White House Guidance on Cost-Benefit Analysis in Regulation

In November, 2023, the Office of Information and Regulatory Affairs (OIRA) issued revisions to Circular A-4, the government-wide guidance on regulatory analysis, for the first time since 2003. The revisions cover a breadth of topics — the valuation of future consequences, the distribution of a policy’s effects, the scope of effects to analyze, and the best way to account for effects that are difficult to monetize — that are significant to determining the benefits and costs of regulations. These changes should better capture the value of climate regulation, particularly on future generations, and allow agencies to act more aggressively in regulating climate pollutants.

Changes include:

• Discount rates: The guidance lowers discount rates, or the amount by which future costs and benefits are discounted over present values in an analysis, to 2% from 3%, and schedules this value for triennial adjustment. This shift represents a reevaluation of the same methodology endorsed in 2003 to account for actually observed values of real return on long-term government debt over the last 20-years. In certain circumstances implicating the impact of a regulation on investment or on broader, societal metrics, the guidance allows for discount rates to be set on a case-by-case basis, accounting for the impacts of the specific regulation in question. Finally, long-term discount rates are lowered (reaching 1.1% by 2164) to account for their uncertainty over long time horizons. These changes are likely to better reflect the value of future benefits and harms in the realm of climate regulation.
• Distributional analysis: Distributional analysis, or determining the impacts of regulations on specific populations that may vary from each other by income, exposure to pollution, and other metrics, can be difficult to design. The guidance offers some concrete tools for agencies, such as estimates for the value of additional income to groups with different levels of wealth, while broadly offering procedural guidance to agencies in how to develop appropriate distributional analysis methodologies.
• Spatial scope of analysis: The guidance takes a more robust accounting of how regulatory effects that seem to primarily affect foreigners may have significant downstream impacts on U.S. citizens and residents.
• Non-monetized benefits: Providing guidance on how agencies can analyze the monetized and non-monetized effects of a regulation in a structured fashion.