it as calling for a balancing of deontological ethical principles with the more welfarist/utilitarian values reflected--albeit incompletely--in a policy wherein all inputs to the analysis must be either monetized or omitted.
There is no obvious way to import the required concern for "qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider" into an analysis that monetizes "net benefits" without treating it as a type of quantitative data. This complete quantification and monetization of all non-economic values considered in the agency's regulatory impact analysis is not only unnecessary, under the text of the executive order it is arguably forbidden.
Agencies cannot literally maximize all the listed types of regulatory benefits, as "[i]t is not mathematically possible to maximize for two (or more) variables at the same time." (75) The techniques used in mathematics to maximize (or minimize) one variable or another necessarily imply that it is not possible to simultaneously maximize two variables in an equation. (76)
A particularly striking expression of the popular misunderstanding about this pseudo-maximum problem is the famous statement according to which the purpose of social effort is the 'greatest possible good for the greatest possible number.' A guiding principle cannot be formulated by the requirement of maximizing two (or more) functions at once. Such a principle, taken literally, is self-contradictory. (In general one function will have no maximum where the other function has one.) It is no better than saying, e.g., that a firm should obtain maximum prices at maximum turnover, or a maximum revenue at minimum outlay. (77)
This directive to maximize and minimize multiple concerns occurs in E.O. 12,866 again, when "[t]o ensure that agencies' regulatory programs are consistent with" the Order's all-of-the-above regulatory philosophy, the Order directs each agency to adhere to all of the following principles, among others: (78)
* "design its regulations in the most cost-effective manner to achieve the regulatory objective." (79)
* "to the extent feasible, specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt." (80)
* "assess the effects of Federal regulations on State, local, and tribal governments, including specifically the availability of resources to carry out those mandates, and seek to minimize those burdens that uniquely or significantly affect such governmental entities, consistent with achieving regulatory objectives." (81)
* "tailor its regulations to impose the least burden on society, including individuals, businesses of differing sizes, and other entities (including small communities and governmental entities), consistent with obtaining the regulatory objectives ... [.]" (82)
* "draft its regulations to be simple and easy to understand, with the goal of minimizing the potential for uncertainty and litigation arising from such uncertainty ." (83)
* "assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs." (84)
As with the regulatory philosophy with which these principles are meant to ensure consistency, it is impossible for an agency to apply such competing directives in a literal way. For example, the regulation that "imposes the least burden on society" might not "minimiz[e] the potential for uncertainty and litigation arising from uncertainty," and/or might not also "to the extent feasible, specify performance objectives [.]" (85)
As with E.O. 12,866's regulatory philosophy, the best reading would allow agencies to make "reasoned determinations" without monetizing intangible regulatory costs and benefits unless this monetization of intangibles makes sense. It does not explicitly or implicitly call for across-the-board formal quantitative CBA, using the controversial techniques promoted at the time of A-4's drafting by industry-sponsored think tanks like the Harvard Center for Risk Analysis (HCRA). (86) Yet this is exactly what A-4 currently demands.
IV. Circular A-4 Is Not the Gold Standard for Regulatory Analysis
A. Intentional and Unintentional Bias
A significant function of OMB-supervised regulatory review has always been straightforwardly political. It was thus under President Reagan, when the modern era of OIRA-overseen regulatory review began. (87) This political gate-keeper/speed-check function has persisted through to the current administration. (88) And so, during a recession year election when regulations were frequently characterized as "jobkilling," (89) the Obama administration was able to use OMB regulatory review to keep controversial regulations on ice, at least until after the election. (90) President Obama's OIRA--as with the previous administration's--will reportedly sometimes delay agencies' submission of regulations to OIRA (or records them as having been "submitted" later than they really are) (91) because official submission triggers a public notice. (92)
While the purely political role of centralized regulatory review persists, there is much more than bald politics to centralized regulatory review. Reviews at OIRA are overseen by OIRA staffers and administrators whose concerns surely include an earnest interest in good policy making, and who do not appear to believe they are manning the Death Star. (93) The facially, though not actually, (94) neutral checkpoint that all economically significant executive agency regulations must pass through, is careful review by OIRA for compliance with A-4. (95) (EPA uses specialized guidelines for regulatory review, but these are meant to operationalize A-4's requirements, not contradict or circumvent them. (96))
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|Title Annotation:||Introduction into IV. Circular A-4 Is Not the Gold Standard for Regulatory A. Intentional and Unintentional Bias, p. 131-154|
|Author:||Luttrell, Melissa J.|
|Publication:||Duke Environmental Law & Policy Forum|
|Date:||Sep 22, 2014|
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