study
Cost-Benefit Analysis of
Environmental Policy in Developing
Countries*
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Michael A. Livermore
Abstract: The use of cost-benefit analysis as an aid to
environmental decision-making has expanded in recent years
as many countries at earlier stages of development—which
are now beginning to take up environmental regulation—have
become interested in how it can inform their decisions. This
paper proceeds as follows. Part I provides brief background
on cost-benefit analysis, discussing its adoption and uses in
the developed world as well as special advantages that costbenefit analysis may have for developing countries. Part II
discusses practical challenges that many developing countries
will face as they attempt to make cost-benefit analysis
more pervasive in government decision-making. Part III
discusses the special importance of distributional analysis for
developing countries. Part IV discusses potential reforms that
may help cost-benefit analysis better accommodate the needs
and priorities of developing countries.
Keywords: cost-benefit analysis; environmental regulation,
developing countries.
M ichael A. L ivermore . Executive Director, Institute for Policy
Integrity, New York University School of Law.
* This paper expands on a presentation given at Centro de Estudios
Públicos (CEP) in Santiago, Chile on June 17, 2009. Many thanks for the
participants in the CEP workshop for their comments and feedback. Thanks
also to David Mehretu, Gonzalo Moyano, and Richard L. Revesz for helpful
comments.
Estudios Públicos, 117 (Summer 2010).
ISSN 0716-1115 (print) ISSN 0718-3089 (electronic).
estudios públicos, 117 (Summer 2010).
2
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Introduction
hile in time, high levels of domestic environmental
regulation will become pervasive, as things stand, some countries are
further along than others. The key environmental statutes in the United
States have been on the books for nearly forty years, while in some
least developed countries, even the most serious environmental risks
are unregulated. However, in all of the myriad conceptions of the good,
there is a nearly universal desire to reduce risks to health and safety, to
breathe clean air and drink clean water. As nations continue economic
progress, there is ample evidence of a trend towards greater control of
the negative impacts of industrial development, to ensure that economic
growth does not come at the cost of an unlivable environment.
The decision to control environmental pollution is only the first
step in a very long process of facing uncertainty and making trade-offs
between environmental, public health, and economic risks. One of the
primary tools that countries with advanced regulatory systems use to
inform their decision-making is “cost-benefit analysis,” a technique that
gathers as much relevant information about a regulatory decision as
possible to identify the regulatory alternative that delivers the greatest
net benefits, all things considered. While cost-benefit analysis is far
from a complete science, it has grown exponentially in recent decades,
as the need for a systematic tool to incorporate the many factors that
affect regulatory decisions into a single understandable model has
become clear.
The use of cost-benefit analysis as an aid to environmental
decision-making has expanded in recent years as many countries at
earlier stages of development —which are now beginning to take up
environmental regulation— have become interested in how it can
inform their decisions. However, while cost-benefit analysis began
in developed countries and has grown to be an extremely useful tool
for them, it will need to see important reforms to be of equal use for
developing countries. There are both practical challenges that must
be overcome, as well as more fundamental changes that should be
made to address the needs of developing countries. On the practical
side, countries must overcome political hurtles—such as the need to
simultaneously build support for cost-benefit analysis while creating
regulatory systems from the ground up—as well as the capacity
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries3
problem of developing the analytic resources needed to conduct
assessments of complex environmental policy. More fundamentally, the
distributional affects of regulation must be a central aspect of regulatory
impact analysis in the development context —both with respect to
equity today and to ensure that future generations are not wrongfully
shortchanged. Further changes to cost-benefit analysis, including
attempts to incorporate insights from development economics, may also
be warranted.
This paper proceeds as follows. Part I provides brief background
on cost-benefit analysis, discussing its adoption and uses in the
developed world as well as special advantages that cost-benefit
analysis may have for developing countries. Part II discusses practical
challenges that many developing countries will face as they attempt
to make cost-benefit analysis more pervasive in government decisionmaking. Part III discusses the special importance of distributional
analysis for developing countries. Part IV discusses potential reforms
that may help cost-benefit analysis better accommodate the needs and
priorities of developing countries.
I. Background: Existing Systems and Special Potential
Cost-benefit analysis has become a widely practiced tool for
improving government decision-making throughout the developed
world, but it also holds special potential in the developing context
to add quality, transparency, and efficiency to environmental, public
health, and safety regulation. While there are clear and important
differences between regulating in developed and developing economies,
many of the dissimilarities provide additional justification for costbenefit analysis for developing countries.
A. Cost-benefit analysis in developed economies
Cost-benefit analysis of environmental policy has become
standard practice in most developed countries. The purpose of costbenefit analysis, in the words of Cass Sunstein (the head of the office
charged with overseeing cost-benefit analysis within federal agencies in
the United States) is to institutionalize the practice of “look before you
estudios públicos, 117 (Summer 2010).
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4
leap” for environmental, public health, and safety policy.1 Cost-benefit
analysis estimates the negative and positive consequences of policies
and then compares them along a common metric to identify the net
effects of regulation. According to the standard formulation of the costbenefit criteria, the purpose of regulation is to maximize net benefits
at the margin—i.e. to adopt regulation up to the point where marginal
benefit equal marginal costs.2
The United States has placed cost-benefit analysis at the core of
its regulatory system. In 1981, then-President Ronald Reagan signed
Executive Order 12,291 which directed all executive agencies to
conduct cost-benefit analysis prior to adopting new regulations. The
order also gave authority to the Office of Information and Regulatory
Affairs (OIRA) within the Office of Management and Budget (OMB)
in the White House to review all proposed regulations to ensure that
they complied with the requirements of the Executive Order. Only
those rules that pass a cost-benefit test would be allowed through OIRA
review, with the exception of cases where analysis of costs and benefits
of agency action was prohibited by law. However, this exemption is
quite limited; while there are some important cases where statutes
explicitly prohibit the use of cost-benefit analysis, for the most part,
courts have protected agencies ability to use cost-benefit analysis to
structure regulatory decisionmaking.3
President Reagan’s move drew significant criticism, especially
from interests that tend to promote regulation, like environmental
organizations, consumer groups, and labor unions. However, while
there was debate over the new centralization of authority over federal
agencies, and especially the use of cost-benefit analysis to evaluate
environmental and public health policy, the practice of OIRA review
and cost-benefit analysis continued throughout the Reagan era. This
practice continued through the four-year presidency of George H.W.
1 Public hearing to consider the nomination of Cass R. Sunstein to
be Administrator, Office of Information and Regulatory Affairs, Office of
Management and Budget (Videocast in 42:11). See http://hsgac.senate.gov/
public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=bd4574c99ca1-4f5c-9f0e-3618ee203a20.
2
This formulation follows from the assumption of marginal increasing
costs and marginal decreasing benefits—the point where marginal costs equal
marginal benefits is the optimal regulatory level that maximizes net benefits.
3 See e.g., Entergy Corporation v. Riverkeeper, Inc., 129 S.Ct. 1498
(2008) (finding that EPA may undertake cost-benefit analysis when applying
technology based standards under the Clean Water Act).
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries5
Bush. Importantly, when Congress attempted to defund OIRA and
refused to confirm President George H.W. Bush’s appointment to head
OIRA, regulatory oversight simply moved to a less formal office, the
Council on Competitiveness, chaired by Vice-President Dan Quayle.4
President William Jefferson Clinton continued the practice
of regulatory review and cost-benefit analysis of environmental and
public health policy during his term. After taking office, he issued
Executive Order 12,866 that updated the Reagan Executive Order in
several important ways, but retained the fundamental architecture of
central review using cost-benefit analysis. The federal government has
operated under Executive Order 12,866 since that time, with only a few
modifications by President George W. Bush near the end of his term
that were rescinded by President Barack Obama when he took office.
The European Union (EU) has also found an important place for
a version of cost-benefit analysis within its regulatory process.5 The
expanded authority of European level regulatory institutions has given
greater power to regulatory bodies within the European Union, creating
a need to cabin the discretion of these bodies and ground their decisions
in some transparent and generally accepted criteria. The most clear
manifestation of the growth of cost-benefit analysis in the EU is the
Better Regulation initiative which the European Commission has been
in the process of implementing since 2002. The Commission has stated
the purpose of the initiative as
to ensure that the regulatory framework helps to stimulate
entrepreneurship and innovation, allows businesses to
compete more effectively and to exploit fully the potential
of the internal market. In doing so, the Better Regulation
agenda contributes to growth and job creation while
maintaining high standards of social, environmental, health
and consumer protection.6
4 See the article from Bob Woodward and David Broder: “Quayle’s
Quest: Curb Rules, Leave ‘No Fingerprints’”, Wash. Post (Jan. 9, 1992) at A1.
See also the article from Susan Reed, “Enemies of the Earth”, People Magazine
(Apr. 1992) (reporting that environmental groups saw the Council “a backdoor
through which industry has entered to water down regulations it finds too
costly”); De Witt (1993).
5 Wiener (2006).
6 See Communication From the Commission to the European Economic
and Social Committee and the Committee of the Regions, Third Strategic
Review of Better Regulation in the European Union, at 2, COM (2009) 15 Final
(Jan. 28, 2009) [hereinafter Communication for the Commission].
estudios públicos, 117 (Summer 2010).
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6
A key component of the Better Regulation program is a
requirement of regulatory impact analysis for all Commission
“initiatives which are likely to have a significant impact.”7 The purpose
of the “impact assessments” is to “analyze both benefits and costs,
and address in a balanced way all the significant economic, social
and environmental impacts of a possible initiatives.”8 These impact
assessments for Commission actions—including both legislative and
regulatory proposals—is a clear move to place a version of cost-benefit
analysis at the very heart of regulatory decision-making at the European
level.
The Commission has also taken several important steps
to formalize and standardize impact assessments. In 2005, the
Commission issue “Impact Assessment Guidelines”—a lengthy
technical document to be used to structure the process of impact
assessment, both at the EU level and also as a guide to domestic
policymakers. The guidelines have been updated several times, and
after a lengthy public review process, new guidelines were issued in
January 2009.9 The guidelines direct analysts to “[i]dentify (direct
and indirect) economic, social and environmental impacts [of
proposed initiatives] and how they occur (causality).”10 Furthermore,
the guidelines state that, after impacts are identified, they should be
assessed “against the baseline in qualitative, quantitative and monetary
terms.”11 The guidelines go on to recommend that, “[i]f quantification is
not possible, explain why.”12
Equally importantly for the development of cost-benefit
analysis in the European system, the Commission has “put in place a
demanding, central quality control function in the form of the Impact
Assessment Board (IAB) which is independent of the policy making
departments.”13 The IAB is charged with reviewing all of the impact
assessments of the Commission. In a January 2009 communication
from the Commission to the other EU political branches, the
7
Id. at 6.
8 Id.
9
European Commission, Impact Assessment Guidelines No. 92/2009 of
15 January 2009.
10 See id.
11 Id. at 6.
12 Id.
13 Communication From the Commission, supra note 6, at 6.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries7
Commission reported that the IAB “has improved policy quality by
requesting resubmissions of impact assessments in 32% of cases in
2008.”14 The IAB has also placed “increasing emphasis on the need to
quantify impacts more systematically.”15
There are several justification for the use of cost-benefit analysis,
chief among these is that it helps to structure the exercise of agency
discretion. In the United States, environmental, public health, and
safety laws grant administrative agencies—which are under the control
of the President—wide discretion for carrying out their statutory
duties. Some of these statutes give agencies extraordinary ambit
for their authority, and relatively little guidance. For example, the
Occupational Health and Safety Act of 1970 provides for workplace
standards “reasonably necessary or appropriate to provide safe or
healthful employment or places of employment.”16 For clear reasons,
this language gives the Secretary vast discretion to set a regulatory
agenda and adopt—or refuse to adopt—a large field of potential
rules. Other statutes give agencies more direction. For example,
many of the core environmental statutes that are administered by the
Environmental Protection Agency stipulate in great detail how the
agency should go about regulating—creating both mandatory duties
for the agency as well as clear requirements. Where the agency fails to
act on a mandatory duty, or runs afoul of a statutory limit, the United
States federal courts have shown little hesitancy to step in and correct
the agency.17 However, even where Congress has given the agency
more complete statutory instructions, there remains a large measure
of agency discretion, especially on technical matters where courts are
loath to overturn expert agency decisions.18
Because of this vast discretion, both agency and commentators
have looked for ways to structure and cabin agency decisionmaking.
