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 Road Not Taken

It’s “beat the clock” time—that time when regulators kick into high gear to finalize their wish list of new regulations before a new President takes office. The last year of a presidential term always shows an uptick in new regulations, and if the regulations are issued after an election and before an inauguration, they are labeled “midnight regulations,” a term that harkens to Cinderella in her rush home from the ball. 

Not all potential midnight regulations make it to the finish line. Turns out, there is a limit to how many new regulations can be processed in any given period of time, and this processing capacity benefits the incoming President, who can (and often does) put the brake on near-final regulations.

All of this raises an important question: how does one determine whether a regulation is worth pursuing? In his new book, Why Government Fails So Often: And How We Can Do Better, Yale professor Peter H. Schuck provides the textbook answer: “Cost-benefit analysis, conscientiously conducted with due regard for its problematic features, is probably the best we can do to assess the efficiency merits of policies.”

And he is correct. Cost-benefit analysis can and does provide valuable information. One of its problematic features, however, is that it relies heavily on estimates of compliance cost, relatively easy to obtain, to the exclusion of opportunity cost, which is more uncertain and more important. Every regulation directs resources toward compliance that would otherwise be spent on something else. If this something else—this foregone opportunity—is more important than what is being regulated, the regulation should not be issued.     

In some situations, a pending regulation or regulatory program is best viewed as a debate over opportunity cost—the road not taken--to borrow a phrase from poet Robert Frost. Two current examples are climate change and biotechnology.

Let’s consider climate change first. President Obama has taken dozens of regulatory actions during his tenure to limit emissions of greenhouse gases. His regulators have developed a table, called the social cost of carbon (and the social cost of methane) to justify regulation of carbon dioxide emissions (and methane emissions) up to a certain level of cost. The remarkable thing about the SCC is that it is very high—it can be used to justify an incredible array of regulatory actions. Even the President’s signature climate policy—the Clean Power Plan—can be viewed as weak (not stringent enough) based on the SCC. 

If the SCC is correct (and it may not be), there is a huge opportunity cost to not regulating GHG emissions even more stringently; a fact not lost on climate change activists. But it is also apparent that there is insufficient political will to regulate up to the SCC, a fact that should give activists pause. It may be that some degree of climate change is something that the American people are willing to accept (and adapt to), not unlike a person who chooses to lose ten pounds but not twenty because the extra sacrifice is not seen as worth it. 

Now let’s consider biotechnology. One of the most exciting (if not revolutionary) scientific breakthroughs in recent years is gene editing, in which very precise changes can be made to the genetic makeup of a living thing (microbe, crop, human embryo) with relatively predictable consequences. These techniques (known by their acronyms such as CASPR or RNAi) are replacing older techniques whereby genetic material from one organism is placed into another organism (i.e., transgenic techniques).    

Regulators did not anticipate this development. In fact, the federal framework regulations for biotechnology were developed twenty years ago to focus on new transgenic techniques. New products made from gene editing are not always covered by the framework regulations. Consequently, whereas regulators must review a new transgenic product before it can enter commerce, regulators do not always have the legal authority to review new products created via gene editing. 

Anti-GMO activists are not happy with this situation. The Obama Administration is now working on changing the framework regulations to, in part, “increase public confidence” in the regulatory system.

Any attempt to regulate products made from gene editing quickly turns on the opportunity cost. Pre-market review of GMOs can take decades (e.g., twenty years in the case of a recently approved transgenic salmon), which creates a powerful disincentive not to develop transgenic GMOs. Should regulation be expanded to require (lengthy) pre-market review of gene editing, the enormous promise of these new technologies (in terms of more productive agriculture, medical cures for genetic disease, etc.) will be diminished. Cost-benefit analysis has a hard time describing, let alone quantifying, the loss of innovation and consumer satisfaction from such regulation. It is, however, likely to be extraordinarily high.

These two examples--climate change and biotechnology--illustrate that opportunity cost is agnostic as to the direction of regulation. The implication of the SCC suggests we should regulate GHG emissions more stringently. The promise of gene editing suggests a light touch from regulators. In both cases, consideration of opportunity cost provides a valuable perspective that regulators should heed.

As policy officials in the White House choose among a long list of pending regulatory actions in 2016, they would be wise to take a step back and reflect on the promise of the road not taken, just as Robert Frost once did. 

 

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