Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

The Benefits of Regulation

In a previous blog, I stated that the aggregate costs of federal regulation equate roughly to hundreds of billions of dollars per year, similar in magnitude to annual revenue from corporate income taxes.  The regulations keep growing—3200 per year, on average, and the costs are also growing---at a rate of tens of billions of dollars annually. 

Now what about the benefits of all these regulations?  Do the benefits justify the costs?

The answer is probably yes.

The heads of regulatory agencies are directed to issue regulations only if they make a determination that the benefits justify the cost.  And for “major” regulations—the most impactful rules—a cost-benefit analysis is required. 

When the President’s Office of Management and Budget (OMB) examined the cost-benefit analyses for new major regulations for the most recent ten-year period, it pegged the average annual cost of new major federal regulations at between $57 and $84 billion per year (in 2001 dollars), and the benefits of these same regulations at between $217 and $863 billion per year (in 2001 dollars). 

So there you go—the benefits exceed the costs by a substantial margin.

Well—not so fast.

The vast majority of benefits come from a handful of environmental regulations.  In the case of major regulations issued in the last ten years, the big driver is control of fine particulate matter (PM)—such as soot from diesel engines—associated with premature mortality.  EPA regulations controlling fine particulate matter account for roughly 70% of the OMB benefit estimate.

But the case for quantifying PM benefits is not ironclad.  In 2002, the National Academy of Sciences identified uncertainties in the benefit estimates, and these uncertainties (e.g., the concentration-response function, the dollar value of premature mortality, the differing toxicity among different kinds of particulates) remain today, where research efforts are underway to expand our knowledge and reduce the uncertainties—and perhaps the benefits estimate too.    

But PM is not the only instance where the benefits of a some major regulations appear large relative to the aggregate cost of all major regulations.  Here are two instances from the 1980s and 1990s where benefits are likely to be very large indeed:

Removal of Lead from Gasoline

Lead has been added to gasoline since the 1920s as an anti-knocking agent.  It was only in the 1970s when regulators started limiting lead in gasoline.  At first, the goal was to protect automobile catalytic converters, which were adversely affected by gasoline with high lead concentrations. Only in the 1980s was a phase-down started to reduce lead in all gasoline through the use of market mechanisms (i.e., banking, trading), and the emerging health research (showing adverse neurological impacts on young children) was suggestive enough to speed up this phase-down.  In 1996, lead was banned completely as a fuel additive.  The phase-down of lead in gasoline correlates remarkably well with the drop in the level of lead in human blood: a cause-effect relationship seems very likely.  According to a report from the Centers for Disease Control, in 1976-1980, 88% of children 1-5 years had blood lead levels greater than 10 micrograms per deciliter. This percentage dropped to 4.4% in 1991-1994, and to 0.8% in 2007-2010.  

The benefits of removing lead from gasoline are likely enormous. According to the World Health Organization, every $1 the USA has spent in prevention yielded between $17 and $225 in benefits, a greater return than that of vaccines.  And eliminating lead from petrol worldwide (we have made progress; only a handful of countries still did this as of 2010) would generate global benefits of more than $2 trillion per year.   

Phase-Out of Ozone Depleting Substances

The Montreal Protocol is a 1987 international treaty that called for the phase-out in the use of ozone-depleting substances (ODS), such as chlorofluorocarbons.  Protecting the stratospheric ozone layer is important to reduce harmful ultraviolet radiation that leads to cancer (melanoma) and eye damage (cataracts).  In 1990, the Clean Air Act was amended to include provisions designed to implement US commitments under the Protocol. 

Since then, worldwide efforts, including regulations issued by EPA, have led to the complete phase-out of the target substances and the beginnings of restoration of the ozone layer.  (Because the atmospheric lifetime of these substances can be decades, the benefits lag regulatory action.)  In the United States, these regulations are expected to circumvent 6.3 million cases of skin cancer, and save $4.2 trillion in health care costs, between 1990 and 2165.  For Americans born between 1985 and 2100, EPA estimates 22 million fewer cases of cataracts will occur as a result of the phase-out.

Not all environmental regulations are equally effective or even impose a net benefit.  Regulation of PM, lead in gasoline, and ODS are the rare exceptions, but the health benefits are large and relatively certain.  Certain enough to lend credence to those who believe the estimated aggregate benefits of federal regulation exceed the estimated aggregate costs.   

Perhaps the most productive conclusion to be drawn here is not about regulation per se, but rather about the importance of retrospective review—looking back objectively at a regulatory decision to determine its effectiveness and efficiency—to see what lessons we might learn for the future. 

We know the impact of these particular regulatory programs in large part because we have put in place ongoing monitoring systems for fine particulate matter, for ODS in the stratosphere, and for lead in human blood.    

And because we know these programs have worked, we can draw lessons to apply to ongoing regulatory debates.  For example, the Montreal Protocol provides lessons that can be applied to lessening global climate change.  The lead phase-down and the ODS phase-out have given us experience in the use of market mechanisms that we can use to solve future environmental problems more cost-effectively.

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