Without clear guidelines for how agencies should exercise their
discretion, agencies are given unchecked power that can be exercised
in a nontransparent, inefficient, or even arbitrary fashion. A mechanism
14
Id.
Id.
16 See 29 U.S.C. § 652(8).
17 See Massachusetts v. EPA, 549 U.S. 497 (2007); Lead Industries
Association v. EPA, 647 F.2d 1130 (1980).
18 See Whitman v. American Trucking Associations, 531 U.S. 457
(2001).
15
estudios públicos, 117 (Summer 2010).
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8
is needed to create a balance between standards of reasonable
decisionmaking and the legitimate exercise of the political authority
vested in agencies.
A similar concern about discretion and the existence of a
“democracy deficit” can be used to justify the use of cost-benefit
analysis in European Union institutions. EU institutions exist at the
supra-national level, and are therefore somewhat removed from
the nation-states that constitute its members—some view this lack
of “demos” as undercutting the democratic legitimacy of these
institutions.19 In addition, the diffused decisionmaking authority
between EU institutions and member states, and the increasingly
technocratic focus of EU-level institutions have also called into
question the democratic grounding for the authority of the EU.20
Popular discontent with and lack of interest in the EU also fuel
concerns about the legitimacy of EU-level decisions. Because, at
some level then, traditional democratic institutions as the justifying
basis for the decisions of EU-bodies are lacking, cost-benefit analysis
can potentially serve as an alternative—both procedurally and
substantively—to provide legitimacy for the decisions made by EU
institutions.
Cost-benefit analysis, thus, provides a partial solution to
problems associated with the separation of decisionmaking authority
from institutions with broadly recognized democratic pedigree.
However, while the theoretical purpose of cost-benefit analysis is to
structure decisionmaking around a criteria of maximize net benefits—
whether by strengthening or weakening regulatory proposals—the
political context that has given rise to broader use of cost-benefit
analysis is often more antiregulatory in nature. As Jonathan Weiner has
written:
The US adopted regulatory reform efforts in the 1970s and
1980s in part to combat inflation and recession. Europe
19
See Jolly (2005) (discussing nature and importance of concept of
“demos” in context of European integration); Weiler (1995) (arguing that lack
of “demos” for European Union does not preclude Union-wide democratic
institutions).
20 See generally Grimm (1995) (analyzing calls for European Union
constitution); Rabkin (2000) (arguing that the EU has a democratic deficit
because their policies are biased in a social democratic direction).
A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries9
turned to Better Regulation in the last five years to remedy
its sluggish economy, which has been growing at about 2
percent per year of late . . . .21
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…
It almost goes without saying that one key purpose
of regulatory reform is to reduce costs. In the 1980s
the US had a Task Force on Regulatory Relief, later
called the Competitiveness Council; the EU now has
a Competitiveness Council of Commissioners. The
UK Better Regulation Executive was earlier called the
Regulatory Impact Unit, and before that the Deregulation
Unit in the 1990s.22
Regulations impose costs on society, typically by requiring
private actors to incur compliance expenses. The costs of regulation are
less obvious than direct public spending—rather than direct taxes, the
average citizen only experiences compliance costs indirectly through
higher consumer prices, fewer employment opportunities, and lower
return to capital. Because these costs are less obvious, they are not
given the same weight as direct government spending.
When public attention focuses on environmental, public health,
and safety risks, there is broad support for strong regulatory programs.
In an economy where under-regulation is prevalent, environmental
and public health risks are obvious and salient—they relate directly
to individuals’ daily lives, and can be understood in relatively
tangible terms. Government efforts to address these risks can be
easily explained, and experience with the downsides of regulation are
relatively scarce.
However, when public attention turns to economic concerns—
inflation, economic growth, and job creation—then officials typically
look for mechanisms to reel-in costs imposed by regulation. Some
macroeconomic trends are beyond the direct control of government
while others are subject to manipulation through measure that
impose short-term economic pain, such as decreasing monetary
supply. Attempting to effect macroeconomic change—like increasing
21 Weiner,
22
supra note 5, at 455.
Id. at 456.
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estudios públicos, 117 (Summer 2010).
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employment opportunity or reducing inflation—through the relatively
pain free method of regulatory reform can look appealing.
Recognizing the political difficulty of simply eliminating popular
programs, governments have looked for objective criteria that could
be used to justify deregulatory steps, and cost-benefit has proven to
be a useful tool. During both the Reagan “regulatory relief” efforts
in the United States, and the “better regulation” campaign in Europe,
cost-benefit analysis has become an important tool for calibrating
regulatory costs. Rather that seeking to undo all progress in the area
of environmental, public health, and safety areas in pursuit of lower
compliance costs, governments have instead sought a mechanism to
balance the need for these programs against the need for economic
growth.
B. Advantages to Cost-Benefit Analysis for Developing Countries
While cost-benefit analysis has become quite popular in the
United States and Europe, the practice is just beginning to take hold
in the developing world. There are a variety of institutional and even
conceptual issues that have hampered more widespread adoption, but
interest in the subject is beginning to grow as many countries begin to
develop more sophisticated environmental, public health, and safety
regulation. Many of the same questions that have arisen in the United
States and Europe are bound to be raised in many other countries in the
near future: How clean is clean enough? What costs are we willing to
impose to achieve environmental protection? How can we regulate to
achieve maximum results at the lowest costs?
In addition, there are reasons why cost-benefit analysis can
provide special advantages in the development context. First, and
most obviously, developing countries have less money to waste, and
therefore mechanisms to ensure that regulations are delivering benefits
that justify their costs are especially important. The economic problems
within the United States and Europe that provided the political impetus
for adoption of cost-benefit analysis are small compared to the vastly
larger economic difficulties faced by many developing countries. For
these reasons, there is less social wealth to be spent generally, and
on environmental, public health, and safety protections specifically.
Given the more limited resources of developing countries, it is doubly
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries11
important that regulations be able to achieve much with as little waste
as possible.
By the same token, however, cost-benefit analysis can help
justify regulatory expenditures even in cases where governments
face tight budget constraints by showing where regulations have net
social benefits—where benefits exceed costs. While some developed
countries may be willing to adopt regulations that have net costs, in
order to achieve other social goals like fairness or to discharge widely
felt moral responsibilities (for example, in the context of protections
for endangered species), developing countries are less able to afford to
adopt net cost measures. But, where there are net benefits to regulation,
then, absent some countervailing problem like distributional concerns,
the economics justify regulations, and even poor countries should
move forward. In cases where benefits exceed costs, rich countries
and poor countries are on equal footing—failing to regulate in those
circumstances is the costly choice.
Second cost-benefit analysis can help improve regulatory
systems that lack transparency, or in which special interest politics
has become too dominant. Just as there is persistent concern within
developed countries that regulatory agencies have been delegated too
much power, creating a “democracy deficit” between regulators and
the public they are supposed to serve, there are similar questions about
the exercise of state authority in many developing countries. Rules
on transparency of government action, public participation, access to
media, judicial review, and reason-giving are sometimes new, nonexistent, or poorly understood and enforced. Independent institutions
that have power-checking functions in developed countries—like
independent media, scholarly institutions, professional associations,
and other civil society actors—are often weak, more subject to state
control, or simply lack the necessary information to bring government
actors to account. More to the point, democratic institutions can
themselves be weak, voters can be ill-informed about the day-to-day
goings on government, and there may be ineffective oppositional forces
to challenge ruling parties. While these same kinds of problems can
also affect developed countries, they are worse in many parts of the
developing world.
Cost-benefit analysis improves transparency by making the
decision-making process explicit, requiring decision-makers to report
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estudios públicos, 117 (Summer 2010).
their data, assumptions, and expectations, and subjecting analysis to
outside scrutiny and criticism by experts. While the public is often
ill-situated to evaluate cost-benefit analysis performed by government
officials, scholars, political commentators, and civil society actors
can review and criticize cost-benefit analysis in a way that is simply
impossible when decisions are made behind closed doors. In this way,
cost-benefit analysis can improve the ability of outside institutions to
subject government actions to scrutiny. While cost-benefit analysis
clearly cannot solve all of a society’s transparency problems, by forcing
government actors to make their choices and the information that they
are using to arrive at decisions more explicit, it can serve an extremely
important transparency function.
A third important advantage is the ability to identify and shame
inefficient programs. Wasteful regulation—rules that stifle innovation
or economic growth, but deliver little in terms of environmental
protection or public health—are a clear threat to development.
However, without a systematic methodology to identify such
regulation, they can remain on the books for years, even decades,
causing unnecessary economic harm. Cost-benefit analysis can help
identify bad rules—hopefully in most cases before they are adopted.
Perhaps more importantly, it supplies a neutral language with which to
condemn unwise programs. The methodological limits of cost-benefit
analysis create constraints on how far it can legitimately be “stretched”
to justify wasteful programs that may be supported by political
officials. By creating a universal standard applicable to a broad range
of programs, cost-benefit analysis can draw attention to those programs
that are particularly inefficient or ill-conceived.
For these reasons, inter alia, cost-benefit analysis can provide
a useful supplement to decisionmaking procedures throughout the
developing world. Just as it has helped developed countries cabin
the discretion of executive decision-makers by providing substantive
criteria and formal procedures for good decision-making, costbenefit analysis can substantially improve how decisions are made
in developing countries as well. For countries that face special
challenges—including the need to boost economic growth and grow
stable and well-functioning political institutions—cost-benefit analysis
can be an especially useful tool.
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However, while there may be special potential for cost-benefit
analysis in developing countries, there are also special challenges as
well. The next two sections deal directly with that issue, first addressing
technical and political barriers to greater adoption of cost-benefit
analysis, and then turning to deeper conceptual issues that arise for
cost-benefit analysis in the developing context, and how those issues
can potentially be resolved.
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II. Practical Challenges
While cost-benefit analysis is widespread in the developed
world, it has not seen wide adoption in developing countries. There
are many potential reasons including specific political, economic, and
capacity challenges faced by developing countries.
A. Politics
In developed countries, cost-benefit analysis is a well established
technique that tends to add positive legitimacy to the decisions of
policymakers. Regulatory review, with cost-benefit analysis at its
core, has been practiced for nearly three decades in the United States.
Economics is accepted within academic and political circles as well
as the general population as a legitimate tool of policy analysis. When
economics is used to justify policy, it has the effect of increasing
support for the policy.
There are some voices in developed economies that do not
support the use of economics or cost-benefit analysis to assess policy,
but these groups represent a small fraction of the political discourse.
In fact, those groups that tend to eschew cost-benefit analysis undercut
their ability to effectually promote their policy prescriptions. The most
clear example of this is within the regulatory context, where some
groups have not participated in forums that make important policy
choices.23 The result is an unbalanced process where some interests
have greater representation.
23
See the interview with Sally Katzen, former Dep. Dir. for Mgmt.,
OMB in Wash. D.C. (Feb. 20, 2007) in Revesz and Livermore (2008).
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estudios públicos, 117 (Summer 2010).
Even in political processes where cost-benefit analysis does not
have a formal institutional role—for example in the legislature and
media—economic analysis has broad political cache. Where groups
reject cost-benefit analysis, it tends to hurt the causes they support more
than it hurts cost-benefit analysis. Where it was possible for opponents
of a policy to insinuate that economic analysts does not support the
policy, they can use that to great effect.24
Cost-benefit analysis may not enjoy the same level of positive
legitimacy in certain developing countries. Part of the legitimacy of
cost-benefit analysis and economics generally in developed countries is
simply output legitimacy—it is seen as having successfully contributed
to a long-term trend of growth and increased consumption. So long as
the consequences of economic analysis seem to be generally positive,
the public and political class are willing to accept its use, despite
whatever misgivings or misunderstandings they may have.
Economic analysis does not have the same track record in
developing countries, essentially by definition. In many countries, the
field of cost-benefit analysis may be seen as a foreign import that has
little applicability to the types of issues presented by development.
While there is nothing inherent in cost-benefit analysis that endorses
a free-market style approach to regulation, it may be closely linked,
at least at a psychological level, with “Washington Consensus”-type
policies that have not met with universal approval in the developing
world.25 To the extent that cost-benefit analysis is weighed down by
association with unpopular policies or approaches, it will enjoy less
legitimacy.
