Formal cost-benefit analysis (CBA) is a regulatory tool that monetizes the cost of environmental compliance–and its derivative economic costs–and the environmental and public health benefits of regulatory alternatives to guide environmental decision-making. CBA, as an informational tool, can influence environmental policy directly when used determinatively by agencies to promulgate environmental and public health risk regulations, or indirectly by justifying regulatory decisions through non-determinative (but highly influential) regulatory impact analyses. 

 

For either purpose, the current methodology of CBA lacks distributional weighting, i.e., it ignores equity-based granularities among stakeholders that would better inform policy makers. In other words, the question of who benefits and who is burdened from a decision to regulate (and how) or not is not answered by an unweighted CBA. As the Environmental Justice (EJ) movement continues to gain momentum, whether an informational tool that is insensitive to distributional equities is consistent with principles of reasoned decision making and environmental justice remains to be carefully examined. 

 

A. Views on Unweighted CBA

 

CBA is rooted in the normative framework of welfare economics that dictates resources ought to be allocated efficiently to maximize the overall welfare (or utility) of society. Whether in the form of a regulatory action, deregulatory action, or no action, an agency acts pursuant to that maxim if the benefits exceed the costs of the regulatory decision. Thus, agencies use CBA to identify the regulatory alternative that yields the wider margin of net benefits and, once the alternative is selected, to justify the course of action as one having the most utility-maximizing impacts. Unweighted CBA does not account for distributional weights, i.e. the background economic information of the stakeholders in question. Accordingly, $1,000 of utility in not bearing a compliance cost—a cost bore by corporate persons—is equivalent to $1,000 of utility in not bearing higher health risks associated with air pollution—a cost bore disproportionately by low-income and people of color. While CBA advocates claim that the use of CBA as currently utilized by regulatory agencies in the United States “enhance[s] the effectiveness of environmental policy decisions by providing policy makers and the public with information needed to systematically assess the likely consequences of various actions or options ,” many critics worry that ignoring distributional effects can result in the exclusion of important regulatory benefits that would otherwise accrue disproportionately to people in need of environmental justice .

 

While the Biden Administration has confirmed support of CBA as a regulatory policy-making tool, the Administration seems to disfavor an unweighted analysis. On January 20, 2021, the Biden Administration signed an Executive Memorandum directing a review of CBA methodologies. The order directs the Office of Management and Budget (OMB), in consultation with federal agencies and departments, to “propose procedures that take into account the distributional consequences of regulations, including as part of any quantitative or qualitative analysis of the costs and benefits of regulations, to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities .” Thus, providing the agency with a different approach to the use and role of CBA and regulation .

 

 

 

B. Unweighted CBA Against Principles of Reasoned Decision-Making and Environmental Justice 

 

The principles of reasoned decision-making and environmental justice caution against unweighted CBA. Irrespective of the level of deference afforded to agencies, they are generally limited by administrative principles of reasoned decision-making. For instance, the APA provides that courts must set aside “agency action[s] . . . . found to be arbitrary [and] capricious.” Therefore, when an agency acts in its area of expertise, the scope of review “is narrow” and courts will review whether the agency made a decision based on a consideration of the relevant factors. On the other hand, to foster the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, Executive Order 12898 (Order) directs agencies to identify and address disproportionately high and adverse human health or environmental effects of their actions on marginalized communities.

 

If the agencies are committed to rationality and justice, the use of unweighted CBA should be examined through the lenses of both principles—reasoned decision making and EJ. While agencies are afforded greater deference when employing statistical methods, courts will not “rubber-stamp EPA’s invocation of statistics without some explanation of the underlying principles or reasons why its formulas would produce an accurate result.” Consequently, to avoid arbitrariness, when justifying a regulatory decision based on unweighted CBA, agencies should have to explain why the methodology ignores the principle of diminishing marginal utility. In other words, agencies should explain why their methodology contradicts the consensus among welfare economists that “the income and [utility] relationship is . . . . curvilinear . . . . with a decreasing marginal utility for higher levels of income” and wealth–indicating that an additional dollar to a wealthy person has less welfare-maximizing effects than an extra dollar to someone facing food insecurity. Agencies should explain how ignoring the initial position of the stakeholders experiencing the benefits and losses of a regulatory decision is compatible with the CBA-maxim of welfare maximization. While a departure from this economic principle alone is not likely to render actions arbitrary, CBA insensitivity to distributional concerns has serious implications when it comes to environmental justice—a factor EPA must consider pursuant to the Order.

 

Together, the principles of reasoned decision-making and environmental justice demand agencies to include vulnerable communities in the decision-making process—for them to be worthy of consideration and protection. Making impactful environmental decisions influenced by unweighted CBAs falls short of satisfying these cornerstone principles of administrative and environmental law. By failing to account for equity-based granularities among regulatory stakeholders, policymakers run the risk of ignoring valuable data that would better inform them when making tough decisions involving the sustainable use of natural resources, economic development, and public health.

 

*Authors:

 

Jorge-Roman-Romero – J.D. & LL.M. in Energy and Natural Resources Candidate, The University of Tulsa College of Law, expected May 2021.

 

Mariana Muñoz – J.D Candidate, Vermont Law School, expected May 2021. Received a Bachelor of Arts in Political Science and a Master’s in Social Work and Public Policy, summa cum laude from The University of Vermont. 

 

Additional Sources: 

 

5 U.S.C. § 706(2)(A) (West).

 

Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co ., 463 U.S. 29, 43 (1983) (West). 

 

See Am. Coke & Coal Chems. Inst. v. EPA , 452 F.3d 930, 941 (D.C. Cir. 2006) (West); See also Nat’l Assoc. of Clean Water Agencies v. EPA , 734 F.3d 1115, 1145 (D.C. Cir. 2013)(West). 

 

Ed Diener et. al., The Relationship Between Income and Subjective Well-Being: Relative or Absolute , 28 SOC. INDICATORS RSCH 195, 204 (1993); See also Ruut Veenhoven, Is Happiness Relative? , 24 SOC. INDICATORS RSCH. 1, 7 (1991) (“[W]e not only see a clear positive relationship, but also a curvilinear patterns, which suggests that wealth is subject to a law of diminishing happiness returns.”).