Life's Value Shrinks at EPA
by Matthew Madia, 7/22/2008
An Associated Press (AP) investigation released July 10 showed that the U.S. Environmental Protection Agency (EPA) has been devaluing human life when it prepares cost-benefit analyses for new regulations. Federal agencies such as EPA use the life value, an inaccurate statistic, to help them determine whether a proposal's benefits will outweigh compliance costs to industry.
The AP investigation found EPA's most recent life value, $6.9 million, to be about $1 million lower than it was five years ago. According to AP's Seth Borenstein, "[I]n 2004, the agency cut the estimated value of a life by 8 percent." Then, in a May 2008 regulation for train and ship pollution, EPA failed to adjust the value for inflation. "Between the two changes, the value of a life fell 11 percent, based on today's dollar," AP says.
When preparing to release a proposed or final rule, EPA counts as many of the potential benefits as it can, such as reduced incidences of asthma attacks, averted toxic spills, or lives saved. The agency also estimates the costs that will be levied upon industries expected to comply with the new policy.
In order to compare costs and benefits on the same scale, EPA translates benefits into dollars. Since lives saved are the greatest benefit of regulation, they also become the benefit of the highest value after the so-called monetization.
EPA uses a figure called a Value of a Statistical Life (VSL) to assign a dollar value to each life it expects a regulation will save. Technically, the VSL approach does not value a human life but rather a "statistical life." The benefit to society, which is monetized in the approach, represents a reduced risk of death for a population, not the certainty of avoiding death for any given individual.
But for decision making purposes, there is little difference. When it's time to study the potential effects of a regulation, EPA estimates the number of lives the regulation will save, then multiplies that figure by the VSL.
EPA is not the only federal agency to use a VSL, but the statistic is not consistent across the federal government. Although EPA has been the subject of criticism in the wake of the AP investigation, its sinking VSL is still higher than that of most other agencies.
In March 2008, the U.S. Consumer Product Safety Commission used a life value of $5 million in a proposal to reduce the risk of furniture fires. In a September 2007 Department of Homeland Security proposal to expand air travel security, the U.S. Customs and Border Patrol estimated life-saving benefits using two separate life values: $3 million and $6 million. New guidance from the Department of Transportation (DOT), sent to DOT subagencies in February, sets a VSL of $5.8 million for current and future transportation safety proposals.
One of the most common ways to distill market data into a VSL is to use so-called willingness-to-pay measures. In the willingness-to-pay approach, economists measure wage differences among industries of varying risk. For example, if an individual requires a higher wage to find employment as a firefighter, rather than as an administrative assistant, at least part of that wage increase must be due to demand for compensation in the face of a higher risk of death, analysts believe.
But why do regulators feel compelled to use VSL in the first place? Agencies must comply with the analytical requirements put in place by the White House Office of Management and Budget (OMB). President Bill Clinton's Executive Order 12866 says, "Each agency shall assess both the costs and the benefits of the intended regulation." The Clinton White House also issued a memo on how costs and benefits should be assessed, including guidance on using VSL. Prior to the Clinton order, previous administrations had their own policies for mandatory cost-benefit measurements.
Under President George W. Bush, cost-benefit analysis's importance has expanded. The Office of Information and Regulatory Affairs (OIRA), an OMB office responsible for reviewing and approving regulations, has used its position as regulatory gatekeeper to expand the role of cost-benefit analysis as a regulatory decision making tool.
Under the Clinton order, OIRA reviews agency regulations before they can be proposed, and again before they can be finalized. Bush's OIRA has placed even greater significance on the quality and conclusions of agency cost-benefit analysis by providing greater detail on how to conduct cost-benefit analysis and elevating its importance in a January 2007 executive order. If monetized costs and benefits cannot prove a proposal will yield a net economic gain to society, the proposal may not clear OIRA review.
For example, OIRA recently rejected an EPA proposal because EPA's cost-benefit analysis showed compliance costs may outweigh benefits once the proposal takes effect. The rule would have established a national program for the recycling of pesticide containers and is widely supported by the pesticide industry and state environmental administrations. But in a July 3 letter, OIRA administrator Susan Dudley sent the proposal back to EPA for reconsideration, saying the rule would be too costly and that the cost-benefit analysis did not adequately assess alternatives to EPA's proposal.
Although agencies must assess costs and benefits and attempt to monetize lives saved to satisfy White House requirements, the laws passed by Congress sometimes prohibit regulators from even considering the conclusions of the economic studies. For example, the Clean Air Act prohibits EPA from considering economics when setting national air pollution standards. Instead, the Act mandates EPA only consider factors related to public health based on the latest and best available scientific research. Nonetheless, EPA prepares a cost-benefit analysis, and uses VSL, when proposing new air pollution standards.
It remains unclear how OIRA resolves conflicts with laws mandating standards other than cost-benefit analysis, such as use of best available technology or putting safety first. However, there are cases where it appears that cost-benefit considerations trump statutory standards.
Despite the drawbacks of the VSL approach, for now, agencies will have to live with it. If agencies failed to monetize lives saved — the greatest benefit of public health and safety regulations — their proposals might not pass the White House's cost-benefit litmus test.