In addition, developed countries began widespread adoption of
cost-benefit analysis after they had put in place significant regulatory
24 One good example is how opponents to EPA regulation of
greenhouse gases argued that OMB opposed the proposed regulations, on the
office internal memorandum that stated that there would be serious economic
consequences from those proposed rules. However, as unearthed by reporter
David Roberts, the statement was never issued by the OMB but was one of the
comments that were generated by inter-agency review. See http://www.grist.
org/article/2009-05-13-omb-epa-sba-endangerment
25 In particular, there has been widespread public anger over neoliberal
policies promoted by international institutions, especially contractory policies
promoted through International Monetary Fund structural adjustments. Of
course, the term “[‘Washington Consensus’] has been used to mean different
things by different people,” not all of them bad. See Williamson (2004).
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries15
systems to address environmental, public health, and safety risk. The
initial regulatory agenda was set on the basis of risk perceptions by the
public, which provided the political environment needed to create new
regulatory agencies with broad power, and justified greater intervention
in the marketplace by regulators. Cost-benefit analysis came later, as
a tool to add rationality to pre-existing regimes as they continued to
exercise their authority.
The political dynamic that led to adoption of cost-benefit
analysis in the United States and European Union does not exist in
developing countries. Both the United States and European Union
adopted cost-benefit analysis and regulatory review when their
economies faced periods of flagging growth within a long-term trend
of increasing prosperity. They had already achieved high levels of
development, had undertaken risk regulation on an ambitious scale,
and addressed many of the underlying difficulties that continue to
plague many developing countries. Cost-benefit analysis in developed
countries came about in part because of sentiment that governments
needed to trim back on spending on a “luxury” good, i.e. high levels of
protection against environmental and public health risks.
The economic problems that provided the political basis for
adoption of cost-benefit analysis—including inflation and persistent
unemployment—are often present in exacerbated form in developing
countries, and they are accompanied by a host of other economic
challenges as well. However, developing countries, facing vastly
greater economic constraints, have never been in the position to
undertake “luxury” spending on environmental protection in the
first place. For countries that are at the beginning of a pro-regulatory
cycle, the political argument in favor of cost-benefit analysis will
have to change. More specifically, if cost-benefit analysis is structured
and perceived as a check on regulation, it is may be both politically
unpopular, and potentially harmful if it unduly slows down or hampers
regulatory systems that are in their beginning stages. Rather, costbenefit analysis needs to be explicitly conceptualized as a mechanism
for agenda-setting—a neutral tool that can help new regulators identify
which problems to address first—comparing alternatives, and achieving
maximum net benefits by properly calibrating regulations so they are
neither unduly strict, nor overly weak. Only if cost-benefit analysis
has this proactive role will it avoid retarding the growth of necessary
16
estudios públicos, 117 (Summer 2010).
regulation and be seen as a productive element of the policymaking
process.
Finally, the broad political support enjoyed by cost-benefit
analysis is in part simply the result of having been practiced longer in
developed countries. Countries that have less experience with the tool
will naturally face greater uncertainty about cost-benefit analysis, and in
the early years of adoption may face greater opposition based on fears
of potential problems. In this respect, the best way that cost-benefit
analysis can gain legitimacy is to prove its utility.
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B. The Problem of International Comparison
A particular issue that could erode popular support for costbenefit analysis in developing countries is the problem external
inequality. Because risk-preferences tend to track fairly closely with
wealth, it can be expected that rich countries will be willing to pay
more to reduce environmental, public health, and safety risk than
countries in earlier stages of development.26 Cost-benefit analysis
would take these preferences into account, and ultimately would justify
less strict regulatory levels in developing countries.
From a purely economic standpoint, regional differences in riskpreferences is neither surprising nor troubling. The correlations between
wealth and willingness to pay to avoid risks is quite well established.27
In fact, differences in preferences generally provides justification for
the diffused systems of government that we see both international and
within nations that implement some version of a federalist division of
power or “subsidiarity.”28 If the residents of California and Mississippi
have different preferences for local environmental protection, the
division of authority between states allows those preferences to be
26 Empirical research on willingness-to-pay and risk in developing
countries tends to support this intuition. See Soma, et al. (2007) (variations of
willingness to pay according to income); Hammitt, and Zhou (2005).
27 See Armantier and Treich (2003).
28 See Buchanan (1995). Also, for a rebuttal of the argument that
placing federal environmental regulation is a way to avoid a socially
undesirable “race to the bottom”, see Revesz (1992). For a reference in the
European context, see Wils (1994). Wouter argues for a broadening of the
principle of subsidiarity.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries17
vindicated in different laws. Within the European Union, countries have
maintained significant levels of autonomy over regulatory choices,
and the principles of “subsidiarity”—where decisions are allocated to
the most local jurisdictional body that can make efficient decisions,
has been adopted in the founding documents of the Union.29 At the
international level, differences in preferences and culture account for
huge differences in policy choices, not only with regards to regulation,
but also in such far flung areas as civil liability for wrong-doing and
health care.
However, the fact of different preferences for risk, especially
when those preferences are closely associated with levels of
development, creates the problem of “international comparison.” Put
most strikingly—and put in the language or morality that is sometimes
used to evaluate cost-benefit analysis: “Is an American life worth more
than the life of a Chilean life?”
This debate is far from academic. One consequence of differing
preferences for risk is that lower levels of environmental protection will
be justified in developing countries because they are wiling to spend
less to “save a life” than developed countries. The trade-off between
economic growth and environmental protection is simply different
in countries that have different levels of economic development. To
some, this result seems unfair because it disadvantages populations in
developing countries through higher degrees of environmental risk.
If, as some have argued30 some degree of environmental protection is
a human right, then no country can fall below that baseline standard,
regardless of risk-preferences or level of economic development.
The flip side of this argument is seen in developed countries,
where labor unions and workers complain that lower environmental
standards in the developing world amount to an unfair advantage
for workers in those countries. Environmental and public health
regulations impose cost on capital, creating incentives for industry
to move to countries with less stringent regulation. When industry
The Treaty of Rome, which was amended by both the Single
European Act (1986) and the Maastricht Treaty (1992), establishes that
Community policies on the environment shall not prevent any member
states from introducing more stringent protective measure. The Maastricht
Treaty also explicitly adopted the subsidiarity principle.
29
30
See McCallion and Sharma (2000); Boyle (2007).
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18
estudios públicos, 117 (Summer 2010).
moves, there are consequences for local communities and jobs.
Throughout the American “rust-belt” states, including Ohio,
Pennsylvania, and Michigan, large industry has shuttered factories
and laid-off thousands of workers. Often, highly paid unionized
manufacturing employment is replaced by lower paid, non-union
service employment, if it is replaced at all. Strict regulations
compounds other factors, like high labor costs, to create incentives
for firms to locate in less developed countries. Unions and localities
harmed by capital flight sometimes blame developing countries for
having rules that are “too weak” or bemoan a “race to the bottom” that
undercuts environmental progress.31
Another political fraught consequences of international
differences in risk-preferences is that, from a purely economic
standpoint, risk transfer from developed countries to developing
countries can be justified. This reality was discussed by Lawrence
Summers, currently a top economic advisor to President Obama, when
he was at the World Bank. A 1991 memorandum signed by Summers
said, inter alia, that “the economic logic behind dumping a load of toxic
waste in the lowest wage country is impeccable and we should face up
to that.”32
The reaction to the Summers memo was swift and global.
As just one example, shortly after the memo was released publicly,
Brazil’s then-Secretary of the Environment Jose Lutzenburger wrote to
Summers: “Your reasoning is perfectly logical but totally insane... Your
thoughts [provide] a concrete example of the unbelievable alienation,
reductionist thinking, social ruthlessness and the arrogant ignorance of
many conventional ‘economists’ concerning the nature of the world we
live in.”33
The reaction to Summers’s suggestion, however, indicates
exactly the kinds of political perils faced by those that wish to expand
the use of cost-benefit analysis. Economic analysis can sometimes
31 Whether such a “race to the bottom” exists, or could be considered
inefficient from an economic perspective, is another question. Revesz, supra
note 23.
32 See Jim Vallette, Larry Summers’ War Against the Earth, Counter
Punch, http://www.globalpolicy.org/component/content/article/212/45462.
html (last visited Sep. 28, 2009).
33 The above quote from Jose Lutzenburger is widely cited on websites
opposed to the work of the World Bank and can also be found in Jensen (2004).
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries19
cast public policy choices in a stark and unforgiving light, clarifying
tradeoffs between highly value-laden goods like environmental
protection and public health. Cost-benefit analysis is likely to highlight
the realities of global inequalities of distribution as protections that are
justified in some countries will not be justified in others.
The issue of international comparison can invoke strong
feelings. But solving this problem will not be easy. There are three
potential solutions, all of which have serious drawbacks. The first is to
“launder” the preferences of people in developing countries to exclude
risk valuations that are “too low.” There are potential justifications for
such laundering—risks may be misunderstood; populations could be
subject to information processing disadvantages or flawed heuristic
mechanisms vis-à-vis comparable populations in rich countries. It is
possible that normatively troubling influences on preferences could
increase risk-tolerance, such as habituation to involuntary risks
associated with poverty, crime, or internal strife. Most controversially
would be the claim that preferences developed under conditions of
poverty are always coerced, and can therefore be ignored.
The argument against laundering preferences is two-fold. First,
if the preferences that serve as the foundation for cost-benefit analysis
are manipulated, it is not clear what the results of cost-benefit analysis
would show. Typically, a net positive cost-benefit analysis would mean
that people would be willing-to-pay more for regulatory benefits than
they would be willing-to-pay to avoid the cost imposed by a regulation.
If preferences are laundered, then analysts would have to make claims
about “true welfare” distinct from welfare as described by preference
satisfaction. While there are philosophers that have attempted to create
a foundation for cost-benefit analysis on the basis of objective welfare
criteria,34 in pluralistic countries where there are many acceptable
conceptions of the good, arriving at agreement on the content of such
objective criteria is extremely difficult.
Second, laundering preferences creates the real possibility that
regulations that “pass” a cost-benefit analysis will nevertheless make
people worse off according to their own estimation. For example, if
a workplace safety regulation is adopted that imposes marginal costs
on each unit of labor, the result is decreased worker productivity, and
34Adler
and Posner (2006).
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20
estudios públicos, 117 (Summer 2010).
therefore reduced wages. If the workers value the safety benefit less
than the lost wages, the state has not done them any favors.
Finally, advocates of preference laundering rarely discuss
increasing risk tolerance in rich countries. From a purely economic
perspective, adjusting preferences upward in developing countries
would result in a regressive global transfer of wealth, as some of the
comparative advantage of developing countries—willingness to take
on greater environmental and public health risk—would be foregone.
Given current levels of inequality, wealth transfers from developing
countries to rich countries are clearly normatively problematic.
The second option to deal with the problem of international
comparison would be to treat international differences in risk
preferences the same way that they are generally treated for internal
domestic purposes. Developed countries do not create differing risk
valuations for differing populations—they use an average value for the
entire population. The use of an average value avoids troubling fairness
problems, and, so long as regulatory costs are not focused toward the
lower side of the income distribution, results in mild redistribution
downward as poor people receive slightly more protection than they
would be willing to pay for, but regulatory costs are mostly carried by
wealthier portions of the population.
There are several reasons why an average global value for risk
preferences is unlikely to be a successful strategy. On a conceptual
level, it would face the problems discussed below in the case of a single
developing country. Huge global disparities in wealth, coupled with
significant demographic clustering around wealth and income, would be
mean that the assumption underlying the use of an average value in the
domestic context—that regulatory costs track wealth—would be less
likely to hold. This means that in some cases, poor countries would be
locked into adopting regulations that result in net costs, because even
though an average value was used, that value was based in part on riskpreferences in rich countries, who may not actually be paying for the
regulation. Similarly, rich countries would be precluded from adopting
some regulations that have net benefits, because the average value is
based on risk valuations in poor countries that are subject to neither the
costs or the benefits. An average value constraint for internal regulation,
then, would result in real welfare losses for the purpose of maintaining
a single global risk valuation.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries21
Even if a compelling case could be made on a conceptual level
for a unitary global risk valuation standard, it would be essentially
impossible to maintain from a political perspective. It would require
the ceding of sovereign power over environmental and public health
regulation, something that few countries are likely to voluntarily
do. When developing countries were forced to adopt overly strict
regulation, or developed countries could not adopt sufficiently strict
regulation, local population would grow discontented with such a rule.
