Discounting, EPA's Nonroad Spark-Engine Rule, and the Hidden Anti-Regulatory Agenda of Cost-Benefit Analysis

By Corey, Jeffrey C. | UCLA Journal of Environmental Law & Policy, Summer 2004 | Go to article overview
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Discounting, EPA's Nonroad Spark-Engine Rule, and the Hidden Anti-Regulatory Agenda of Cost-Benefit Analysis


Corey, Jeffrey C., UCLA Journal of Environmental Law & Policy


I.

INTRODUCTION

In the past twenty years, it has become increasingly common for administrative agencies to use cost-benefit analysis to evaluate proposed regulatory programs. (1) As part of their cost-benefit analysis, agency policymakers typically assign a monetary value to the health benefits of a given regulatory program. This monetization of human health benefits allows agencies to assess a proposed regulation by comparing the theoretical monetary benefits of a new regulation with its projected costs. Scholars have criticized many aspects of this cost-benefit analysis, with perhaps the most attention given to the ethical implications associated with assigning a dollar value to a life saved by a regulation. (2) However, less attention has focused on a potentially more controversial component of cost-benefit analysis known as discounting. (3)

On a basic level, discounting is a way of assessing the present value of a cost or benefit that will take place in the future. Discounting is founded on two assumptions that, when mathematically factored into a cost-benefit analysis, reduce the value of both costs and benefits that occur in the future. The first assumption, generally referred to as the "time value" of money, (4) views money as worth less in the future than today because money can be invested to increase its value over time. In this sense, discounting is simply the application of a reverse interest rate, minimizing costs or benefits depending on how far they occur in the future. The second assumption justifies discounting based on people's preferences. (5) Discounting assumes that people prefer to have a benefit now instead of in the future and incorporates this preference into cost-benefit analysis by reducing the present-day valuation of a future benefit. Similarly, discounting assumes that people prefer to incur costs in the future rather than today, and therefore reduces the present-day valuation of a future cost.

The logic of discounting is deceptively simple. In the abstract, discounting may seem like a reasonable method for evaluating future benefits. However, when applied to a regulation that imposes present costs but does not provide benefits until many years into the future, discounting skews the analysis against regulation. (6) In other words, discounting acts as a default presumption in favor of small benefits today over much larger benefits far in the future. (7) The way in which discounting skews cost-benefit analysis is perhaps best seen in the field of environmental regulation in general, and, more specifically, in efforts to improve air quality. (8) Air pollution is largely created by the bedrock components of modern society: the internal combustion engine and industrial production processes. (9) Any effort to improve air quality by changing the internal combustion engine and industrial production processes will naturally require significant up-front expenditures such as research and development costs, new technology costs, and implementation costs. In contrast, the sheer size of the task of improving air quality means that widespread improvements in air quality may not occur for many years, perhaps many generations, into the future. Although cost-benefit analysis of air quality regulations are highly susceptible to being skewed against regulation, the U.S. Environmental Protection Agency (EPA) has continued to employ discounting in its three most recent proposals to improve air quality: the Clear Skies Initiative, (10) the Nonroad Diesel Engine Rule, (11) and the Nonroad Spark-Engine Rule. (12)

This paper focuses specifically on EPA's use of discounting in support of its Nonroad Spark-Engine Rule. I focus on this particular rule for two reasons. First, it provides a good example of how discounting can skew cost-benefit analysis against regulation, particularly when the regulation is aimed at a substantial problem where benefits may not be realized until many years into the future.

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