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Key principles for applying benefit-cost analysis to federal regulation

Since 1974, Presidents have issued Executive Orders requiring regulatory agencies to analyze the anticipated results and economic effects of proposed regulations. Executive Order 13563, Executive Order 12866, and the Office of Management and Budget (OMB) Circular A-4 require agencies to conduct a careful and transparent analysis of the anticipated impacts of economically significant regulatory actions. Regulatory impact assessments, or benefit-cost analyses, are sophisticated analytical tools for weighing the quantitative and qualitative benefits and costs associated with a proposed regulation, while also evaluating other tradeoffs, such as potential job losses, and other societal impacts.

In the past, however, these Executive Orders have not been applied consistently.  The incoming Administration has a distinct opportunity to fulfill the commitment articulated in these Executive Orders, or to otherwise take the opportunity to implement policies and develop new strategies for modernizing how federal regulatory analysis is conducted. Done correctly, benefit-cost analysis can enhance the transparency of the regulatory process, create a consistent framework for data collection and the identification of data gaps and uncertainties, and allow for a useful comparison of alternative approaches. Benefit-cost analysis is not a tool intended to delay or block regulatory decision-making.  Instead, it is a means to ensure that any proposed regulation produces net benefits to society.  When correctly applied, such analysis may provide evidence on which to base regulatory decisions and achieve better social outcomes at lower cost.

The need for benefit-cost analysis in regulatory decision-making was most recently reaffirmed in 2011 with Executive Order 13563.  Unfortunately, the implementation of this Order by agencies remains quite varied in quality and completeness.[1] Congress is considering legislation to codify benefit-cost principles and strengthen congressional regulatory oversight of this process, and ACC will continue to play a constructive role in working with Congress to codify those reforms.  We encourage the new Administration to improve upon previous efforts and to provide more specific direction on benefit-cost analysis that would compel agencies to adopt the following practices:

1) commit to a higher level of transparency in the science, data and modeling that go into development of an appropriate benefit-cost analysis;

2) demonstrate that proposed regulatory action addresses a compelling public need;

3) evaluate alternative regulatory approaches objectively;

4) fairly evaluate the societal costs and benefits resulting from regulatory action;

5) direct agencies to conduct the cumulative economic impact assessments, as well as develop plans for periodically reviewing existing regulations;

6) select regulatory action that provides the greatest net benefit to society; and

7) provide public opportunities to engage in and comment on the benefit-cost analysis conducted  for proposed regulations.

The chemical manufacturing sector makes a significant contribution to our economy and society, including development of products and technologies that improve our quality of life and the creation of well-paying jobs, so it is particularly important that we understand the role regulations can have in helping or hindering the attainment of those objectives. Benefit-cost analysis can deliver careful and objective assessments, both before and after regulatory decisions, and ensure that regulation attains the anticipated outcome.  It is an instrument for smarter regulation and an opportunity for considerable improvement in how federal agencies regulate.

[1] 2016 The George Washington University Regulatory Studies Center Comments to the Commission on Evidence-Based Policymaking (November 8, 2016)

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