And, given the very large disparities of wealth at the global scale and
the significant amount of clustering of wealthy and poor populations,
the average risk value is going to be very far away from the optimal risk
valuations for many countries. If only for purely practical reasons, then,
it is extremely unlikely that a universal value is likely to be adopted any
time in the near future.
The final option to deal with the problem of international
comparison is simply to face the potential political backlash that
may result from differing risk valuations, and perhaps make some
limited concessions in order to avoid the most obviously troubling
consequences. There are several potential such compromises. Direct
and obvious risk-transfers to developing countries, for example
through transportation of hazardous waste, could be avoided. Where
rich countries are causing cross-border risk, for example in the climate
change context, then policy can be set using the wealthier country’s
risk preferences, because that is where costs will be imposed. Wealthier
countries that want developed countries to adopt stricter regulation
in order to lower differences in comparative advantage for attracting
industry can create compensation regimes, at the very least through
technology transfer. While none of these compromises is strictly
economically efficient, they could avoid a potential backlash that ends
up costing even more.
In the end, differences in risk valuation call attention to the
tremendous problem of wealth inequality at the global level. If it seems
striking to a person in the United States or Europe that a person in a
developing country is not willing to pay what may seem to be paltry sums
of money to avoid very significant risks, that should shock the conscience
and show in striking terms the need for real measures to reduce global
poverty. The best solution is not to hide away the problem of inequality
by laundering preferences or creating an artificial global average value,
but is instead to address the issue of inequality head-on. estudios públicos, 117 (Summer 2010).
22
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C. Analytic Capacity
Even where there is broad support for cost-benefit analysis,
finding the resources to implement it on a widespread basis will pose
a challenge. Developed countries have devoted significant resources to
conducting cost-benefit analysis. Because it has been practicing costbenefit analysis on a large scale at the federal level for three decades,
the United States has developed the most sophisticated capacity in this
area. U.S. administrative agencies have hired significant personnel
with expertise in economics, risk-analysis, and related disciplines
for the purpose of analyzing policy alternatives. Many agencies have
policy offices that are directly charged with developing regulatory
agendas. The U.S. Environmental Protection Agencies (EPA) in
particular has devoted time, money, and staff to conducting costbenefit analysis. Among other steps, EPA has created the National
Center for Environmental Economics (NCEE) which employs
dozens of economists and other professionals in order “conduct[] and
supervise[] research and development on economic analytic methods”;
“lead[] production of EPA economic reports”; “provide guidance
for performing economic analysis”; and prepare its own economic
analyses of environmental policy.35 In addition to the NCEE, the EPA
has created a standing committee of its Science Advisory Board—the
Environmental Economics Advisory Committee (EEAC)—composed
of economists and other experts from academia, that provides EPA with
guidance on the economic analysis of environmental policy.
The EPA has even developed its own extensive guidelines for
conducting economic analysis of proposed environmental regulation.36
The guidelines cover topics ranging from appropriate assumptions
concerning willingness-to-pay to avoid risk, discount rates to be used
when regulatory benefits accrue in the future, how to best estimate
the compliance cost of proposed regulation, identifying appropriate
alternative policies, and the scope of secondary consequences that
35
National Center for Environmental Economics, About NCEE, http://
yosemite.epa.gov/ee/epa/eed.nsf/webpages/AboutNCEE.html (last visited May
20, 2009)
36 U.S. Environmental Protection Agency, Guidelines for Preparing
Economic Analyses (2000). Available at http://yosemite.epa.gov/ee/epa/eed.
nsf/webpages/Guidelines.html/$file/Guidelines.pdf
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries23
must be considered. The guidelines are an extremely well-articulated
technical document based on decades of scholarship and research that
had been conducted in the field of environmental economics and costbenefit analysis.
In addition to the capacity within administrative agencies at the
federal level, there is also a centralized body, the Office of Information
and Regulatory Affairs (OIRA) within the Office of Management and
Budget (OMB) that is charged with overseeing the cost-benefit analyzes
performed by all agencies. This office has its own complement of
several dozen professional staff that has developed significant expertise
in the practice of cost-benefit analysis and regulatory review. In nearly
three decades of operation, OIRA has developed a deep capacity for
regulatory analysis and for improving the methodology and technical
sophistication of agency analysis. While that capacity comes at a cost—
OIRA may be relatively slow to change or adopt more cutting edge
approaches—it represents an extremely important asset that facilitates
the widespread use of cost-benefit analysis in the United States.
Beyond direct government spending, there is also a complement
of academics that provide a great deal of data and analysis that
augments governments efforts.37 The fields of risk analysis, cost-benefit
analysis, and environmental and public health economics are well
developed across the developed world, with faculty at top institutions of
higher education devoted to teaching new professionals and enhancing
and expanding the field through scholarship. Within the United States
alone, there are several interdisciplinary centers devoted to the costbenefit analysis and regulatory issues, including the Center for Risk
Analysis at Harvard University, Benefit-Cost Analysis Center at the
University of Washington, and the Institute for Policy Integrity (IPI) at
New York University School of Law.
Another factor that facilitates cost-benefit analysis in developed
countries is the significant extant literature that has been developed over
the past several decades that forms the basis of much contemporary
analysis. Any cost-benefit analysis is going to include a significant
number of parameters that link, for example, risk-exposure scenarios
with outcomes, and outcomes with preferences, to estimate regulatory
37
See e.g. Viscusi (1978); Farrow et al. (2004). Other researches
discuss the institutional context of cost-benefit analysis and how it can improve
decisionmaking. See e.g., Morgenstern (1997).
estudios públicos, 117 (Summer 2010).
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24
benefits, or that estimate compliance needs and technological
development to estimate costs. A great deal of scientific research
has been done to estimate the various parameters concerning risk
and health-endpoints, for example, that could easily be translated to
other countries—the dose response curve for a carcinogen can be
expected to hold across national borders (putting aside the problem of
exposure to multiple pollutants, which is not something that even the
most sophisticated cost-benefit analysis can often take into account).
However, a great deal of research has also been done on economic
questions, and in particular people’s preferences regarding risk
exposure. These studies have taken a variety of forms, from “contingent
valuation” studies that solicit preferences by asking survey-respondents
about their willingness-to-pay to avoid risk; to labor-market analysis
that looks back at data on wages and differential injury risks to
statistically infer a “risk premium” that workers demand to take more
hazardous jobs.
The cross-social applicability of this research is questionable.
As an initial matter, it is well known that risk preferences change with
wealth, so that the wealthier a person is, the more he or she is willing
to pay to avoid risk. Some estimates exist for parameters to define
this relationship,38 although they are controversial.39 However, it is
not clear that sound estimates can be made about risk preferences in
developed countries merely by discounting willingness-to-pay estimates
from rich countries to account for differing levels of wealth—there are
likely cultural, social, political, and other factors that may influence
risk-preferences as well. Use of discounted values from developed
countries does not seem well-suited for generating parameters that will
always be meaningful in other contexts. To have accurate inputs into
their analyzes, it is likely that developing countries will have to conduct
a significant amount of original research on at least some of the key
economic parameters.
In the developed world, it has made sense to devote resources
to regulatory analysis. Even where regulations have relatively small
impacts as a percentage of the economy, the overall size of their
38 Robinson and Hammitt (2009) (report prepared for the World Bank).
Available at http://regulatory-analysis.com/robinson-hammitt-air-pollution-
africa.pdf
39
Id. at 19.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries25
economies means that they have large impacts in absolute terms.
The threshold for subjecting national regulations to full cost-benefit
analysis in the United States is $100 million (USD) annual impact—
regulations that have less of an impact are subjected to less analysis.40
Similarly, the European Union guidelines limits full impact analysis
to “significant” policies, and recommends proportionally less analysis
to those policies with less impact.41 However, with the relatively high
threshold set in the United States, there are still many regulations that
are subjected to cost-benefit analysis. Given the amount of economic
value at stake, devoting the, relatively, small amount of resources
needed for cost-benefit analysis is money well spent.
Even within developed countries, however, smaller governmental
units—like states in the US—sometimes have difficulty mustering the
analytic resources to carryout cost-benefit analysis. IPI is in the midst
of a large-scale project to determine how states use regulatory review
and cost-benefit analysis to shape environmental and public health
regulation. Perhaps unsurprisingly, our preliminary findings, which
accord with the past research on the subject,42 are that states generally do
not have significant resources devoted to cost-benefit analysis, and that
where regulatory review is carried out, it is often much more cursory that
review at the federal level, and at times far less sophisticated. But, for
states facing resources constraints, it is reasonable to avoid spending too
much on analytic efforts to make marginal improvements in regulatory
efficiency. Because state regulations affect smaller economies, the
absolute economic effects of their regulations are smaller, so the returns
to investment in analysis are less.
Developing countries can be expected to face a similar
dilemma when deciding the level of resources to devote to costbenefit analysis. For small countries with relatively small economies,
subjecting regulation to expensive cost-benefit analysis will not
generally be efficient. Because there will be relatively few policy
moves that have sufficient economic impact to justify lengthy and
40
The threshold has remained unchanged since the original Executive
Order. Compare Executive Order No. 12,866 of September 30, 1993 (58 Fed.
Reg. 51,735) with Executive Order No.12,291 of February 17, 1981 (46 Fed.
Reg. 13,193).
41 European Commission, supra note at 13.
42 Hahn (1998).
estudios públicos, 117 (Summer 2010).
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26
resource intensive cost-benefit analysis, the start-up costs necessary to
develop sufficient capacity to conduct this type of analysis would be
too expensive. Countries at lower levels of development may also not
have a sufficiently large professional class such that highly educated
community members can be optimally used in conducting regulatory
analysis instead of serving in other high-value roles that need to be
filled.
While the issues of analytic capacity are serious, the will not
pose insurmountable barriers in all cases. In addition, some steps—like
pooling analytic resources between countries or conducting analysis of
similar policies across a number of countries—can be taken to reduce
redundancies and allow developing countries to take advantage of
returns to scale that have empowered developed countries to justify the
devotion of significant resources for cost-benefit analysis. Furthermore,
as countries expand economically, the real impact of potential
regulations will grow, creating greater justification for committing scare
resources to undertaking cost-benefit analysis of environmental, public
health, and safety policy.
III: The Problem of Distribution
Examining the distribution of regulatory costs and benefits
is a fundamental aspect of regulatory impact analysis. There can be
distributional differences intra-generationally—so that some members
of the same generation are burdened while others benefit. Distributional
effects can also exist inter-generationally, where benefits or costs are
spread unequally over time. Both are explored below.
A. Intragenerational Equity
The most fundamental criticism of cost-benefit analysis based on
unfairness of intra-generational distribution is that the inputs to costbenefit analysis are sensitive to wealth. The most important measure of
regulatory benefits is “willingness-to-pay.” If a regulation reduces the
risk of exposure to a contaminant, that risk reduction is monetized by
asking how much the beneficiaries of the rule would be willing to pay
to avoid this risk. Whatever the affected population is willing to pay to
avoid the risk is the benefit of the proposed rule.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries27
The first distributional concern presented by cost-benefit analysis
is that willingness-to-pay is closely correlated with wealth. A person
with higher income can be expected to be willing to pay more for a
reduction of the same risk than a person with a lower income. If costbenefit analysis were to individualize willingness to pay, or separate
classes of regulatory beneficiaries by income, it would have the affect
of giving higher levels of protection to wealthy people than poor
people, because they are willing to pay more for protection. For many,
this outcome could conflict with fundamental concepts of fairness and
equality before the law.
There are two basic responses to this criticism; one conceptual
and one practical. On a conceptual level, proponents of cost-benefit
analysis can argue that willingness-to-pay is really a proxy for
the welfare effects of regulation. The questions that cost-benefit
analysis asks is whether regulations are welfare enhancing, not only
whether willingness-to-pay exceeds costs. By taking into account the
diminishing marginal value of consumption, cost-benefit analysis could
theoretically be structured to identify the welfare consequences of
regulation, approving regulations that maximize net well-being.43 This
response serves as the basis for cost-benefit analysis techniques that
give greater weight to policies that have net benefits for lower-income
individuals discussed below.
