Many jurisdictions attempt to incorporate cost-benefit analyses as they develop environmental regulations, but too many rely on poorly gathered or unreliable empirical source data and offer only limited consideration to the social benefits of regulation, such as pollution reduction or national security gains. Another challenge is timing the cost-benefit analysis within the regulatory decision-making process, because poor timing both limits the impact of the analysis on the design phase and drives up costs.
To introduce more rigor and transparency into cost-benefit analyses, a checklist setting forth practices that ensure the credibility of underlying research should be used. Private benefits that accrue only to individuals, such as household savings or lower fuel costs, should be excluded from analyses. Finally, an early review process of at least six months should be required for regulations with a projected annual impact in excess of $1 billion.
Cost-benefit analysis of environmental regulation plays a key role in determining how to achieve our environmental goals without imposing unnecessary costs on the economy. This paper proposes three reforms that address several problems that undermine the role played by cost-benefit analysis in environmental regulation. First, agencies should be required to use a checklist of good empirical practices and should promote decentralized evaluations of data and research. Second, absent compelling systematic evidence to the contrary, agencies should presume that consumers are best able to make their own energy-saving decisions, and should focus on regulations that address the harm that people impose on others. Third, a six-month early regulatory review process should be established for particularly important regulations to allow sufficient time for a thorough cost-benefit analysis and the incorporation of the results into the final regulations.