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Climate Change, Racial Justice, and Cost-Benefit Analysis

Climate Justice Responsive Government Climate Defending Safeguards Environmental Justice

This post was originally published on LPE Blog and is part of a symposium on the future of cost-benefit analysis. Reprinted with permission.

President Biden has made climate change and racial justice central themes of his presidency. No doubt with these problems in mind, he has signaled a desire to rethink the process and substance of White House review of agencies' regulatory actions. On his very first day in office, Biden ordered administrative agencies to ensure that this review does not squelch regulatory initiatives nor brush aside "racial justice, environmental stewardship, human dignity, equity, and the interests of future generations." At the same time, however, Biden reaffirmed the "basic principles" of a Clinton-era executive order on White House regulatory review, subjecting agencies' major rules to a cost-benefit test.

These twin inclinations – toward acting boldly on climate change and racial justice, and toward judging regulation using cost-benefit analysis – are trains racing toward each other on the same track. Two entrenched, perhaps even inherent, features of cost-benefit analysis practically ensure that the benefits of regulatory measures addressing climate change and racial injustice will be diminished and deformed in the process of "valuing" them.

The first is the practice of discounting the future. Cost-benefit analysts insist that good consequences that occur in the future are worth less than those that occur today. They have reasoned, variously, that money we have in hand today can be invested to produce more money in the future, that people in the future are likely to be better off than we are today, that failing to recognize the diminished value of the future as compared to the present will induce us to spend all of our money on the far future rather than the needy present, and that people are impatient and would rather have good things today than tomorrow. Arguments like these have long led cost-benefit analysts to apply a discount rate – which operates, essentially, as compound interest in reverse – to the future benefits of regulation. The steeper the discount rate, and the longer the time horizon in which benefits accrue, the punier the future benefits will appear in the cost-benefit calculus. To illustrate: if a 5 percent discount rate is applied to 100 lives in 100 years from now, those future lives dwindle to the equivalent of less than one life today. Lives further in the future would be worth even less.

Given that climate change is a threat reaching into the distant future, the quantitative implications of discounting for the cost-benefit profiles of regulatory actions on climate change are huge. Even seemingly modest adjustments in the discount rate make a massive difference in the cost-benefit balance. Consider the federal government's varying estimates of the "social cost of carbon," a measure calculated to reflect "the monetary value of the net harm to society" of adding one ton of carbon dioxide to the atmosphere in a given year. By raising the discount rate from 3 percent to 7 percent, the Trump administration managed to shrink the social cost of carbon tenfold, from $50 (its value in the Obama administration) to $5 per ton in the year 2050. Even in the Obama years, the administration produced a negative estimate for the social cost of carbon – implying that climate change will have overall good rather than bad consequences – in several scenarios in which it used a 5 percent discount rate instead of a 3 percent rate.

The very idea behind discounting – that a consequence in the future is worth less than the same consequence today – is an affront to values that President Biden has singled out for protection in the regulatory process. Environmental stewardship is a long game, the benefits of which stretch into the indefinite future. Yet the farther into the future these benefits reach, the more discounting diminishes them. The interests of future generations are likewise undermined through discounting, precisely because they are the interests of future generations. Devaluing the future is a feature, not a bug, of cost-benefit analysis as it is currently practiced.

Racial justice, human dignity, and equity also suffer in cost-benefit analysis, due to a second engrained feature of this methodology. Put simply, cost-benefit analysis proceeds by asking how much certain consequences are worth, in dollar terms, to the people who will bear them, and declares a winner by adding up the total dollar amounts on each side of the ledger. A dollar is a dollar in this world, and it matters the same whether a poor person or a rich person is spending or receiving it. It also matters the same whether one person is poor, and another rich, as a consequence of this country's long history of racism and racial subordination. Willfully blind to the maldistribution of society's resources and the historical injustices that underwrite this maldistribution, cost-benefit analysis whistles past two of the central moral concerns with today's regulatory system.

Moreover, to pass the test of cost-benefit analysis, a regulation's benefits must be conceptualized in transactional terms—in terms of what a person is willing to pay or accept—even when doing so disrespects and warps the values at stake. Cost-benefit analysis's relentless insistence on converting all human interactions into economic transactions is most jarringly illustrated by a cost-benefit analysis conducted to evaluate a Department of Justice rule aimed at reducing rape and sexual assault in prisons. For purposes of this analysis, the Department tried to estimate how much money people would be willing to accept to endure rape or sexual assault. Converting rape and sexual assault into market transactions changed them from acts of coercion and violence into supposedly free and willing exchanges; in "valuing" them, the Department of Justice erased the harms that make these acts crimes.

A similar kind of erasure would be entailed by using a cost-benefit lens to evaluate regulatory policies targeting racial discrimination. A regulation that aimed to reduce racial discrimination in the workplace, for example, would be judged by asking how much the employees subject to racial discrimination would be willing to pay to avoid it or how much they would be willing to accept to endure it. Even to ask the question is to strip the context of its rights-based foundations; an underlying premise of cost-benefit analysis is that there are no rights, only preferences. To ask the question is also to exacerbate the dignitary injury inflicted by discrimination. Consider here another cost-benefit analysis produced by the Justice Department – the economic analysis of a rule aimed at improving the access of disabled persons to public and commercial spaces. There, the Department pondered how much money people who use wheelchairs would be willing to pay to avoid the indignity of needing assistance in moving from the wheelchair to the toilet due to an inaccessibly designed space. To value this indignity, the cost-benefit analysis found it necessary to inflict a new one.

Discounting and monetary valuation are so central to the cost-benefit method that it is hard to imagine cost-benefit analysis without them. Happily, though, it is easy to imagine White House regulatory review without cost-benefit analysis. The vast majority of federal regulatory statutes do not require cost-benefit analysis. Many do not even allow it. Instead of evaluating major rules by asking whether they satisfy the test of formal cost-benefit analysis, the White House could ask whether the rules faithfully follow the relevant statutory framework and whether the agencies have rigorously analyzed the evidence in front of them. This simple reform would not only avoid the conundrums posed by cost-benefit analysis. It would also close the gap that has opened between the regulatory standards set by Congress and the cost-benefit metric that recent presidents have preferred.

Climate Justice Responsive Government Climate Defending Safeguards Environmental Justice

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