One way of measuring the success of environmental policies is benefit-cost analysis. Yet no such analyses exist with respect to the vast majority of environmental laws and regulations implemented since Earth Day 1970. As the United States enters its third decade of environmental regulation, it may be prudent to supply decisionmakers with benefit and cost valuations that will help them weigh the pros and cons of legislative initiatives from both environmental and broader social perspectives.
There are many ways to measure the success of public policies. These include public opinion polls and ballot-box results; by either of these measures, the environmental laws and regulations enacted since Earth Day 1970 appear to have been successful. Several students of public opinion polling have recently pointed to the record-high support now being given to environmental regulatory measures. This is made all the more impressive by the fact that questions asked in these polls explicitly require respondents to balance environmental protection against economic growth. Similarly, when environmental initiatives are put to popular votes, they are generally strongly supported no matter how uncompromisingly worded.
Another way to measure the success of environmental initiatives is benefit-cost analysis. This approach involves ascertaining the improvements that have resulted from environmental regulations and translating these improvements into physical effects such as the reduced incidence of human disease, curtailment of damage to materials and crops, and so on. Dollar values are then assigned to these favorable effects and compared with the costs of the regulations. Such comparisons are very difficult—sometimes impossible—to make, but those that do exist suggest a more sober assessment of the last two decades of environmental regulation.
In spite of the considerable progress environmental economists have made in estimating benefits, there exists no estimate of the cumulative benefits associated with the environmental regulatory programs implemented since 1970. Notwithstanding this unfortunate fact, there exists a fair bit of scattered evidence worth reviewing.
While some serious problems remain, the substantial improvements in urban air quality between 1970 and 1990 have been the most impressive success story in federal environmental regulation. To be sure, other factors have played a role in these improvements—not the least of which are the closings or relocations of some major industrial facilities—but the 1970 amendments to the Clean Air Act have played a major role. Among the most notable improvements in air quality is a decline in the average ambient concentration of lead of more than 90 percent since 1980. Since 1978, the average ambient concentrations of sulfur dioxide and particulate matter have decreased 35 and 21 percent, respectively. These are truly significant accomplishments, since lead and fine particles, particularly sulfate aerosols, are among the most harmful pollutants from the standpoint of human health. Averaged nationally, ambient concentrations of carbon monoxide, nitrogen oxides, and even ozone—the most stubborn air pollution problem facing the nation—have declined over this same period.
But what is the dollar valuation of the health improvements, reduced damage to exposed materials, increased agricultural output, improved visibility, and other physical changes that have accompanied reduced air pollution concentrations? More than a decade ago, A. Myrick Freeman III, a senior fellow at Resources for the Future (RFF), attempted to make such an estimate for the year 1978. In 1984 dollars, his best estimate of air pollution control benefits for that year was about $37 billion, although he said the true number could fall anywhere in a range of $9 billion to $90 billion. At the time of his analysis, Freeman’s estimate was limited by some gaps in information and by unavoidable assumptions that he readily acknowledged; recent developments in epidemiology and economics have further eroded the confidence we can place in the estimate. Nevertheless, Freeman’s attempt stands as the only one thus far to comprehensively estimate annual air-quality control benefits.
When it comes to estimating water pollution control benefits, the situation is more discouraging. Because of the inadequacy of the national water quality monitoring network, there are fewer data concerning the overall improvements in water quality since the 1972 amendments to the Clean Water Act. Dramatic improvements in water quality in a number of major metropolitan areas are, unfortunately, an insufficient basis for comprehensive benefit estimates. What is needed are better and broader data on changes in water quality, coupled with credible estimates of the increase in water-based recreation such changes would effect, along with estimates of any health and other improvements that would follow. Once again, making use of any and all existing information on changes in water quality and individual valuations thereof, Freeman pegged the most likely national benefits associated with the Clean Water Act at $14 billion for the year 1978. His uncertainty range was between nearly $6 billion and $28 billion.
There exists no estimate of the cumulative benefits of the environmental regulatory programs implemented since 1970.
No such comprehensive estimate of national water quality benefits has been made since that time. This is unfortunate, because now-available data on physical changes in water quality and an improved understanding of the way individuals value fishing, boating, swimming, and other types of water recreation benefits would allow an up-to-date estimate to be more accurate.
