Frequently Asked Questions on Mortality Risk Valuation

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This page contains information on Frequently Asked Questions on Mortality Risk Valuation and EPA practices concerning the use and measurement of the "Value of a Statistical Life" as it is applied in EPA economic analyses.

What Does it Mean to Place a value on life?

Why do Agencies Attempt to Value Risk Reduction in Monetary Terms?

What is Benefit-Cost Analysis?

What is Benefit-Cost Analysis used for?

What is the "Value of a Statistical Life"?

Why does EPA use a Value of Statistical Life?

How does EPA Estimate the Value of Statistical Life?

What Value of Statistical Life does the Agency Use?

What studies has EPA reviewed to reach these estimates?

What is the current process for updating the Agency’s estimates?

What other values has the Agency used in the past?

What adjustments are made to the VSL estimates at EPA?

References

What Does it Mean to Place a value on life?

The EPA does not place a dollar value on life, but the Agency does try to estimate the benefits from reducing the risk of death from environmental contaminants. While these reductions in risk are generally relatively small for any one person, they often affect a large number of people. For benefit-cost analysis, the question is: How do people value, in dollar terms, this small (but important) reduction to their risk of dying? The process of valuing risk – also known as the process of valuing "statistical life" – does not produce an estimate of the value of life itself.

Many economic studies attempt to answer the question of how to value reductions in risk. EPA uses the estimates from these studies to help evaluate the health benefits of environmental policies. Other federal and state agencies also try to estimate the benefits of their risk-reducing policies in dollar terms.

Why do Agencies Attempt to Value Risk Reduction in Monetary Terms?

Agencies attempt this estimation primarily due to Presidential Executive Orders that have required or encouraged the use of cost-benefit analysis in policy evaluation since the early 1980's. Most environmental laws do not require benefit-cost analysis; indeed, some prohibit it (e.g., the air quality standards provisions of the Clean Air Act). Just one federal environmental statute (the Safe Drinking Water Act) explicitly calls for the kind of formal benefit-cost analysis we describe here.

What is Benefit-Cost Analysis?

Benefit-cost analysis is a tool used to evaluate policy actions. Benefits are based on what individuals would be willing to pay for risk reductions or for other improvements from pollution reduction. Costs are determined by the value of the resources directed to pollution reduction. If estimated benefits are greater than estimated costs, then the policy "passes" a benefit-cost test. But the benefit-cost test alone is not the only relevant criterion for good public policy. As noted, most environmental laws do not create a cost-benefit test, and some do not even allow one to govern EPA policymaking.

What is Benefit-Cost Analysis used for?

The primary purpose of benefit cost analysis is to provide policy makers and others with detailed information on a wide variety of consequences of environmental policies.

Benefit-cost analysis is only one of many inputs into policy evaluation. Other factors include environmental justice considerations; ethical concerns; enforceability; legal consistency; and technological and institutional feasibility.

What is the "Value of a Statistical Life"?

The "value of statistical life (VSL)" refers to the aggregate estimated value of reducing small risks across a large number of people. It is based on how people themselves would value reducing these risks and is best explained with an example.

Suppose a policy affects 100,000 people and reduces the risk of premature death by 1 in 100,000 for each individual. Summing these individual risks across the entire affected population results in 1 life "saved" from the policy. We refer to this as a "statistical life saved" because while, on average, we expect one person to live longer than he or she would otherwise, we don't know who this person will be.

To estimate the benefits of this policy in dollar terms, we look to how people value reducing their risks of dying. Suppose each of the 100,000 people would be willing to pay $500 for the risk reduction. The total willingness to pay would be $5 million (=$500 * 100,000 people). So, we would say that, in this case, the "value of statistical life" is $5 million. However, as noted, this estimate is not in fact an estimate of the value of life itself.

Why does EPA use a Value of Statistical Life?

EPA uses a value of statistical life so it can perform benefit-cost analysis of its policies and regulations that involve risks to human life. The benefits and costs in a benefit-cost analysis are both translated into dollar terms in order to try to determine whether benefits exceed costs. The value of statistical life is one way to put risk-reduction benefits in dollar terms.

How does EPA Estimate the Value of Statistical Life?

