A Dangerous Change in Cost/Benefit Analysis

The Brookings Institution has just published a working
paper of real importance on a profound change in cost/benefit analysis.  Don’t be fooled by its innocuous, academic title:  “Determining the Proper Scope of Climate
Change Benefits.”  It is worth your attention.

While its authors, Ted Gayer and Kip Viscusi, believe that human-generated climate change is real, they are asking serious questions about the Obama Administration’s calculation of the benefits of the EPA’s recent proposed rule on power plant emissions.

In a nutshell, Gayer and Viscusi find that the Administration defines the cost of the power plant proposed rule domestically while defining the benefits in global terms.  “This practice,” they write, “is not only inconsistent with what we consider to be the proper scope of benefit assessment, but is also inconsistent” with existing OMB guidance.

Here’s the bottom line:  the EPA estimates the benefits of its proposed power plant rule to be $30 billion in 2020 using a 3 percent discount rate.  However, only 7 to 23 percent of those benefits would be domestic, based on the Administration’s own methodology.  “As a result,” Gayer and Viscusi write, “the domestic benefits amount is only $2.1 billion – $6.9 billion, which is less than the estimate compliance costs for the rule of $7.3 billion.”

No other country employs this asymmetrical approach to cost/benefit analysis.  It is entirely the product of the Obama Administration.  As the authors note, if such an approach “applied broadly to all policies,” it would “substantially shift the allocation of society resources.”  For example, “the global perspective would likely shift immigration policy to one of entirely open borders,” shift away from “transfers to low-income U.S. citizens towards transfers to much lower-income non-U.S. citizens,” and “drastically” change defense policy.

Indeed, such a methodology could profoundly change all administrative rulemaking, including  such business-related agencies as the SEC.  The prospect of altering commonly held views of the scope of cost/benefit analysis should not be accepted without careful debate because cost/benefit analysis is at the heart of measuring the growth effects of regulation.