The more practical response is that, as conducted, cost-benefit
analysis uses average valuations, not individual valuations, of policy
costs and benefits. Thus, the value of statistical life is set for the entire
U.S. population—there are no separate values for higher or lower
income people. This situation comes about for both simple technical
reasons—it would be more complex to try and divide the population
into sub-groups, assign differing values for risks to those groups, and
then classifying all regulatory impacts according to those sub-groups—
as well as the obvious political difficulty that would arise if groups were
treated differently. This practical solution undermines the distributional
critique, and in fact, so long as burdens are distributed evenly
43 An interesting consequence of cost-benefit analysis along these lines
is that it would justify straight wealth transfers, where money is taken from the
wealthy and given to the poor. By looking at only willingness to pay, a certain
amount of error is introduced if welfare is important Armantier and Treich,
supra note 27.
estudios públicos, 117 (Summer 2010).
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28
throughout the population (or clump upwards), results in a downward
(progressive) redistributional trend.
Some steps have been taken to integrate distributional analysis
into regulatory assessment. The executive order governing regulatory
review in the United States explicitly calls for distributional analysis,44
and the EPA guidelines45 and other guidance documents46 provide for
mechanisms to assess the distributional impacts of regulatory proposals.
However, the issue is far from resolved, and President Obama has
specifically called attention to the need to develop better tools for
assessing and weighing distributional issues.47
A second order criticism is that, even where average values
are used, cost-benefit analysis is insensitive to the distribution of
regulatory costs and benefits. In most basic form, cost-benefit analysis
is only interested in maximizing net benefits in the aggregate, it is
not concerned with how those regulatory benefits are distributed.
Thus, a program that increases the wealth of the rich, while creating
burdens on the poor, could be justified by cost-benefit analysis so long
as the value of the regulatory benefits was greater than the value of
regulatory costs.
For this reason, cost-benefit analysis is potentially insensitive
to an important aspect of regulation: distributional effects. Without
some mechanism to account for distributional effects, cost-benefit
analysis will create an incomplete assessment of policy. If decisions
are based on cost-benefit analysis alone, there is a real risk of
bad policy being adopted. Cost-benefit analysis, then, needs to be
augmented by some form of distributional analysis to give a more
complete picture of the consequences of environmental, public health,
and safety regulation.
These distributional issues, while they are important in
developed economies, are much more important for developing
countries. Income inequality is a larger problem in developing
countries, a situation that some commentators argue has been
44 Executive
Order No. 12,866, supra note 40 at section 1(b)(5). Environmental Protection Agency, supra note 36.
46 Office of Management. & Budget (OMB), Circular A-4, Regulatory
Analysis 14 (2003)
47 Regulatory Review: Memorandum for the Heads of Executive
Departments and Agencies, 74 Fed. Reg. 5977 (Jan. 30, 2009) (calling for
recommendations on the subject from the Director of OMB).
45 U.S.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries29
exacerbated by the expansion of globalization48—international trade,
rapidly expanding telecommunications technology, trade, foreign
investment all create economic opportunity, but may also tend to
concentrates wealth in fewer and fewer hands.49
Income inequality is especially troubling, from a normative
perspective, when portions of the population live a subsidence or nearsubsidence levels, and have access to inadequate housing, food, health
care, and education. While theories of distributional justice abound,
there is a persuasive argument that people should have access to at least
those resources necessary to achieve some sufficient level of autonomy
and self-direction.50
The consequence of these two distributional facts: greater total
inequality and populations living at or near subsistence, complicates
the picture for developing countries wishing to engage in cost-benefit
analysis. First, there may be certain classes of regulatory measures
which are simply impermissible on a moral basis no matter what the
cost-benefit ratios. For example, if a regulation burdened a group of
individuals at or near subsistence, so that their wealth levels fell below
subsistence, that regulation would potentially be immoral, even if it
did result in aggregate increases in wealth. In order for the regulation
to be legitimately adopted, their would have to be mechanisms of
compensation put in place to ensure that those who were negatively
affected by the regulation were made whole and did not experience the
potentially catastrophic consequences to their well-being of even small
negative changes to their wealth.
See Narula (2008) (“Some have begun to tell the Tale of Two
Indias, wherein inequalities are further polarized by globalization’s steady
march, and where Indians are anointed into the Billionaire’s Club”); Ben S.
48
Bernanke, Chairman of the Bd. of Governors of the Fed. Reserve Sys., The
Level and Distribution of Economic Well-Being, Address at the Greater
Omaha Chamber of Commerce (Feb. 6, 2007), available at http://www.
federalreserve.gov/newsevents/speech/Bernanke20070206a.htm (“Beyond
the effects of technological change, the variety of economic forces grouped
under the heading of “globalization” may also have been a factor in the rise in
inequality, even as these forces have provided a major stimulus to economic
growth and to living standards overall.”).
49 See Faux et al (2006) (citing rising income inequality as a
disturbing trend resulting from NAFTA); see also Polaski (2003), available
at http://www.carnegieendowment.org/files/nafta1.pdf.
50 See Dworkin (1981).
estudios públicos, 117 (Summer 2010).
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30
Second, where inequality is already high, there needs to be
special attention to ensure that a bad situation is not made worse.
Typically, many economists think that there is a trade-off between
economic productivity and economic equality,51 such that measures
taken to alleviate poverty often distort incentives, reducing overall
economic productivity. Regulations that exacerbate inequality then
can be thought of as imposing actual costs on societies that must
take affirmative steps to reduce that inequality—say by expanding
redistributional tax policy. Because developing countries already face
large distributional problems, it is likely the case the where those
problems are exacerbated by a regulation, government would have
to step in to counter those effects. Cost-benefit analysis must take
into account these costs or risk failing to account for a key regulatory
consequence.
Third, the technical fix that has been used in developed countries
of using a single population-wide metric for valuing regulatory benefits
results in reasonable outcomes if regulatory burdens are roughly
distributed according to wealth—i.e. the wealthier population tends
to be more burdened by regulation. If regulatory burdens are not so
distributed, then negative wealth transfers, or even simply inefficient
regulations, arises. For example, if only the bottom quintile is both
burdened and benefited by a regulation, but risk valuations are based
on the middle-quintile, then regulations will be inefficiently strict.
Likewise, if only the top quintile is burdened and benefited, they will
be inefficiently weak. If the top quintile is benefited, and the bottom
quintile is burdened, it would result in a normatively problematic
transfer of wealth.
Because income inequality is exacerbated in developing
countries, it is possible that more regulatory proposals will fall into
these problematic categories where use of an average value for risk
valuations will have bad consequences. If that is the case, then an
alternative mechanism to conduct risk valuation that both avoids these
consequences, while respecting commitments to fairness and equal
protection, would need to be developed. As it currently stands, there is
no obvious candidate for such a valuation methodology.
51 Recent
advances in development economics challenges this view, as
will be discussed below.
A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries31
These distributional issues present clear challenges to the
expanded use of cost-benefit analysis in developing countries.
Specifically, they create a need for the development of more nuanced
and sophisticated ways of conducting distributional analysis and
incorporating that alongside cost-benefit analysis when assessing
the impacts of proposed environmental, public health, and safety
policy. While some attempts have been made in the developed world
to deal with the distributional consequences of regulation, they are
rudimentary, and not up to the task faced by developing countries in
setting policy. It will be for leaders and thinkers in developing countries
to create the next generation of analytic tools to address these issues.
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B. Challenges of Distributional Analysis
There are several methods in which distributional analysis could
be incorporated into regulatory impact analysis. The choice among
these methods will reflect both analytic needs and limitations, as well
as social value choices about how the distribution of costs and benefits
should factor in environmental or public health policymaking.
1. Counting Distribution
At its most fundamental, distributional analysis is based on an
exercise in accounting: not only must aggregate costs and benefits
be calculated, but the identifies of the parties bearing those costs
or receiving those benefits (up to some pre-determined level of
granularity) must be determined. Normative questions will arise even
at this early stage—an analyst must identify which characteristics are
relevant for the analysis. Distribution can be measured according to
region, income, race, gender, age, socio-economic status, business size,
industry, or any other of a potentially limitless set of characteristics
that could be determined to be relevant for purposes of policymaking.
The initial decision about the groups to be targeted for distributional
analysis will form the bedrock of future decisions about how to weigh
inequalities in the allocation of costs and benefits.
Second, the degree of distributional analysis should be identified.
Policy can have a wide range of direct and indirect effects, creating
estudios públicos, 117 (Summer 2010).
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32
a potentially limitless analytic task if all effects must be estimated.
In standard cost-benefit analysis, a traditional decisionmaking rule
would require an analysis to stop at the point where the value of the
information generated from additional investigation is outweighed by
the cost (including delay) of further research. Distributional analysis
does not admit of such a straightforward rule—there needs to a
normative decision about the value of distributional information to
determine the analytic resources that should be devoted.
Distributional analysis will also likely require greater attention
to certain types of policy effects. There are a variety of “pathways”
through which environmental policy can have regressive distributional
consequences—i.e. where lower-wealth individuals bear proportionally
greater costs or fewer benefits of the policy as a percentage of overall
wealth.52 These pathways include increased product prices, reductions
in real wages, allocation of new property rights, differential valuation,
increasing returns to real property ownership, and transition/job
effects.53
Some of these pathways can be relatively easily incorporated
into regulatory impact analysis. For example, the creation of new
property rights, and the allocation of those rights, for example through
a cap-and-trade program where allowances are distributed to existing
emitters, will have clear distributional consequences. Because the
creation of the new right is a direct goal of the policy, and the means
of allocation of the new right is likely to be explicit, it is relatively
straightforward to anticipate the distributional consequences of that
discrete aspect of a policy.
On the other hand, the secondary effects of the same policy—for
example, a cap-and-trade scheme on some environmental pollutant—
are harder to anticipate, and it is especially difficult to anticipate
who will bear the consequences of those secondary effects. The
cap-and-trade program is likely to increase factor costs for certain
industrial processes, potentially leading to losses in shareholder
value (progressive), but potentially causing job losses (regressive).
Other industries in substitute goods, or which use the regulated
factor more efficiency will likely benefit from the policy, increasing
52
53
See Fullerton and Karney (2009)
Id.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries33
shareholder value (regressive), but also potentially causing job creation
(progressive). Consumer prices for basic necessities, like energy or
food, may increase—a regressive effect. But, consumer prices for
luxury goods may also increase—a progressive effect.54
There are two additional complicating factors. First, where
possible, it is likely that the benefits of environmental regulation will
be incorporated into market prices, leading to complications as benefits
are distributed into the market. For example, a land use regulation that
restricts new buildings in a city center is likely to generate an increase
in the value of existing buildings. Some owners of those buildings will
sell into the market, producing consumer surplus for a new buyer and
capturing a windfall profit. Tenants, on the other hand, will experience
disruption and potential transition costs if rental values increase as a
consequence, although new tenants, willing to pay the greater prices,
will enjoy consumer surplus. While a standard cost-benefit analysis
could simply accept higher prices as a benefit of regulation—reflecting
wealth creation as a consequence of the policy—distributional analysis
requires much deeper investigation of who benefits and who losses out
as the effects of the price increase ripple through the economy.
Second, distributional analysis may require that differences
in valuation for regulatory benefits be taken into account, in a way
that standard cost-benefit analysis does not. As discussed above,
individual valuation of the benefits of environmental policy can be
expected to track wealth—the higher the income a person has, the
higher the average valuation for a given environmental benefits. As
a consequence, there is a second mechanism in which benefits can
be regressively delivered—even if every citizen receives an equal
environmental benefit, the valuation of those benefits will mean that
wealthier individuals will receive greater value.
2. Policy-by-Policy vs. Holistic Responses to Distributional Concerns
After gathering basic facts about how costs and benefits are
distributed, policymakers must face the question of how distributional
concerns should be factored into decisionmaking. Where there are a
54
Despite the difficulties of modeling the distributional effects of a
greenhouse gas controls, there are several sophisticated attempts. See e.g.,
Burtraw et al.( 2009).
estudios públicos, 117 (Summer 2010).
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34
large number of policies, the distributional effects of some policies will
be canceled out by the distributional effects of others. Some groups
that benefit from one regulation will be burdened by other regulations.
In this way, over a large number of policy choices, distributional
imbalances will tend to be self-correcting. If distributional corrections
are made at a policy-by-policy level, then, some distributional
effects that would be canceled out through the normal course of
decisionmaking may instead be eliminated by changing the policy,
presumably at the expense of overall efficiency.
An example is illustrative. Image two policies Alpha and Beta
that impose costs of $100 and generate benefits of $200. Alpha imposes
costs on Person B and generates benefits for Person A, and Beta does
the opposite. There are alternative policies, Alpha´ and Beta´ that
impose each imposes costs of $55 on each person, and generates $100
in benefits for each person.
