Environmental Regulation, Cost-Benefit Analysis, and the Discounting of Human Lives

Abstract:     
Probably the most vexing problem raised by the cost-benefit analysis of environmental regulation is how to deal with the fact that the loss of human life generally does not occur contemporaneously with the exposure to certain contaminants. In some cases, the environmental exposure produces a harm with a latency period whereas in others it produces harms to future generations.

Because there are essentially no empirical studies of the value of lives threatened by latent harms, the valuations used in regulatory analyses are from threats of instantaneous death in workplace settings. Various adjustments then need to be performed to obtain a defensible valuation. Discounting, to reflect that the years lost occur later in a person's lifetime, is one such adjustment, and it leads to a lowering of the value of life. Upward adjustments need to be undertaken, however, to account for the dread and involuntary nature of environmental carcinogens as well as for higher income levels of the victims. By not performing these adjustments, the regulatory process may be undervaluing lives by as much as a factor of six, or even more for particularly long latency periods.

In the case of harms to future generations, discounting is ethically unjustified. Because of the long time horizons of environmental problems such as climate change, the rejection of discounting is likely to lead to far more stringent responses to global environmental problems.

The Article underscores the extent to which the cases of latent harms and harms to future generations are analytically distinct, even though they have generally been treated as two manifestations of the same problem. In the case of latent harms, one needs to make intra-personal, intertemporal comparisons of utility, whereas in the case of harms to future generations what is needed is a metric against which to compare the utilities of individuals living in different generations. Thus, the appropriateness of discounting should be resolved differently in the two contexts.

JEL Classifications: Q28, Q38

Accepted Paper Series