For decades economists have been studying how people make tradeoffs between their own income and risks to their health and safety. These tradeoffs can reveal how people value, in dollar terms, small changes in risk. For example, purchasing automobile safety options reveals information on what people are willing to pay to reduce their risk of dying in a car accident. Purchasing smoke detectors reveals information on what people are willing to pay to reduce their risk of dying in a fire. EPA reviews those studies that are in published scientific literature and attempts to find the best estimates of what people seem to be willing to pay for small risk reductions.

What Value of Statistical Life does the Agency Use?

EPA recommends that the central estimate of $7.4 million ($2006), updated to the base year of the analysis, be used in all benefits analyses that seek to quantify mortality risk reduction benefits regardless of the age, income, or other population characteristics of the affected population. This approach was vetted and endorsed by the Agency when the 2000 Guidelines for Preparing Economic Analyses were drafted. Although $7.4 million ($2006) remains EPA’s default guidance for valuing mortality risk changes, the Agency has considered and presented others (see "What Values Has EPA Used in the Past," below.)

What studies has EPA reviewed to reach these estimates?

The Agency’s guidance from Guidelines for Preparing Economic Analyses is based on twenty-six studies. Twenty-one of the studies are labor market studies (i.e., studies that consider the extra compensation workers receive in exchange for taking on additional risk in the workplace) and five of the studies are stated preference studies, a type of survey. They studies were published between 1974 and 1991. Although they were the best available data at the time, the Agency is currently considering more recent studies as it evaluates approaches to revise its guidance.

What is the current process for updating the Agency’s estimates?

EPA is committed to using the best available science in its analyses and is in the process of revisiting its guidance on mortality risk valuation.

The Agency has engaged the Science Advisory Board Environmental Economics Advisory Committee (SAB-EEAC) on several issues related to mortality risk valuation, including the use of meta-analysis – a statistical technique used to combine results from individual studies addressing similar problems.
Following advice of the SAB-EEAC, the Agency formed an expert panel to explore issues of meta-analysis (see USEPA 2006).
In addition, the Agency commissioned reports on the various approaches used in the literature to estimate the value of mortality risk reductions (see Alberini 2004; Black, et al. 2003; and Blomquist 2004).

EPA is now taking all of this information into account in the guidance revision process. The Agency anticipates presenting several approaches for valuing mortality risk reductions to the SAB-EEAC. The extent to which EPA's VSL will change after this review process will depend upon what the evidence shows.

What other values has the Agency used in the past?

Few economic analyses prepared by EPA calculated monetary benefits until the mid-1980s. One of the earliest major EPA regulations that developed more detailed economic estimates of the benefits of proposed regulatory standards was the National Ambient Air Quality Standards for particulate matter (USEPA 1984). This analysis drew on a review of six wage-risk studies published during 1976-1981 with a central estimate of $4.6 million (2001$). Around this same time EPA issued its first economic guidance and reported a range of VSL estimates for use in policy analysis of $0.7 to $12.9 million (2001$) (USEPA 1983). The next major review of mortality risk valuation came in the mid-1990s when EPA reported to Congress on the economic benefits and costs of the Clean Air Act (USEPA 1997). This report based its VSL findings on 26 studies, 21 from the wage-risk literature and five from stated preference studies. This study forms the basis of EPA’s existing mortality risk valuation guidance discussed above.

Beginning in 2004 EPA’s Office of Air and Radiation (OAR) used an estimate of $5.5 million (1999 dollars; $6.6 million in 2006 dollars) for the analysis of air regulations. This estimate was derived from the range of values estimated in three meta-analyses of VSL conducted after EPA’s Guidelines were published in 2000 (Mrozek and Taylor (2000), Viscusi and Aldy (2003), and later, Kochi, et al. (2006).) However, the Agency neither changed its official guidance on the use of VSL in rule-makings nor subjected the interim estimate to a scientific peer-review process through the Science Advisory Board (SAB) or other peer-review group.

While the Agency is updating its guidance by incorporating the most up-to-date literature and recent recommendations from the SAB-EEAC, it has determined that a single, peer-reviewed estimate applied consistently best reflects the SAB-EEAC advice until updated guidance is available. Therefore, EPA has decided to return to the value established in the 2000 Guidelines for all its actions until a revised estimate can be fully vetted within the Agency and by EPA’s Science Advisory Board.

What adjustments are made to the VSL estimates at EPA?

