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Is Quantified Cost-Benefit Analysis a Requirement for Rulemaking?

| Jun 1, 2016 | Analysis

    When the U.S. Environmental Protection Agency (EPA) decided four years ago to regulate mercury emissions from power plants, it refused to consider costs, citing that its main focus was public health. The U.S. Supreme Court, however, disagreed with the EPA’s approach. In a 2015 ruling, the court found the EPA’s strategy unreasonable and required the agency to consider costs when redrafting the rule. Confronted with a separate topic – corporate shareholder voting – the D.C. Circuit Court of Appeals recently requested that the U.S. Securities and Exchange Commission provide a complete quantified cost-benefit analysis of the agency’s rulemaking.

    These cases suggest that courts favor the use of formal, monetized cost-benefit analysis. In concept, such analysis seems simple and straightforward. But, should quantified cost-benefit analysis become something an agency must include when drafting new rules to earn a green light from the courts? In a recent paper, Cass Sunstein, a professor at Harvard Law School, communicates the importance of quantified cost-benefit analysis, but argues that courts may not deem an agency’s rulemaking “arbitrary” under the Administrative Procedure Act (APA) simply because it fails to use such analysis.

    Sunstein acknowledges the benefits of an agency including cost-benefit analysis, such as checking “misleading intuitions” among officials and combating excessive influence that powerful interest groups hold over the government. However, Sunstein argues that certain circumstances may justify agencies not producing a quantified cost-benefit analysis.

    Sunstein suggests that most of the time the judiciary should defer to the agency’s chosen analytical method when reviewing its rulemaking. Sunstein argues that a prolonged judicial review of the agency’s analysis can delay the rulemaking process and even jeopardize some agencies’ “life-saving” mandates to address public health or environmental protection concerns. Furthermore, courts typically do not possess adequate agency-specific knowledge to assess the technical aspects of the agency’s analysis.

    Sunstein also explores the scenarios in which Congress permits or requires an agency to balance costs and benefits. According to Sunstein, an agency may cure a failure to demonstrate a quantified cost-benefit analysis by offering reasonable explanations. Sunstein offers three possible justifications for an agency not adopting quantified cost-benefit analysis. First, the agency may encounter technical difficulties in quantifying costs or benefits. For instance, the EPA may demonstrate that scientists cannot predict how many types of cancer a regulation on arsenic in drinking water would reduce. From Sunstein’s perspective, unless a challenger could provide opposing evidence, the EPA’s justification would stand.

    Second, Sunstein argues that an agency can use equity as a justification for not adopting a complete quantified cost-benefit analysis. Sunstein illustrates how a U.S. Department of Justice rule that facilitates building access for those who use wheelchairs was ultimately based on non-quantifiable considerations. The Department estimated the monetized costs of the rule at $600 million and the monetized benefits at $300 million. But the Department also recognized the importance of the rule in ensuring dignity and equity for those who use wheelchairs.

    To justify the $300-million shortfall in the Justice Department’s access rule, Sunstein explains that the Department used a “break-even analysis” to supplement the incomplete cost-benefit figures. The Department found that reaching the break-even point would cost each person in the local community 5 cents per use in one scenario or $2.20 per use in a different situation. Since the cost to each individual was small, the Department concluded that the building access was worthwhile to regulate.

    Finally, Sunstein considers “welfare effects” or “distributional justice” as a suitable explanation for not using cost-benefit analysis. He presents a hypothetical regulation by the U.S. Occupational Safety and Health Administration (OSHA) that aims to reduce premature deaths of workers. Even if the rule would cost consumers $200 million, but gain only $135 million in benefits for workers, under a principle of fair distribution, one may argue that the regulation is still justifiable. To support this position, Sunstein reasons that it fits OSHA’s primary goal of protecting “relatively disadvantaged” workers and that the net cost of $65 million remains within “reasonable bounds.”

    In the end, Sunstein concludes that quantified cost-benefit analysis, when available, may be the best way for agencies to demonstrate rulemaking processes and justify regulatory decisions. But under certain circumstances, an agency can find ways other than quantified cost-benefit analysis to justify its rules.

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