The Clean Air and Clean Water Acts are only two of more than twenty major federal environmental laws. Statutes exist for regulating pesticides and herbicides, drinking water contaminants, solid and hazardous wastes, and new chemicals, but there are virtually no estimates of the annual benefits of these laws.
Although information is lacking, it is likely that the corpus of environmental laws and regulations passed since 1970 has produced substantial economic benefits—surely in the tens of billions of dollars annually. Considering the substantial costs of implementing and enforcing this legislation, one should hope so.
Measuring environmental costs is not straightforward. As RFF researchers Raymond J. Kopp and Michael Hazilla have pointed out, the costs associated with a particular regulation should be measured by the amount of money required to compensate those harmed by the regulation (through higher prices, job losses, and the like) so that they are just as well off after the regulation as before. This is analogous to, and no simpler than, measuring benefits by willingness to pay, the widely accepted metric. Nevertheless, the appropriate measure of costs bears some resemblance to out-of-pocket expenditures for pollution-control equipment, cleaner fuels, sewage treatment, and other environmental ends. About such expenditures better data exist.
A survey of a wide variety of estimates suggests that total annual expenditures necessitated by federal environmental regulation are now on the order of $85 billion. Approximately $30 billion to $35 billion of this is a result of regulations written pursuant to the Clean Air Act. Another $30 billion can be attributed to the Clean Water Act requirements. The remainder arises from regulations to protect drinking water, ensure the safe disposal of solid and hazardous wastes, control pesticides and toxic substances, and further other environmental goals.
It is important to realize that this $85 billion is just an estimate: there is no very precise way to tally up just what industries, governments, and individuals are required to spend for environmental protection. The true total may be somewhat higher or lower than $85 billion, but it is probably close (within 10 percent or so)—something that cannot be said about estimates of aggregate national benefits. As further evidence of the accuracy of the $85 billion total, the US Environmental Protection Agency (EPA) independently estimates, in a draft report, that the annual costs associated with all federal environmental regulations is $93 billion.
The 1970 Clean Air Act amendments improved urban air quality, but estimates of air quality control benefits, such as improved health, are lacking.
For purposes of comparison, it is worth noting that the federal government spends about $40 billion annually on health care for the indigent under the Medicaid program and another $10 billion for the Food Stamp program.
There is always interest in knowing what the macroeconomic effects of these environmental compliance expenditures may be. That is, what effect does this spending have on the inflation and unemployment rates, the rate of growth of GNP, the trade balance, and so forth? The most recent study came to about the same conclusions as previous ones: environmental regulation adds slightly to the inflation rate, has a negligible effect on the unemployment rate, and somewhat reduces the rate of productivity growth.
Two important caveats must be attached to these findings. First, these macroeconomic analyses looked only at the effects of compliance costs on the economy. They did not attempt to factor in the effects on the economy of improved human health (which might stimulate labor productivity, for example); reduced damage to exposed materials at factories, homes, and apartment buildings; increased agricultural output; or other beneficial effects. Second, the models used for these studies are often unable to detect the macroeconomic effects arising from other subtle yet important costs of environmental regulation: disincentives to modernize plant equipment, the increased likelihood that new plants will be constructed abroad rather than in the United States, and reduced levels of innovative activity in the chemical and pharmaceutical industries, to take but a few examples. In the long run, these may be as important as the direct effects of compliance expenditures, but it is impossible to know because of the inadequacies of current analytic tools.
What about expenditures for environmental purposes over the whole twenty-year period since Earth Day 1970? Based on the annual reports of the Council on Environmental Quality from 1971 through 1981, studies performed by or for EPA since that time, and other sources, it would appear that total expenditures necessitated by federal environmental regulation have been on the order of $600–$700 billion. (In the early 1970s, few regulations had been written under the Clean Air and Clean Water acts; as a result, compliance expenditures began to grow in earnest only toward the middle of the decade.) The draft EPA report alluded to above puts cumulative spending from 1970–1990 at closer to $1 trillion; however, the report may count spending for solid-waste disposal that is more correctly attributed to local ordinances. Either way, the total is eye catching.
