The White House proposed a major overhaul to the country’s guidelines for analyzing regulations and government spending on Thursday. The changes to an incredibly dense, wonky set of documents known as “Circular A-4” and “Circular A-94” would affect how government agencies, like the Environmental Protection Agency, measure the costs and benefits of decisions that have big implications for climate change, like power plant regulations, clean car rules, and highway expansion projects.
It’s hard to overstate the magnitude of the makeover. More than anything, the changes represent a shift in philosophy. The proposed guidelines would change the way the government views and takes into account inequity, not just within the United States but also how U.S. actions affect people in other nations and future generations.
The current documents were also sorely outdated. The government hasn’t updated its instructions for regulatory analysis in 20 years, and the guidance for public investment is more than 30 years old. In the years since, academic thinking on how to conduct cost-benefit analysis has changed, financial markets have changed, and the philosophy of the White House has changed, said Noah Kaufman, a senior research scholar at Columbia University who previously served as a senior economist at the Biden administration’s Council of Economic Advisors.
“There's a lot of disagreement about a lot of what's in here, but pretty much everyone kind of agreed that they needed to be redone,” he said.
The proposal will go through a public comment period before being finalized by the federal Office of Information and Regulatory Affairs.
Cost-benefit analysis is but one consideration in government decision making, and often not the most important one, so Kaufman cautions against reading too much into the changes. Perhaps most significant to him is the overall vibe shift between the old guidance and what the White House released on Thursday. He said the old version reads like it’s written by people who are trying to convince you that there’s a very limited role for the government to play. “The people who worked on this document are far more interested in a more proactive role for how government programs and regulations can help address market failures.”
Here are three big changes the White House is proposing.
Changing the discount rate
The proposed guidance makes a big adjustment to an incredibly complicated, confusing, but consequential number called the discount rate. The discount rate determines how much government analysts weigh distant, future benefits of a policy versus its cost today. A higher discount rate downplays future gains, making it much harder to justify the expense of flood protection infrastructure or rules that limit carbon emissions from power plants.
While the old instructions called for a discount rate between 3% and 7%, the new proposal suggests a dramatically lower rate of 1.7%. This means that when regulators look at the cost to society of putting more carbon in the atmosphere — and they take into account all of the potential future lost lives, reduced crop yields, and damages caused by rising seas — it would look a lot more expensive than it does under the current guidelines. To get a sense of how much more, the Obama administration used a discount rate of 3%, and estimated that the cost of every ton of carbon spewed into the atmosphere was about $51 per ton. The nonprofit research group Resources for the Future estimates that with a 2% discount rate, that number would jump to $185.
Factoring in global impacts
The new guidelines encourage agencies to take the global impact of decisions — such as potential lives lost to extreme weather outside the U.S. — into account when conducting a cost-benefit analysis. This is a big deal, according to Paul Kelleher, an associate professor at the University of Wisconsin-Madison who studies the ethics of public policy.
“This probably is an acknowledgement that when Americans emit carbon dioxide, it doesn’t only harm Americans,” Kelleher said. It also incentivizes American policymakers to approach international climate negotiations from a more cooperative standpoint, rather than only being interested in what happens within American borders, he said.
It’s an important, if admittedly wonky, way for the Biden administration to acknowledge the United States’ role in global climate change — suddenly, the lives of billions of people around the world are added to the accounting sheets of government agencies. That means a proposal to, for example, limit tailpipe emissions would appear to have larger financial benefits.
Equity-weighting
Today, the benefits of a proposed policy are weighed against how much the potential beneficiaries would be willing to pay for it. The problem is the government assumes a dollar means the same thing to everyone. But the value of a dollar to a grocery store clerk is a lot higher than the value of a dollar to, say, Elon Musk.
Under the current system, “climate damages in the poorest parts of the world will be registered as not as serious as climate damages that are much less serious in richer parts, where people’s willingness to pay can be quite high because their ability to pay is higher,” Kelleher said.
The new guidelines allows agencies to use an approach known as “equity-weighting,” or to account for the differential impacts of a given regulation or investment. “Now, instead of just counting up the dollars that people are willing to pay to avoid damages, you try to account for the real effect on wellbeing,” said Kelleher.
Take, for example, a new rule to reduce pollution from power plants, which low-income communities are disproportionately affected by. Under the new system, the financial benefits of such a regulation would appear much higher than they currently do, because more weight would be given to the health rewards and other gains the community would see from that regulation. And because the new guidelines allow analysts to look beyond U.S. borders, the practice of equity-weighting could also account for the disproportionate harms that a poorer country like Bangladesh would face from a warmer planet, significantly raising the cost of emissions.
If this approach is finalized, “it would be a titanic shift in the federal cost-benefit analysis framework,” Kelleher said.
Courtesy of Rhodium Group
