Immediate Options to Address Environmental Disparities in Cost-Benefit Analysis

Note: On March 10, the author spoke at the Florida International University annual environmental forum, for a panel titled “Environmental Justice, Cost-Benefit Analysis, and the OIRA Regulatory Process.” This article reprints his prepared remarks.

Ever since President Biden issued his memorandum on Modernizing Regulatory Review, scholarly debate has intensified over whether and how to incorporate equity considerations into cost-benefit analysis. On one end of the spectrum, some have called for fundamentally revising cost-benefit analysis to prioritize equity over efficiency (that is, maximizing net benefits regardless of distribution). On the other end, some have said that cost-benefit analysis should not consider equity at all. And between those two poles, many have debated both how to measure the costs and benefits of regulatory policies for disadvantaged groups and how to balance efficiency and equity concerns.

I do not have answers to these weighty issues, and I frankly doubt that our regulatory system will resolve them anytime soon. But this much is clear: As it is currently performed, cost-benefit analysis generally undercounts many benefits both to society at large and to vulnerable communities in particular. Before resolving how to consider equity as part of cost-benefit analysis, there are improvements we can make within the existing cost-benefit framework to ensure that health and environmental benefits to society at large — and to marginalized communities in particular — are sufficiently considered.

I’ll quickly highlight two ready-to-go modifications.

First, agencies should apply lower discount rates in cost-benefit analysis. In cost-benefit analysis, a discount rate puts all impacts that occur at different times into a common present value by reducing, or “discounting,” impacts that occur in the future. Agencies are currently using outdated discount rates that devalue impacts in the more distant future — impacts such as latent health harms from pollution or harms to vulnerable populations from climate change — with the effect of prioritizing cost savings to industry that occur in the nearer future and thus are discounted less. Economic evidence now overwhelmingly supports the use of lower discount rates that will ensure that long-term health and environmental benefits to impacted communities are not devalued. Federal agencies should incorporate these lower discount rates into their regulatory analysis without delay.

Second, agencies should assess environmental impacts using granular models and rely less on population-wide averages. In general, the communities that are exposed to the highest levels of pollution also tend to suffer from risk factors such as underlying health conditions or low healthcare access that increase their vulnerability to pollution. Relying on population-wide averages overlooks this dynamic and thus generally underestimates the benefits that these communities — and society as whole — experience from pollution reductions. Granular modeling capacity has vastly improved in recent years, and the government should make greater use of it.

In conclusion, there are many ways that regulators can adjust cost-benefit analysis to better capture the benefits that all of us — and vulnerable communities in particular — receive from mitigating pollution and improving public health. We need not await the most ambitious reforms to make substantial progress. Regulators already have tools available at their disposal to improve cost-benefit analysis in a matter that promotes efficiency while also advancing equity.