Future cost-benefit analysis
It is discouraging for environmental economists to have to admit that they know as little about annual or cumulative benefits and costs as they do. Nevertheless, there are reasons to believe that understanding about such costs and benefits will increase in the future. For one thing, the art of benefit estimation has improved dramatically over the last two decades. It is now rare, for instance, to see the benefits of life-saving regulations calculated by reference to lost earnings. Although in vogue until the mid-1970s, this approach was offensive to those not in the labor force (since they earned nothing, there were no benefits from extending their lives) and theoretically inconsistent with applied welfare economics. Similarly, economists have made great strides in understanding individuals’ willingness to pay for reduced risks of acute and chronic morbidity, for improved visibility, for the preservation of unique wilderness areas, and for other types of benefits. Particularly useful in this regard has been the development of the so-called contingent valuation technique in which individuals’ valuations are elicited through their responses to questionnaires.
Research at RFF and elsewhere is shedding light on the relationship between environmental compliance expenditures and true social costs—the latter being the appropriate measure to use in benefit-cost analyses. This, too, is a welcome development because the distinction has been—and is—poorly understood even within the economics profession.
There is another reason for encouragement as the nation stands on the brink of a third decade of environmental regulation. Although it may be difficult to make precise benefit-cost comparisons, we have always known that it is possible to reduce the costs of meeting predetermined environmental goals by making better use of economic incentives in regulation. It is not unusual for studies to conclude that these savings are on the order of 30 or 40 percent.
Until recently, however, incentive-based approaches fared poorly in legislation when compared to more centralized command-and-control regulation. In June of 1989, though, President Bush announced that marketable pollution allowances—that is, tradable permits—would form the centerpiece of his ambitious proposal to reduce emissions of sulfur dioxide, a precursor of acid rain. Under this approach, the electricity-generating plants that would be required to reduce sulfur dioxide emissions would be given an option. They could make the reductions themselves, or they could pay other sources to reduce emissions by more than their mandated amount—so long as the total emissions reduction target is met. Such “swaps” would be pursued in cases in which it would be cheaper for a plant to buy emissions reductions elsewhere than accomplish them itself.
The technique of benefit estimation has improved dramatically over the last two decades.
Led by the Environmental Defense Fund, other environmental groups soon threw their support behind marketable permits, even though such groups had steadfastly opposed incentive-based approaches in the past. It now appears that marketable permits will become a legislative reality. Compared to the standard legislative approach to air pollution control—mandating the installation of specific technologies—the tradable permits approach will save about $4 billion per year, yet accomplish the same reduction in sulfur dioxide emissions.
If this initiative is successful, and if it leads to a reconsideration of incentive-based approaches elsewhere in environmental regulation, the potential savings are considerable. Suppose, for example, the substitution of incentive-based rules for their command-and-control counterparts would save but 10 percent of the $60 billion currently spent on air and water pollution control in the United States each year. That $6 billion would be enough to operate EPA for three years at its present level, test for and remediate elevated radon concentrations at hundreds of thousands of homes around the country, provide for emergency removals at thousands of abandoned hazardous waste disposal sites, or accomplish other important environmental (or non-environmental) goals. That is a savings worth pursuing.
Those who oppose the use of benefit-cost analysis in environmental policymaking often do so on the grounds that there are important values and effects that defy quantification. They are absolutely right, and for that reason, benefit-cost analysis can never—and should never—be the only basis for making regulatory or other decisions. From this vantage point, at least, an overreliance on benefit-cost analysis is not the problem in environmental regulation today. Rather, it is that many of the most important environmental statutes explicitly prohibit even a qualitative balancing of favorable and unfavorable effects. This denies decisionmakers access to information that just might help them make better decisions from an environmental and from a broader social point of view.
Paul R. Portney is vice president and senior fellow at RFF. Previously he was the director of RFF’s Quality of the Environment Division and the founding director of its Center for Risk Management. Formerly, he served as senior staff economist at the Council on Environmental Quality in the Executive Office of the President.
A version of this article appeared in print in the May 1990 issue of Resources magazine.