A
B
Costs
Benefits
Costs
Benefits
Alpha
Alpha´ Beta
Beta´ $0
$55
$100
$55
$200
$100
$0
$100
$100
$55
$0
$55
$0
$100
$200
$100
If distributional analysis is carried on a policy-by-policy level,
then it is possible that Alpha´ and Beta´ will be selected. Under Alpha,
there is a very unequal distribution of costs a benefits, with Person
A made $300 better off than Person B. Under Alpha´, the two groups
receive an equal net benefit, and neither is better off than the other.
Likewise, under Beta, there is a similar unequal distribution of
the costs and benefits of the rule. If each rule is evaluated separately,
then the alternative policies, with better distributional evenness, look
reasonable.
However, if analysis is carried out of both policies, then
Alpha and Beta will be selected, because there is no distributional
imbalance when both policies are considered. The net benefits under the
alternative policies lead to $180 in net benefits, while the net benefits of
Alpha and Beta are $200—evaluating the policies together, then, has a
net benefit of $20 with no negative distributional consequences.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries35
In this example, if the policies are evaluated separately, then
alternative policies that have fewer distributional consequences,
but also deliver fewer net benefits, may be selected. The result over
both regulations of selecting the alternative policies is to lower
overall net benefits without affecting any positive redistribution of
the costs and benefits of the policies taken together. In this case,
making modifications to account for distribution to individual policy
choices will lead to less efficient outcomes than accounting for the
distributional impacts of environmental policy as a whole.
While this example is clearly stylized, it has applicability in
the real world. In the case of actual policy making, we would instead
expect there to be probability distributions of how costs and benefits
would be distributed for a regulation. The expected distributions for all
groups for all regulations should be equitable—i.e. costs and benefits
should track the population of each group, so that all individuals have
the same expected payoff. For individual regulations some groups
would come out ahead and others behind. However, over large numbers
of policy choices, we would see the actual payoffs approach the
expected payoffs, leading to a roughly even distribution of costs and
benefits.
This situation is compounded by economic theory which
suggests that redistribution through regulation is likely to be more
costly than using a tax and transfer system to effect redistribution.55 In
the above example, if there was only a one-time policy choice between
Alpha and Alpha´, it might still make sense to choose Alpha if an
equitable redistribution of wealth can be accomplished through the tax
code for less than $10.
In general, there will be no need for systematic redistribution
of the costs and benefits of regulation—because unequal distribution
will tend to cancel out—unless there is some systematic bias such
that some groups are consistently forced to pay for benefits that go to
others. In those cases, it also may be the case that looking at inequality
more generally, including inequality caused by policy choices but also
inequality that arise from the marketplace, will lead to more efficient
redistributional policy because it can be done holistically rather than
through piecemeal correctives at the level of individual polices. Holistic
55
See generally Kaplow and Shavell (2002).
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36
estudios públicos, 117 (Summer 2010).
redistribution can be done either through the tax-and-transfer system,
or where appropriate through targeted regulations that have positive
distributional benefits even if they may not be optimal from a purely
economic standpoint. Understanding that a holistic, all things considered, approach to
redistribution—with environmental and public health policy designed
to maximize wealth, and a second tax-and-transfer or even targeted
inefficient but redistributional environmental or public health policies to
correct for unequal distributional of well-being—may be optimal, there
may nevertheless be a place for distribution to be taken into account
at the level of individual policies. Most obviously, in cases where
progressive redistribution of costs or benefits can be achieved through
minor changes in policy, at lower efficiency costs than redistributing
through the tax and transfer system, then adopting those changes would
be justified.
It also may be that, though redistribution through the tax-andtransfer system is efficient, it is politically difficult for a variety of
reasons. If that is the case, the regulatory system would be a second
best means of correcting distributional inequality. In this scenario,
a holistic approach that looks at all regulations systematically to
determine distributions, with corrections made to some policies
where distributional goals can be achieve most cheaply, would be
efficient.
Only in cases where tax-and-transfer is largely off the table,
and a holistic approach to modifying regulations is also difficult,
would distributional rules built into cost-benefit analysis be the most
efficient mechanism to achieve egalitarian goals. This may actually
be the case for many countries. In the United States, for example, taxand-transfer policy is politically unpopular, and modifying regulation
is extremely difficult and time consuming. In these circumstances,
making distributional corrections at the policy-by-policy level may be
justified.
There are a variety of possible tools that could be used to
explicitly incorporate distribution into regulatory decisionmaking. The
most popular approach is equity weighting, where benefits and costs
are treated differently depending on the populations affects. Systems
of equity weighting have been put into practice in the UK and World
A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries37
Bank.56 Equity weighting has also been the subject of significant
discussion in the economics literature.57
With equity weighting, costs and benefits for disadvantaged
populations count more that costs and benefits for wealthy populations.
For example, with a simple weighting scheme such that that costs and
benefits for B are four-times as important as costs and benefits for A,
we see different policy outcomes being preferred.
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Alpha
Alpha´ Beta
Beta´ A (.2)
B (.8)
Costs
Benefits
Costs
Benefits
$0
$11
$20
$11
$40
$20
$0
$20
$80
$44
$0
$44
$0
$80
$160
$80
Under these equity weights, policies Alpha´ and Beta would
be preferred, whether the policies were considered individually or
collectively. Alpha generates a net loss of $40, while Alpha´ generates
a net benefit of $45. Beta has a net benefit of $140, whereas Beta´ has
a net benefit of only $45. Out of the four possible combinations,(Alpha/
Beta), (Alpha/Beta´), (Alpha´/Beta), (Alpha´/Beta´), the third —(Alpha´/
Beta)— has the highest net return.
There is no general consensus on appropriate equity weights.
Typically, distributional weights are based on social welfare function
comprised of aggregate individual utility, where individual utility
functions are concave in income—each additional unit of income
produces less utility than the last.58 While the fundamental structure of
marginally decreasing utility of income is widely accepted, the actual
shape of the curves—at what rate income produces marginally less
utility—is subject to no such consensus. Even were a regime of equity
weighting to be generally accepted, arriving at the weights to be used
would be no simple manner.
56 See H.M Treasury, The Green Gook: Appraisal and Evaluation in
Central Government 25, 91-96 (2003); Dr`eze (1998).
57 See e.g. Johansson-Stenman (2005).
58 See e.g. id.
estudios públicos, 117 (Summer 2010).
38
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C. Intergenerational Equity and Discounting
A persistent issue that arises for cost-benefit analysis is the
mechanism to discount benefits that occur in the future. In general,
future cash flows are less valuable—all things considered—than current
cash flows, so cost-benefit analysis in the fiscal context would discount
future cash flows to present values in order to make valid comparisons
between costs incurred today and the future benefits of a project. The
discount rate in a purely fiscal context is set according to the riskfree rate of return (usually thought to be around 2% or 3%) and then
adjusted upward to account for a risk premium if the payouts from
the project are unsure.59 The discount rate in the regulatory context is
somewhat different and represents the rate at which a society is willing
to substitute present day consumption for future consumption. It is
typically thought to be comprised of the sum of two components: a term
for a “pure rate of time preference”; and a term that accounts for the
effects of economic growth on the marginal utility of consumption.60
This formula is typically expressed as:
Social discount rate = r + μg
Where:
r is the rate of pure time preference
g is expected growth rate in per capita consumption; and
μ is the negative elasticity of marginal utility to consumption.
However, it is not clear that a straightforward application of
discounting is appropriate in the regulatory context. As an initial matter,
59
The most influential model of combining a risk-free rate an risk
premium to estimate a rate of return on investment (and therefore discount
rate) is the “capital asset pricing model” (CAPM) developed by a handful of
economists in the 1960s, including William Sharpe, Harry Markowitz, and
Merton Miller, who jointly received the Nobel Memorial Prize in Economics
for their contribution to developing the model. In finance, CAPM is used to
determine a theoretically appropriate required rate of return of an asset, if that
asset is to be added to an already well-diversified portfolio, given that asset’s
non-diversifiable risk. See Grossman (1995).
60 See Ramsey (1928) (describing what has been named the Ramsey
Equation).
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries39
it is worthwhile to distinguish between two different contexts where
regulatory benefits occur in the future: long-latency context and future
generations context.61 The long-latency context describes situations
where there is a long lag between exposure to a risk and realization of
the risk. The paradigmatic example is exposure to carcinogens: it can be
years or even decades between the time when a person is exposed to a
harmful chemical and the diagnosis of a disease.
Distinct from the question of long-latency is the question of
future generations. In the future generations context, steps are taken
today that will reduce risks far out into the future. This means that the
peopled burdened by the regulation are different from the people that
will benefit from the regulation—there is a temporal distinction that
means that the two classes will be large distinct. The paradigmatic
case of benefits being delivered to future generations is greenhouse
gas reductions undertaken now. Because of how long greenhouse gases
tend to remain in the atmosphere, reduction in emissions today will not
result in substantial reductions in atmospheric concentrations for many
years.
The use of a pure rate of time preference is justified in the longlatency context. For long-latency threats, discounting is just a matter
of respecting individual preferences. If a person has a preference to
enjoy goods sooner rather than later, and put off harms even if the are
inevitable, then those preferences should be respected. Just as costbenefit analysis typically does not question individuals risk preference,
there is no reason to question preferences about the distribution of risks
over time.
However, the intergenerational context is different, because
there, the distribution of risk is not between two different times
for the same individual, but instead the distribution is between two
different individuals. In this case, the question is not merely a matter of
respecting preferences for when individuals prefer to experience costs
and benefits, but represents a social decision to allocate greater burdens
or benefits to different classes of people. The two questions are distinct,
and must be analyzed differently. This is especially true with respect
to the pure rate of time preference. The term in the social discounting
formula that takes into account diminishing returns to consumption is
61
See Revesz (1999); see also Burton (1993).
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40
estudios públicos, 117 (Summer 2010).
well understood and fairly well justified. It is not clear to what extent
any pure rate of time preference is justified.
The debate over the social discount rate as taken on special
importance in the context of climate change. The Stern Review, the
most large scale economic assessment that has been conducted of
climate change by a government body, for example, used a rate of pure
time preference near zero, to reflect the moral notion that people in the
future should be treated with equal regard.62 Because a small discount
rate was used, relatively strict greenhouse gas controls were found
to be justified. However, the report was subjected to large amounts
of criticism from academic economists—many of whom support
mandatory limits on greenhouse gas emissions—for using a very low
social discount rate, which they felt skewed the results to favor larger
expenditures on climate change controls. 63
While there is much disagreement about the use of a pure
rate of time preference, the second term in the social discount rate
formula—which accounts for the effect of economic growth on the
marginal utility of consumption—could also pose challenges in the
developing context. This term itself can be disaggregated into two
parts: the relationship between total consumption and the marginal
utility of consumption, and predictions about economic growth. While
the exact term for the elasticity of marginal utility of consumption is
debated, the fundamental intuition is widely shared, and a declining
marginal utility of consumption is a basic principle of economic theory.
In general, then, accounting for projected growth in consumption is
uncontroversial.
However, the rates that are used in developed and developing
countries for projected growth are likely to be very different.
Developed countries have experienced economic growth for many
years, and the most advanced economies generally have relatively mild,
62 Stern Review: The Economics of Climate Change available at http://
www.hm-treasury.gov.uk/stern_review_report.htm part 1 at 31 (“We take a
simple approach in this Review: if a future generation will be present, we
suppose that it has the same claim on our ethical attention as the current one.”)
63 See e.g., Nordhaus (2007) (“[T]he Stern Review’s alarming
findings about damages, as well as its economic rationale, rest on its model
parameterization— a low time discount rate and low inequality aversion—that
leads to savings rates and real returns that differ greatly from actual market
data.”).
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries41
though persistent, levels of economic growth. Because they are starting
from a lower level, many important developing countries have high
rates of economic growth.64
The higher growth rates in developing countries will justify
a higher discount rate. The consequence will be less regulation that
benefits future generation. In essence, the higher discount rate reflects
a judgment that populations in the future will be wealthier than current
populations, and therefore it would be unjust to redistribute wealth
from the current generation to the future. Only in cases where the value
of future benefits exceeds the value of costs incurred today would
regulations be justified.
There are some problems that could arise from differential
discount rates for developing countries. First, the problem of
international comparison arises again. Actions that would be justified
in developed countries to protect future generations would not
be justified, potentially raising the ethical and political problems
discussed above.
