Economists are debating whether to take a domestic or international perspective on environmental ... [+] policy. getty In recent years, an interesting debate has been taking place among economists. It centers around the appropriate scope of regulatory policy, with a particular emphasis on environmental regulation. Given the Biden Administration’s ambitious environmental goals, this debate may accelerate in the coming months and years. The issue economists are grappling with is whether benefits that accrue to foreigners from U.S. policies should receive the same weight in an economic analysis as costs that fall primarily on Americans. This dilemma comes up most often in climate policy, but is relevant to many other areas of policy as well. The question is ultimately one of
James Broughel considers the following as important:
This could be interesting, too:
Tyler Durden writes NYC Mayor Expands Vaccine Mandate To All City Workers, Offers 0 “Carrot”
In recent years, an interesting debate has been taking place among economists. It centers around the appropriate scope of regulatory policy, with a particular emphasis on environmental regulation. Given the Biden Administration’s ambitious environmental goals, this debate may accelerate in the coming months and years.
The issue economists are grappling with is whether benefits that accrue to foreigners from U.S. policies should receive the same weight in an economic analysis as costs that fall primarily on Americans. This dilemma comes up most often in climate policy, but is relevant to many other areas of policy as well.
The question is ultimately one of “standing,” meaning who gets counted in an economic analysis. One aspect of climate change that makes the issue so challenging is that the problem is global in nature. Our own emissions have effects that extend beyond our borders, and the same is true of other countries’ emissions.
The standing issue becomes more concrete when considering some of the technical inputs that go into regulatory economic analysis. Consider the “social cost of carbon” (SCC), which is a measure of the welfare cost from emitting a ton of carbon dioxide into the air. One estimate suggests that the domestic SCC is only about 7 to 23 percent of the total SCC, meaning most of the welfare benefits from U.S. actions to fight climate change go to foreigners. Meanwhile, the costs of complying with the same U.S. policies generally fall on Americans.
Traditionally, regulatory policy has taken the domestic-only perspective. That is, the focus has been on benefits and costs to Americans, and not on the impact our policies have on people in other nations. To some extent this makes sense. Perhaps our representatives in Washington, D.C. should focus their attention on doing the most good for the constituents who elected them. If our leaders gave the same weight to everyone on the planet in other areas of policy, like defense or immigration, our domestic institutions and resources might quickly become overwhelmed.
MORE FOR YOU
But on another level—a purely economic level—the domestic-only perspective really does not make much sense at all. When considering the economic tradeoffs involved with fighting climate change, shouldn’t all of the benefits and costs of a policy be counted? Why should some individuals, who feel the effects of our actions as much as we do, be left out of the analysis by being given zero weight?
Many economists adhere to a principal that benefits and costs should receive the same weight in an analysis irrespective of who they apply to. The distribution of those effects—while also important—should be considered as a separate matter.
Here’s another way to think about it: Even if we accept that some individuals should be excluded from an economic analysis, the decision about who to let in and who to keep out is a matter of values, not science. It’s exactly the kind of political question we might expect to see different answers to when there is a change in administrations. We should not be surprised if Democrats, when they are in power, decide to count benefits to foreigners in their economic analysis, while Republicans take an America First perspective. After all, the two parties have different (and evolving) value systems.
But there are also reasons why conservatives and libertarians might want to rethink their position to keep certain people out of economic analysis. While some economists who endorse the global analysis perspective undoubtedly do so to tip the scales in favor of aggressive policy action by increasing those policies’ estimated benefits, it is far from obvious that things will play out that way.
Consider for example that when a policy is expected to reduce mortality, the analyst conducting the economic analysis will often attach a dollar value to the saved lives, typically using a metric called the “value of a statistical life” (VSL). Like the SCC, the VSL is another technical input in economic analysis. In this case, it is a measure of what a group of people is willing to pay to prevent the death of one of its members. Valuing lives can be controversial for a number of reasons, but it’s also widely done by governments, so for now, let’s take for granted that our government is doing analysis correctly.
The VSL tends to vary dramatically depending on the group whose preferences are used to dictate policy. For example, when an analysis takes a domestic, U.S.-only perspective, the typical VSL used is an average of what Americans are willing to pay to prevent a death. When the analysis shifts to a global perspective, it stands to reason that the government should use the willingness to pay of the entire world.
Not surprisingly, willingness to pay is largely a function of income, and because the United States is richer than average, it also has a higher VSL than average. So assuming the government’s current practices are the right ones, if an analysis takes a global perspective—giving standing to all peoples of the world—the appropriate VSL will fall from about $11 million (the current U.S. figure) to roughly $2 million.
So even while the value of climate benefits might rise significantly when taking a global perspective in economic analysis, the value of mortality benefits will decline significantly. Moreover, historically mortality benefits have constituted a much larger fraction of benefits in regulatory economic analysis than the benefits from reducing greenhouse gas emissions.
Republicans are within their rights to take the domestic-only perspective when they are in power. But their arguments are less compelling when Democrats are representing the desires of their voters, because the question of who gets counted in an economic analysis is ultimately one of values. Republicans would be on firmer ground by emphasizing that once the decision is made to take a global perspective, consistency requires that all aspects of analysis do so. Democrats must accept all of the analytical implications that follow a change in core assumptions, not just the ones they find politically convenient.