With the support of our Science Advisory Board, the Agency at this time makes the following adjustments to primary benefits estimates: (1) adjusting willingness-to-pay estimates to account for higher future income levels, though not for cross-sectional differences in income (i.e., differences in individual income); (2) adjusting willingness to pay estimates for inflation; (3) taking into account the time lag between actions taken today and the benefits that occur in the future through “discounting.” Any other adjustments, if made, should be relegated to sensitivity analyses.

Increases in income over time: Studies show that willingness to pay to reduce mortality risk increases as income levels rise. As a result, benefits estimates of reduced mortality risk accruing in future years may be adjusted to reflect anticipated income growth.
Adjustments for inflation: VSL estimates are routinely adjusted for inflation using either the Consumer Price Index or the GDP Deflator. Whichever inflation index is used, it is important that benefits and costs be reported in the same year’s dollars for comparison.
Timing: Many environmental policies are targeted at reducing the risk of effects such as cancer, where there may be an extended period of time between the reduced exposure and the reduction in death from the disease. This delay between the change in exposure and the death may affect the value of that risk reduction. Economic theory suggests that reducing the risk of a delayed health effect will be valued less than reducing the risk of a more immediate one, when controlling for other factors. However, most existing valuation estimates for fatal risks are based on risks of relatively immediate fatalities making them an imperfect fit for a benefits analysis of many environmental policies. A simple ad hoc approach to account for this difference in timing is to apply the social discount rate over the expected lag. However, defining these lags with existing risk assessment methods may be difficult and empirical estimates highly uncertain. Further, the underlying assumptions supporting this procedure may oversimplify how individuals appear to consider delayed health effects. Ultimately, the risk reduction is what matters and the various attributes of the risk, including the timing, could affect the value an individual holds for its reduction. Applying the simple discounting approach to the value of an immediate death may not adequately capture the effects of timing on the value. EPA will review this issue as it reviews the general question of how to value reductions in risk.

References

Alberini, Anna. 2004. Willingness to Pay for Mortality Risk Reductions: A Re-examination of the Literature. Draft Final Report, Cooperative Agreement with U.S. Environmental Protection Agency, #015-29528.

Black, Dan A. and Thomas J. Kniesner. 2003. On the Measurement of Job Risk in Hedonic Wage Models. Journal of Risk and Uncertainty 27(3): 205-220.

Blomquist, Glenn C. 2004. Self-Protection and Averting Behavior, Values of Statistical Lives, and Benefit Cost Analysis of Environmental Policy. Review of Economics of the Household 2: 89-100.

Kochi, Ikuho; Bryan Hubbell and Randall Kramer. 2006. "An Empirical Bayes Approach to Combining and Comparing Estimates of the Value of a Statistical Life for Environmental Policy Analysis," Environmental and Resource Economics, 34: 385-406.

Mrozek, J. and Laura Taylor. 2002. “What Determines the Value of Life? A Meta Analysis,” Journal of Policy Analysis and Management,21(2), 253-70.

U.S. Environmental Protection Agency. 1983. Guidelines for Performing Regulatory Impact Analyses. Office of Policy Analysis, EPA-230-01-84-003.

U.S. Environmental Protection Agency. 1984. Regulatory Impact Analysis for NAAQS for Particulate Matter. Office of Air and Radiation.

U.S. Environmental Protection Agency. 1997. The Benefits and Costs of the Clean Air Act 1970-1990. Prepared for Congress by Office of Air and Radiation and Office of Policy, Planning and Evaluation. October 1997.

U.S. Environmental Protection Agency. 1999. The Benefits and Costs of the Clean Air Act: 1990-2010. Prepared for Congress by Office of Air and Radiation and Office of Policy, EPA 410-R-99-001, November 1999.

U.S. Environmental Protection Agency. 2000. Guidelines for Preparing Economic Analyses, Office of the Administrator. EPA-240-R-00-003, December 2000.

U.S. Environmental Protection Agency. 2006. Report of the EPA Workgroup on VSL Meta-Analysis, May 31, 2006.

Viscusi, W. K. 1992. Fatal Tradeoffs: Public and Private Responsibilities for Risk.New York, NY: Oxford University Press.

Viscusi, W. Kip and Aldy, Joseph E. 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty,Springer, vol. 27(1), pages 5-76, August.

Frequently Asked Questions on Mortality Risk Valuation

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