Perhaps more importantly, using differential growth rates for
global problems—climate change being the most important case—
could lead to perverse results. Higher growth rates stem, at least in
part, from the lower level of economic development. While some
cost-benefit models of climate change use “equity weighting” to
account for the lower consumption rates of poor countries, many do
not. The use of differential discount rates, then, would bias the results
because the diminishing return to consumption would be accounted
for in one context—discounting of future benefits—but would not be
accounted for in another context—current distribution of wealth. This
would create a bias against policies that would benefit developing
countries in the future: equity is not taken into account when it would
increase the value of benefits for developing countries, but is taken
into account when it would decrease the value of benefits for the same
countries.
Even in the domestic context, care would have to be taken. If
regulatory burdens in the present are imposed on wealthier segments
of the population, but regulatory benefits in the future accrue to less
64
See Central Intelligence Agency World Factbook available at https://
www.cia.gov/library/publications/the-world-factbook/.
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estudios públicos, 117 (Summer 2010).
wealthy segments of the population, then the assumption of diminishing
return to consumption would not necessarily hold, and certainly not
at the general growth rate for the economy. Discounting would have
to take into account the incidence of regulatory costs and benefits not
only according to the dimension of time, but also along the wealth
distribution within the country. In essence, discounting would be
subsumed into the larger project of distributional analysis.
There is another potential trap from the use of a high discount
rate based on high projected long-term growth. A very high discount
rate may discourage long-term policies, and ultimately result in
reductions in economic growth in the future as the current generation
consumes rather than making regulatory investments. Where a very
high discount rate is used, there should be additional scrutiny that
policies that are justified by the high rate do no threaten the economic
growth that is the basis of a high rate in the first place. While this does
not mean that a higher discount rate based on projected growth in
consumption is never justified, it does mean that discount rates cannot
be unproblematically incorporated into cost-benefit analysis.
IV: Adapting Cost-Benefit Analysis for the Developing Context
The field of development economics focuses on positive
economic questions involving development and developing countries,
rather that the normative questions that concern welfare economics.
Development economics tries to answer questions about the empirical
consequences of policies, or to identify policies associated with longrange economic growth. Whether those policies are “good” or not is left
to the individual policymakers, and development economics does not
itself propound any ultimate set of decisionmaking criteria upon which
choices “should” be made.
However, that does not mean that development economics
has nothing to offer cost-benefit analysis. The positive claims of
development economics may be of clear value to a normative
assessment of the wisdom of particular policy choices—a policy’s
impact on growth could have major consequences for determining its
net benefits.
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A. Effects of Environmental Policy on Physical Capital Accumulation
Capital accumulation is a well-established variable that
influences development.65 Countries without access to capital have
less productive workers,66 have fewer opportunities to participate
in the global economy through trade, and rely to a greater extent on
agricultural production and raw materials for wealth—subjecting them
to weather risks and highly variable global prices.67 Accumulating
the wide range of assets classified as capital—from factories to
technological know-how—lies at the heart of industrialization and
development.
The most obvious category of capital is physical: the machines,
factories, transportation and communications infrastructure, energy
generation capacity, and built real estate that make a modern economy
run. Physical capital provides the foundation to maximize worker
productivity and increase overall ability to produce goods and services.
There are a variety of positive and negative impacts that
environmental regulation can have on physical capital. Within the
field of environmental economics, there has been a great deal of recent
interest in the concept of “ecosystem services.” The basic idea behind
ecosystem services is that nature itself can be thought of as a form of
physical capital, providing important services to a community. Classic
examples of ecosystem services include water-filtration: preserved
forests or wetlands in a watershed area improve water quality by
filtering rainwater recharge. Managing preservation programs to avoid
building expensive water filtration plans is a key aspect of New York
City’s water management plan, for example. In this case, managing an
existing natural resource can avoid the need to devote social resources
to building new physical capital—resources that can be put to a higher
use elsewhere in the economy.
Developing countries are at a special advantage for protecting
ecosystem services. Many advanced economies have already
65
66
Urata (2002); Cao (1997); Seita and Tamura (1994)
See Urata, supra note 68.
Eubanks II (2009) (“In response to depressed global cotton prices,
for example, an estimated 40,000 cotton farmers in India committed suicide
between 1996 and 2005, while thousands more sold one of their kidneys on the
black market for approximately $800.”).
67
estudios públicos, 117 (Summer 2010).
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converted natural capital to built uses—clearing forests for real estate
development; filling in wetlands; damning rivers. Many of these
decisions are either irreversible or very costly to reverse. However,
many developing countries have not locked themselves into particular
choices concerning natural resources—there remain significant
unexploited natural capital reserves. Making wise decisions about these
resources, including keeping the option to rely on ecosystem services
in the future, is a key asset that cannot be underestimated as the world’s
natural resources become ever more scarce.
There are many other ways that environmental regulation
can impact physical capital outside of directly protecting ecosystem
services. Influence on foreign direct investment is no doubt an
important consideration. A common complaint among labor leaders in
developed countries is that other governments, by keeping low levels
of environmental regulation, “unfairly” attract capital to their shores.
Of course, where the effects of less strict regulation is local, this simply
represents a trade-off—a willingness to bear additional environmental
costs in order to generate economic benefit. The situation is more
complicated, of course, in the presence of externalities, where the
choices of local governments have effects that spill-over into other
regions. In those cases, environmental agreements and cooperation and
necessary to avoid inefficiently high levels of pollution.
While the standard narrative of companies moving around the
world to chase the lowest possible level of regulation has wide cache,
the effects environmental regulation on foreign direct investment is
complex and contested.68 There are many confounding factors that
make the study of the relationship between FDI and environmental
regulation difficult, including regional variation and many potentially
omitted variables—such as stability, location, abundance of natural
resources, local corruption, and cultural connection. “Third-country”
variables, where factors outside of either the investor country or
recipient country, affect investment, present a particularly tricky
problem.69 Some have posited that causation runs in the other direction,
from foreign direct investment to lower environmental standards.70
While the state of economic knowledge is unclear, countries should
68
See generally, Fullerton (2006).
See Kukenova and Monteiro (2008).
70 Cole et al. (2004).
69
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries45
explicitly recognized whatever risks to foreign direct investment are
posed by strong environmental standards.71
Environmental regulation could also have positive effects on
certain areas of foreign direct investment as well. The most obvious
example is in the tourist industry. Investment in preservation can return
dividends in tourist dollars to national parks; investment in clean
water controls protect lakes, rivers, and oceanfront areas that generate
economic activity and attract foreign investment for hotels, resorts,
and associated local industries. Given the vast size of the global tourist
industry,72 and the degree to which some developing countries rely
on tourism to generate investment,73 the potential for environmental
protection to generate investment in tourist infrastructure is clear.
Whether environmental protections encourage or discourage
foreign direct investment, then, is likely to be context specific. It
will not always be the case the environmental regulations will scare
away foreign investors, but nor is it likely that compliance costs are
completely ignored by firms making location decisions. To make
rational and well-though out decisions about environmental policy,
examining the impact on foreign direct investment—with associated
effects on development—will be important.
Environmental regulation can also impact the rate of
technological innovation and adoption—spurring investment in
these areas. The role of technology in growth is well established. As
71 Clarifying
the extent of the risk to foreign direct investment of
strong environmental regulation can also help alleviate fears associated with
new environmental policies—if the effects on investment are unrecognized or
understudied, then it is easier to exploit those fears to stop critical progress,
even if the fears are ill-founded or out of proportion to actual risks.
72 According to World Travel and Tourism Council, the value of
travel and tourism is expected to rise from $5,474 billion in 2009 to $10,478
billion by 2019. See Tourism Impact Data and Forecasts, World Travel and
Tourism Council available at http://www.wttc.org/eng/Tourism_Research/
Tourism_Economic_Research/. According to the United Nations World
Tourism Organization, international tourism receipts represented in 2003
approximately 6 percent of worldwide exports of goods and services.
See United Nations World Tourism Organization,Tourism and the World
Economy, http://unwto.org/facts/eng/economy.htm.
73 See, e.g., CIA World Factbook, Barbados (three quarters of GDP and
80% of exports attributable to services related to tourism and other industries)
available at https://www.cia.gov/library/publications/the-world-factbook/geos/
bb.html.
estudios públicos, 117 (Summer 2010).
wwww.cepchile.cl
46
technology becomes more widespread, worker productivity increases.
Gains in worker productivity sit at the base of economic growth—
while institutions are important, and robust markets and exchange
create economic benefits, it is the ability to use technology to leverage
worker productivity that accounts for the huge consumptions gains that
have been experienced in many parts of the world in the past several
centuries.74
Some economists have argued that environmental regulation
can increase productivity directly. The “Porter hypothesis” holds that
“stringent environmental regulation (under the condition that it is
efficient) can lead to win-win situations, in which social welfare as well
as the private net benefits of rims operating under such regulation can
be increased.”75 The proposed mechanism is that firms have a variety
of productivity enhancing innovations available to them, of which
they are unaware. Environmental regulation, by forcing an investment
of intellectual resources in thinking through production processes
and new technologies, can spur firms to take advantage of innovation
opportunities that had been ignored in the status quo ante. Because
it proposes large-scale irrationality amongst business firms—under
conditions in which competition should weed out less efficient firms—
the Porter hypothesis is controversial.76
Even if the Porter hypothesis does not hold, widespread adoption
of environmental technologies can have “spill-over” effects to other
areas, where technology can increase worker productivity. Investment
in technology to improve productivity can “piggy-back” on investments
to improve environmental performance—a regulation requiring that
heating boilers in a municipality be upgraded from residual fuel oil to
natural gas can be an opportunity not only to improve environmental
quality, but also upgrade efficiency to generate net savings for
businesses, for example. As societies respond to controls on greenhouse
gas emissions, serious rethinking of design and production will spur
investments in a wide number of areas, some of which will ultimately
be largely unrelated to the original government intervention.
Environmental regulation has a well-established relationship
with technological change. Technological change in response to
74
See generally, Maddison (2001).
Wagner (2003).
76 Id.
75
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries47
environmental regulation has been documented in many contexts, from
steps taken to comply with the Montreal Protocol on Ozone Depleting
Substances,77 to power producers production process changes to
reduce costs of the Acid Rain Program in the United States,78 to recent
technological develops to save the incandescent light bulb in the face of
impending energy efficiency rules.79 This innovation not only springs
from investment that had been made in research and development, but
ultimately adds to the stock of physical capital available to a society to
fuel economic growth.
In the case of technological adoption, while many developing
countries lag advanced economies in their access to technology,
they also have certain advantages because they are not locked-into
particular technological choices from past decisions. For example,
the transportation infrastructure of Europe and the United States is
largely locked in, and in the United States at least, heavily dependant
on private cars using gasoline as the primary power source. While
most developing countries have invested some capital building similar
transportation infrastructures, they have not made the same level
of commitment, leaving them room to adapt their systems as new
technologies come online.
A similar situation arises in the case of private industry—
production changes are much easier to put in place at the front end
when designing a plant, rather than attempting to retrofit existing
capital to comply with environmental regulations. This higher level of
flexibility makes it especially important for developing countries to take
account of the ability of technological innovation and change to reduce
the cost of environmental protection.
B. Environmental Regulation and Human Capital
Human capital —the stock of skills and knowledge of a
countries workforce—is also clearly related to development. New
Victor (1999) (“The Montreal Protocol, for example, has
strengthened over time in part because technological innovation has made
benign substitutions for ozone-depleting substances available to the market”).
78 See Ellerman et al., (2000).
79 See the article of Leora Broydo Vestel, called “Incandescent Bulbs
Return to the Cutting Edge”, N.Y. Times, July 5, 2009.
77
estudios públicos, 117 (Summer 2010).
wwww.cepchile.cl
48
fields of development theory in particular have focused on the role of
knowledge, education, and technological know-how to contribute to
development.80
Investment in education has well known payoffs in productivity
and economic growth.81 This is especially true as countries continue to
adopt technology and increase worker productivity. Economists have
shown for generations that “To the extent that the productivity changes
are caused by technological change, skilled labor becomes relatively
more important, and the need for human capital development becomes
a crucial factor of continued growth. An educated work force is more
adaptable to innovations on the job.”82
However, it is also known that “the market underproduces
human capital.”83 Many of the investments necessary to increase human
capital are accomplished through public subsidies—money spent on
school construction and public education. A well functioning capital
market that would supply optimal capital for human capital investments
is almost impossible to imagine: children would have to take out loans
to pay for education. Clearly, cognitive limitations would interfere with
the proper functioning of this market. While private capital can have
an important role to play in human capital accumulation —like in the
United States where students take on significant debt to pay for college
and graduate-level studies— it is almost certain that public subsidies
will be necessary to achieve optimal investment.
