With respect to instrument choice, industry groups were originally attracted to marketable permit schemes as a lower-cost means of achieving pollution reduction, while environmental groups were skeptical of these approaches. First with the Clean Air Act Amendments of 1990, and then when faced with the daunting challenge of climate change, environmental groups acknowledged that market mechanisms are more economically and politically viable than command-and-control regimes because they impose far lower aggregate costs on society. And industry groups realized that by attacking marketable permit schemes they might defeat greenhouse gas regulation altogether. While environmental groups and industry have largely switched positions on the two central questions of environmental policy, there was a brief time when their positions largely overlapped. As a result of the fleeting nature of this consensus, however, the opportunities to make substantial progress in rationalizing the system of environmental regulation have been unrealized.
INTRODUCTION II. COST-BENEFIT ANALYSIS A. Putting a Price on Life B. A Tentative Embrace C. Turning Away from Cost-Benefit Analysis III. MARKETABLE PERMITS A. Market Environmentalism B. A Moment of Consensus C. From Theory to Praxis, to Debacle IV. CONCLUSION I. INTRODUCTION
When designing environmental policy, decision makers must address two principal questions: What are the policy's goals? What instrument should be used to carry out the policy? In the United States, these questions have principally been translated into a set of binary choices. First, should the government use cost-benefit analysis instead of alternative risk management frameworks? Second, should the government favor market-based instruments over command-and-control regulation as the principal regulatory instrument?
In the 1970s and 1980s, when U.S. environmental policy was in its infancy, the position of interest groups with respect to these questions, particularly on issues affecting public health, was clear and predictable. On the first question, industry groups--principally trade associations representing polluters--favored the use of cost-benefit analysis, arguing that environmental benefits needed to be weighed against the resulting undesirable economic consequences. (1) In contrast, environmental groups vigorously opposed cost-benefit analysis, claiming in part that it would systematically lead to weak protections. (2)
On the second question, industry groups favored marketable permit schemes on the grounds that they led to the least-cost way to meet a given environmental standard and that they provided desirable incentives for technological innovation. (3) Environmental groups, in contrast, argued that such schemes were "licenses to pollute" and therefore unethical, and that they would compromise the effectiveness of environmental controls. (4)
Now, decades later, when the field of environmental regulation is relatively mature, industry and environmental groups continue to have strong and opposite positions on each of these principal building blocks of environmental policy. That is not surprising. But what is surprising is that each of the positions held by the competing sides is, to a significant extent, the diametric opposite of the position they held in the 1970s and 1980s.
On cost-benefit analysis, many industry groups have largely abandoned their commitment to weighing environmental benefits against economic costs. Instead, they spend considerable energy casting doubt on the economic models that they themselves had advocated only a few decades earlier, calling them unreliable and manipulable. (5) In contrast, many industry groups vigorously embrace the mantra of "job-killing regulations," arguing that any regulation that has a negative impact on jobs should not be undertaken, regardless of how large the benefits--including saving tens of thousands of lives--and how small the number of jobs it might eliminate. (6) And, to calculate the impact of regulations on jobs, they use economically questionable methodologies that have no support in the peer-reviewed literature. (7)
The position of environmental groups has also shifted, though less dramatically. A number of significant groups now engage in methodological discussions of how cost-benefit analysis should be conducted, and participate effectively in the types of administrative proceedings that they would have eschewed decades earlier. And while other groups still view cost-benefit analysis with suspicion, overall the opposition by environmental groups has softened considerably.
As to marketable permit schemes, the industry groups that had been enthusiastic about them until the 1990s have changed their mind, referring to such schemes derisively as cap-and-tax approaches and invoking a parade of horribles that would allegedly follow their adoption. (8) In contrast, environmental groups have embraced marketable permit schemes and have taken an active role in designing them and lobbying Congress for their adoption.
What happened? Why did the positions of the 1970s and 1980s largely become the opposite positions in the 2000s and 2010s? The best explanation is that neither side had any robust commitment to any of the positions they espoused then, and similarly has no robust commitment to the positions they are espousing now. (9) Instead, each of the sides had--and continues to have--only a commitment to particular substantive outcomes on the stringency of environmental policy. Industry groups want laxer standards and environmental groups want more stringent standards, and they are both prepared to invoke any argument that will advance their respective positions along that spectrum.
As to cost-benefit analysis, industry groups came to see that, when properly conducted, the technique could justify stringent regulation. Similarly, environmental groups came to see the promise of cost-benefit analysis. In particular, over time the U.S. Environmental Protection Agency (EPA) refined its methodology for computing the value of statistical life, which is the benefit from averting a death from pollution. The value of statistical life is now around $9 million, (10) and can justify quite stringent regulations, especially when coupled with a growing body of research demonstrating causal links between environmental quality and mortality. Similarly, the federal government now uses an estimate for the social cost of carbon--the damage of a ton of carbon dioxide emissions--of around $40." This value, likewise, can justify significant regulation of greenhouse gases.
On marketable permit schemes, environmental groups came to see that they provided the best hope for a comprehensive approach to climate change regulation, in particular because the command-and-control regimes that they had previously favored would be far more expensive and therefore less likely to be adopted. (12) And industry groups realized that maligning marketable permit schemes was a potentially effective strategy to defeat greenhouse gas regulation altogether.
The positions did not flip overnight. In fact, there was a brief moment when it looked like a relative consensus might emerge. But that consensus evaporated almost as soon as it coalesced, as environmental issues became increasingly polarized across the political parties, removing the opportunity and incentive for interest groups to arrive at compromise positions.
Cost-benefit analysis made its appearance in the administrative state as a deregulatory tool favored by the political coalition that brought Ronald Reagan to the presidency in 1981. Not surprisingly given its genesis, groups interested in environmental protection were strongly opposed to this development. Even when cost-benefit analysis became institutionalized and not only the province of Republican Administrations, such groups absented themselves from participating in proceedings where they could have influenced the methodology, not wanting to be seen as acquiescing in its use. More recently, however, protection-oriented groups have come to see both that cost-benefit analysis was here to stay and that it could support stringent environmental regulation. But almost as soon as it appeared that consensus around the use of cost-benefit analysis might have been possible, conservative politicians and interest groups changed course, abandoning their support.
Putting a Price on Life
In our 2008 book, Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health, (13) we discuss the strong antipathy held toward cost-benefit analysis by protection-oriented groups, including environmentalists, and the embrace of the technique by antiregulatory groups, including industry trade associations and their ideological and political allies. (14) We also argue that this interest group dynamic had deleterious effects on the development of cost-benefit methodologies, because interests that favored stronger protections absented themselves from methodological debates about how cost-benefit analysis should be carried out. As a consequence, cost-benefit analysis became biased against regulation. In essence, environmentalist opposition to cost-benefit analysis became a self-fulfilling prophecy.
In a chapter on "missed opportunities," we recount the experience of Sally Katzen, Administrator of the Office of Information and Regulatory Affairs (OIRA) in the Clinton White House. (15) Since the promulgation of an executive order by President Reagan in 1981, (16) OIRA has overseen the application of cost-benefit analysis by federal agencies. During the Reagan and George H.W. Bush Administrations, OIRA was reviled by environmental groups, which viewed the office as a "black hole" for regulations, in part because of its delay in performing reviews. (17) When Bill Clinton took office, there was some hope on the part of environmentalists that OIRA would be...