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How To Design Smarter Green Regulations

Michael A. Livermore is the executive director of the Institute for the Study of Regulation and the author, with Richard L. Revesz, of Retaking Rationality: How Cost-Benefit Analysis Can Better Protect the Environment and Our Health.

The next administration is certain to face intertwined crises on the economy, environment, and energy. There’s the prospect of a significant recession, coming on the heels of a shallow economic expansion that mostly benefited the wealthy. There's the fact that the United States has gone years without taking any action on the great environmental challenge of our time—reducing greenhouse-gas emissions. As the rest of the developed world has begun the long march to a cleaner, less-carbon-intensive future, we've watched from the sidelines. We need to reshape our energy infrastructure to improve efficiency, increase the use of alternatives, and create incentives for smarter energy use. Politicians who have gotten comfortable using cheap energy to juice the economy around election time will need to break their habit.

In order to lead us safely through this storm, the next administration will need to use the power of the regulatory state to remake the economy into something stronger and smarter. Over the last thirty years, regulation has gotten a bad name. But with the aftershocks of under-regulation now ripping through the financial sector, many people are taking a second look, and recognizing that too little regulation can be just as harmful as too much. The key is striking the right balance. To do that, the next administration will need to update one of the central tools of smart governing: cost-benefit analysis. In the past, this approach has been used to ensure that the costs of regulation are justified by the benefits. Unfortunately, this tool has often been misused and manipulated to favor industry interests—and, as a result, has garnered distrust among environmentalists. Right now, for instance, the Bush administration is being sued—for the second time—over its cost-benefit analyses of fuel-economy standards that didn't take into account the benefits from reduced greenhouse gases.

As an alternative, the Institute for Policy Integrity has outlined some steps for the next administration to take a more evenhanded approach toward cost-benefit analyses. An important first step would be for the next president to issue a new executive order ordering that agencies follow cost-benefit analysis when formulating new rules, but, at the same time, fixing antiregulatory biases that prevent agencies from considering the true benefits of various regulations, and cause them to overestimate the costs of compliance. One of the worst flaws, for instance, is that regulatory inaction and deregulation are not scrutinized nearly as closely as new regulations, even though they can have tremendous consequences. As well, the cost estimates are often inflated because they fail to account for the ability of industry to adapt and innovate. The country needs pragmatic, evidence-based approaches to the challenges we face—the key is to make sure sifting through that evidence is done correctly.

--Michael A. Livermore