Human capital accumulation does not only take the form of
formal education. Learning-by-doing, on-the-job training, diffusion of
technology and know how through worker movement: all work with
formal educational systems to increase worker capacity. A workplace
environment where technology is pervasive is self-reinforcing: workers
become gain technical knowledge that can be easily carried to new
jobs; managers can adopt production processes to new areas; and
innovators have ample opportunity for cross-fertilization. All work
together to reduce the start-up costs of introducing new technologies,
which feeds back into a virtuous cycle of increased worker productivity.
80 Romer
81
(1990).
Gardner (1989); Baldacci et al. (2005) (“a country with literacy
scores above the sample´s average . . . experienced an above- average increase
in annual per capita GDP growth”).
82 Compare Blakemore and Herrendorf (2009) with Nelson and Phelps
(1966) (making this argument).
83 See Basu (1997).
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries49
There are a wide variety of pathways that environmental
regulation can affect human capital. As discussed above, environmental
regulation can help spread the adoption of technology—increasing
the human capital of workers that are exposed to that technology.
Managers and engineers are forced to think through production
processes, which exposes them to new technological developments.
Experience implementing environmental control technology can be
easily transferred to other situations where technological upgrades can
improve worker productivity. Environmental regulation, then, can act as
a periodic spur to firms and workers to upgrade their technologies—and
therefore their skill sets—which in tandem with the opportunity to use
those skills in a the broader workplace environment, helps contribute to
a virtuous cycle of human capital development.
Environmental regulation can also contribute more directly to
human capital accumulation. Environmental pollution has a wide range
of harmful effects on health, increasing risks of long-term and acute
conditions that can interfere with education and worker productivity.
Of particular importance are neurotoxins and endocrine disrupting
toxins that can have long range effects on intellectual capacity. There
are many well known examples of environmental pollutants that can
have harmful consequences for neurological development, including
lead and mercury. The exposure of pregnant women to neurotoxins
can be especially important. There can be no more clear investment in
human capital than ensuring that future generations are not exposed to
pollutants that permanently reduce their ability to learn.
Environmental regulation can also help generate human capital
by helping firms attract and retain high quality workers. Environmental
quality and amenities are key attributes of any place of business or
work, and if a firm is located in a place with poor environmental
quality, it will have to pay relatively more to retain the same quality
workforce as a firm located in areas with good environmental quality
and amenities. By providing a clean environmental, governments help
subsidize efforts to hire workers with high-demand skills. The presence
of high quality workers also spills over to increase the productivity
of other workers—for location dependant tasks, the ability to attract
competent staff is vital to maximizing the potential of all workers. A
strong form of this phenomenon is described as “O-Ring Theory”84
84 Basu,
supra note 83, at 33–36.
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50
estudios públicos, 117 (Summer 2010).
where, if any worker does not perform their jobs adequately, there
are large scale reductions in productivity for an entire firm. Certain
key positions—including management, engineering, or sales and
advertising—can be thought of as “o-ring” components of firm
productivity. Environmental quality and amenities can make it cheaper
for firms to hire these types of workers, with productivity benefits that
spill over to all workers in the firm.
The distributional effects of environmental policy must again
be taken into account in the context of human capital accumulation as
well. Even in systems where public education is widespread, private
actors are called on to make important contributions to human capital
accumulation: giving children proper nutrition and attention; paying
for school supplied; allowing children to remain free for overbearing
work commitments during adolescence; paying for undergraduate and
graduate expenses (including room and board); guaranteeing student
loans—all of these vital private investments accumulate to amount to
a vast social expenditure for human capital accumulation. However,
these types of expenditures are also impossible for families at or near
subsistence or poverty incomes. For investments in education to be
possible, other necessities but be provided at adequate levels.
To the extent that environmental regulation has negative
distributional consequences, especially for the lowest income sectors
of society, it will have the effect of reducing expenditures for human
capital accumulation, undercutting social efforts at development. Any
harmful distributional effects must be identified and, to the extent
possible, counteracted through alternative policies or compensation
programs. Otherwise, policymakers run the risk of impeding one of
the most well-recognized pathways to generating long term economic
growth. C. Poverty Traps
In addition to identifying some of the key requirements
of growth, development economics is concerned with conditions
detrimental to growth, especially vicious cycles where sets of
conditions interact to create negative feedback loops that hinder
economic growth. Avoiding these “poverty traps,” is an important goal
of development economics.
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries51
There are several poverty traps that are relevant to environmental
regulation, and which should be considered in a cost-benefit analysis as
a developing country anticipates the effects of a new rule. While none
of these considerations should be dispositive, they nonetheless will
require careful consideration as countries develop environmental policy.
One of the persistent challenges of many developing countries
is to spread the benefits of growth to the entire population. As
countries have engaged in industrialization, entered the global
economy through trade, and invest in education and public
infrastructure, many of the positive effects of economic progress are
felt by a relatively small percentage of the population that tend to be
concentrated in affluent mini-economies located in urban centers.85
Often, large productivity in many sectors is hampered by a lack of
legal institutions, including strong property rights.86 While per capita
GDP, or other measures of economic growth, continue to rise, the
lives of many of the population, especially the poorest segments or
households located out of urban centers, tend to be left out of new
prosperity. The benefits of growth accrue to a small number of elites in
an “inner economy” while a large number of unskilled workers in the
“outer economy” see little change.
Where a dual economy is a problem, it should be taken into
account when developing environmental policy. If certain regulations
create a barrier to entering the legal economy —for example, by
creating burdensome record-keeping requirements87 or subjecting
small business owners to arbitrary and/or unreviewable action by
Blanchard (2005) (“China’s modernization policy has ... exacerbated
existing economic disparities between its small fraction of urban elite and the
hundreds of millions of peasants far removed from the country’s new-found
wealth.”); International Bank for Reconstruction and Development, World
Development Report 2008, Agriculture for Development (2007) (“The ruralurban income divide is large and rising in most transforming [developing ]
countries”).
86 For a controversial assessment of the importance of property rights in
development, see de Soto (2000).
87 International Bank for Reconstruction and Development, (2000) “Can
Africa Claim the 21st Century?” (“In many countries restrictive regulations
and practices, often aimed at generating rents for officials and favored groups,
constrain business activity, affecting both agriculture and industry.”); Burki
and Perry (1997) (unnecessary regulations resulting in excess paperwork and
administrative costs produce inefficient economic outcomes).
85
estudios públicos, 117 (Summer 2010).
wwww.cepchile.cl
52
bureaucrats88 —it may exacerbate a dual economy problem: regulatory
alternatives that do not create this problem would be preferred.
Environmental policy can also help to reduce dual-economy
problems as well. Preservation programs can sometimes have negative
consequences for rural communities, where environmental protection
is seen by local groups as the removal of productive resources, but
can also be designed to incorporate the participation of local groups
and help spur local economic development.89 For example, rather
than burning down forest land that is used (usually only briefly90) for
grazing, local individuals can be employed for preservation purposes,
or local industries that use forest lands in a sustainable manner can be
subsidized.91 By focusing on how environmental policies affect the dual
economy problem, cost-benefit analysis can help identify regulations
that minimize negative effects on the poorest members of society, and
ease barriers between the inner and outer sectors of the economy.
Another well known poverty trap is political stability and
its relationship to economic variability. If an economy is subjected
to sever boom bust cycles, even where there is average positive
economic growth, it creates the possibility for political instability
that can threaten foreign investment, drain human capital, and lead
to politically motivated policies that have negative impacts on longterm growth. If a policy can help smooth economic, or generally
makes a country less susceptible to political instability, that is a clear
benefit that should be considered. By the same token, if policies tend
to have strongly cyclic effects, or undermine stability, that is a cost
that equally must be taken into account.
Environmental policy could have effects that reinforce or
reduce the strength of the business cycle. For example, spending
See Nabli (2007) (“Studies have found that ... an honest and
efficient bureaucracy emerge as the components [of government] with the best
documented and strongest links to economic development and growth.”).
89 Sobrevila (2008).
90 See Pearce et al. (2002).
91 See, e.g., United Nations Foundation, UNDP Helping Coffee
Growers Adjust To Economic Crisis (2002) available at http://www.unwire.org/
unwire/20021115/30382_story.asp (A UNDP program in Guatemala provides
credit, training, alternative crop development support and technical assistance
to farmers for the purpose of reducing erosion and diversifying the local
economy).
88
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A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries53
on for long-term environmental investments could be timed to
stimulate the economy during downturns—this was the logic of
many provisions of the American Recovery and Reinvestment Act
passed by the United States Congress in early 2009. China, in a
recent round of stimulus spending, also invested heavily in projects
expected to benefit the environment.92 During boom times, taxes
could be levied that could build up spending reserves that could be
used for environmental protection during down years.
Environmental regulation may also have either cyclic or
counter-cyclic effects. Land use controls, environmental taxes,
pollution control requirements will all likely dampen growth and
can be expected to have incrementally high effects as the growth
rate increases, which will provide an automatic slowing mechanism
as the economy heats up.93 By channeling economic development
in productive ways, environmental regulation can also ensure
that times of growth are used productively, rather than in unwise
overbuilding and hasty exploitation of natural resources that adds
little to the stock of physical or human capital. When growth rates
are low or zero, it is unlikely that well-designed environmental
regulations will significant hamper economic development; rather
than bursting at the seams and looking for every possible investment
opportunity, an economies with low growth rates are beset by
uncertainty and excess inventory, or ill-invested capital that is no
longer productive. In these cases, regulations can be structured to
provide additional market security, and give signals to investors of
potentially profitable ventures.
Naturally, environmental regulation can also reinforce
business cycles if, during periods of downturn, overly burdensome,
paperwork intensive, or wasteful rules are implemented, and during
periods of growth regulatory regimes are weakened. An example
may be the case of financial regulation where powerful financial
92
Stimulus Is Greenest in South Korea and China, N. Y. Times,
Sept. 24, 2009 available at http://www.nytimes.com/2009/09/25/business/
global/25green.html (citing the United Nations Environment Program
explaining that “China lead the world’s 20 largest economies in the percentage
of economic stimulus money they invest in environmental projects”).
93 Goodhart et al. (1998) (“It is the role of the Central Bank to take
away the punch bowl, just when the party is getting going”).
54
estudios públicos, 117 (Summer 2010).
wwww.cepchile.cl
lobbies can succeed in reducing regulation when markets are
working well, but when markets fail regulators step in to rein in
a problem after the market has already corrected. Environmental
regulation could follow a similar path if industry is given greater
leeway when it is producing growth, but loses political power during
low-points in the business cycle and face greater scrutiny from
regulators during those times. The goal should be to have consistent
levels of regulation throughout the business cycle, and if possible
use regulation to channel growth in the most productive ways during
up-cycles and resolve uncertainty and spur investment during downcycles.
Conclusion
One of the most vexing problems in cost-benefit analysis,
and development in general, is deciding how to trade short-term
consumption against long-term investment. If countries invest too
little, then they risk short circuiting the virtuous cycle of capital
accumulation that allows for ever increasing worker productivity.
But, if too much is invested, it threats the political coalitions
necessary to maintain stability—countries walk a delicate balancing
act of protecting the interest of future generations while keeping
current generations happy. These issues are especially severe in
developing countries, where the immediate demands of food,
shelter, and basic education and health care are substantial.
Cost-benefit analysis, property reformed to take account of
the circumstances of developing countries—which is to say the
vast majority of the world’s population—can help in making these
choices. While the technique will never be value-free or purely
technical, it can help clarify value choices, and ensure policy makers
are aware of the most efficient way to achieve their goals.
While cost-benefit analysis was developed in advanced
countries as a political response to short-term economic downturns,
it is a technique that has wide applicability throughout the
world. At its heart, cost-benefit analysis is equivalent to rational
decisionmaking—aggregating available information, identifying
goals, quantifying uncertainty, and making a choice that best
achieves them with the fewest negative consequences. For
A. livermore / Cost-Benefit Analysis of Environmental Policy in Developing Countries55
countries that don’t have money to waste, but that have prioritized
environmental protection as an important component of sustainable
development, it can be the right tool at the right time.
wwww.cepchile.cl
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