Regardless of the Cost of Environmental Protection, Is It Still Money Well Spent?

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Given this estimate, a simple, straightforward way to evaluate the claim that our nation's environmental compliance costs are too high is to ask how they compare with similar national priorities. In 1997, the United States spent 10.6 percent of GDP for health care and about 4.3 percent for national defense[7]. If it is worth nearly 15 percent of our domestic income to protect our personal health and the security of our nation, is it worth 2.6 percent of GDP to have clean water to drink and air to breathe and to maintain the health of the ecosystems upon which the economy really depends - not to mention our aesthetic interests in nature and the opportunities it provides for enjoyment and recreation?

This is not really an issue for economics to decide, but for people to decide. Many would probably agree that most Americans would find this a very reasonable investment - even if it turned out to be twice the amount EPA estimated (or half). Further, what the United States spends each year on environmental protection is similar to what the other nations in the Organization for Economic Cooperation and Development devote to pollution control. The OECD has developed estimates of environmental expenditures for various nations using a consistent methodology, although somewhat different from EPA's[8]. According to these figures, the United States is smack in the middle of four European nations. In 1990, the OECD calculates that the United States spent 1.5 percent of GDP, a figure in line with the Cost of Clean estimate. France (1.2 percent) and the United Kingdom (1.4) were lower, West Germany (1.6) and the Netherlands (1.7) were higher. So the U.S. experience certainly does not seem out of line.

But while comparisons of environmental costs to expenditures on other national priorities, and to what other countries spend on pollution control, are interesting and illuminating, from an economics perspective they are ambiguous. Whether we spend too much on environmental protection depends not only on what we spend on other things, but also on the value of what we receive from these expenditures. If we get environmental improvements of, say, $10 billion as a result of spending $210 billion, we may indeed be spending too much. But if the environmental benefits amount to $500 billion, then these expenditures would appear to be good investments.

If all of the benefits of all environmental regulations were quantified and quoted in monetary terms, determining whether the aggregate benefits exceed costs, and by how much, would be a simple matter of comparison. But there is only a partial Benefits of Clean report, and for a good reason. The environmental benefits of many regulations are not quantifiable, while those for other regulations can be quantified but are hard to value in monetary terms. Indeed, regulations for which all benefits are quantified and monetized are the exception rather than the rule. Nevertheless, several factors strongly suggest that environmental regulation in the United States provides positive net benefits.

First, a substantial amount of the Cost of Clean - about a third - comes from activities that clearly would be undertaken without being mandated by EPA regulations. For example, the costs of solid waste collection and disposal, as well as all of the costs of water purification, are included in the $210 billion figure. But since most of these costs would be incurred voluntarily in the absence of regulation, the benefits associated with those activities equal or exceed the costs by definition.

Second, the Office of Management and Budget has summarized the ranges of costs and benefits of a large number of environmental regulations (mostly EPA rules, although a few other agencies also issue environmental regulations) as part of their larger effort to summarize the costs and benefits of all Federal regulations [9]. OMB relied on one comprehensive academic study of the costs and benefits Federal regulation (itself based on some 25 academic articles) and on regulatory assessment documents prepared by the Federal agencies issuing regulations costing $100 million or more per year. OMB's report shows that the aggregate annual benefits of all of these environmental regulations totaled $162 billion (1996 dollars), while their total annual costs were $144 billion. Another study [11] of the total annual benefits and costs environmental regulations estimated the aggregate annual benefits and costs at $253.8 billion and $206.7 billion respectively (1994 dollars).

Probably more convincing is that in a comprehensive study of the costs and benefits of the entire Clean Air Act from 1970 to 1990[10], total benefits for this time period ranged from $5.6 trillion to $49.4 trillion (1990 dollars), while total costs were $523 billion (1990 dollars). This implies that we are getting nearly roughly $10 to $100 of benefits for every $1 spent on air pollution abatement. Indeed, for one set of regulations - the Montreal Protocol and other early regulations to protect stratospheric ozone – the benefits provided were orders of magnitude greater than the costs. And even for many EPA regulations that do not value human health benefits in terms of dollars, the implied cost-per-life-saved is frequently well within the generally accepted range from the economics literature[12].

Finally, EPA and the Office of Management and Budget have long conducted some form of analysis of the economic effects of environmental regulation, dating back to the "quality of life review" process set up by President Nixon in 1970. Presidents Ford and Carter had similar processes, and President Reagan formalized it with Executive Order 12291, issued in 1981. And President Clinton has further refined the process in Executive Order 12866. These agencies have adhered to a regulatory development process that has had as one of its goals maximizing net benefits, and making regulations cost-effective and sensitive to economic feasibility. This is true even in cases for statutes EPA administers do not permit an explicit weighing of costs against benefits. Given this level of scrutiny, it is unlikely, taken as a whole, that EPA regulations impose costs higher than their benefits.

Of course, one is bound to find the occasional regulation whose costs are decidedly larger than the benefits. After all, there is more to environmental policymaking than purely economic costs and benefits. But these exceptions acknowledged, it is unlikely that, as an entire body, EPA regulations would cost more than their benefits.

So what should one conclude from all of this? Are environmental protection costs large? Yes, they are. Environmental protection is a big enterprise. Large-scale undertakings of every kind involve large sums of money. But they are not nearly as large as what we spend on other, similarly important national priorities. Okay, but are they too large, draining vast resources into complying with regulations that otherwise could have been put to productive use elsewhere?

Probably not, because these regulations collectively provide very large offsetting benefits to society. It would be nice, of course, if pollution control were free. That way we would enjoy lots of environmental benefits at no cost. But the same can be said for anything. We might not like spending almost 11 percent of our national income on medical care or over 4 percent on defense, but we do. Of course, in environmental protection, as in health and defense, there are ways to improve efficiency and save money. And we should do just that. But inefficiency does not mean they are entirely bad investments.

Finally, characterizing these admittedly large environmental protection costs as a drain on the economy, siphoning off resources that could be used productively elsewhere, is off the mark as well. It is closer to the truth to say that these costs are the results of demands for environmental quality improvements by citizens. We should no more characterize the costs of environmental protection as a drain on the economy as we should the costs of providing food and shelter. Allocating resources to produce things nobody wants is a drain. Environmental quality is something the public demands in the classic economic sense.

To read the answers to the other questions:
1. What Do We Spend on Environmental Protection?
3. Does Environmental Protection Cause Unemployment, Plant Closures, and Reduce International Competitiveness?
4. Does Environmental Protection Decrease U.S. Economic Growth?
5. Multi-Sector Economic Modeling Results Must Be Interpreted With Caution
6. What Conclusions Can We Draw?

Regardless of the Cost of Environmental Protection, Is It Still Money Well Spent?

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