On Balance: The Costs and Benefits of Deregulation

May 29, 2019

By: Bethany Davis Noll

Administrative agencies, courts, and litigants are just coming off two years of intense debates over the legality of agency deregulation through delay. One fascinating development has been how significant cost-benefit analysis has been in these debates. Cost-benefit analysis has formed the basis for several important court losses suffered by the administration. (See Air Alliance 2018; California 2017.) Now agencies have proposed to repeal many big-ticket rules, including the Clean Power Plan, the Clean Water Rule, and vehicle emissions standards. A key question is what role cost-benefit analysis will play in the upcoming legal battles over repeals.

The Administrative Procedure Act of 1946 governs regulation and deregulation. In passing the statute, Congress wanted to make sure agencies were accountable to the public and to Congress. The statute mandates notice-and-comment procedures so that the public is informed about agency actions and has an opportunity to participate in the process. The statute also requires agencies to provide an explanation for their actions. This helps facilitate judicial review. When an individual or entity has standing to sue—such as a state suffering a concrete injury traceable to the agency’s conduct—and brings a lawsuit (usually at the federal district court level), courts can look at the agency’s explanations and check for arbitrary and capricious decisions.

These rules apply equally to delays and repeals (deregulation), as well as to regulation, which has several significant advantages. First, regulated industries and the public can count on a certain amount of regulatory stability. Once a regulation is passed, the regulation cannot be cancelled without a public process and an explanation for the change (see Nielson 2018).

Second, these rules keep agencies faithful to the congressional decision that authorized them in the first place. Agencies must have congressional authorization for their actions and when they act, those actions must be faithful to the congressional purpose (see Davis Noll & Grab 2017; Garland 1985). That said, agencies often still have room to figure out the best way to regulate—as long as they pick an option that falls with the range of reasonable options.

Enter President Donald Trump. In March 2017, Executive Order No. 13771 directed agencies to cut costs of new regulations in two ways: First, by repealing two regulations for every new regulation issued and, second, by keeping the total incremental costs imposed by all new regulations for the year at no greater than zero. (In 2018, the Office of Management and Budget set a new cap on total costs allowed, requiring several agencies to keep total costs of all regulatory actions at less than zero.)

In implementing Executive Order No. 13771 and rolling back rules, some agencies made serious legal errors. Since 1993, Executive Order No. 12866 has required agencies to “propose or adopt” a regulation only when the “benefits justify its costs” (§ 1(b)(6)) and, when choosing between different alternatives, to select the regulatory alternative that maximizes net benefits, unless a statute requires otherwise (§ 1(a)). As a result, the regulations that the Trump administration has tried to roll back have included at least some analysis – and sometimes very detailed analysis – on the benefits that the regulations promised, along with the regulatory costs. And rolling back a regulation like that involves forgone benefits, even if it also cuts regulatory costs.

In the early days of the Trump administration, several agencies, including the Bureau of Land Management (within the Department of the Interior) and the U.S. Environmental Protection Agency (EPA), issued rollbacks that focused solely on regulatory costs and ignored forgone health, environmental, and other benefits (EPA 2017; California 2017). But it has been settled in the courts for decades that ignoring one side of the equation while emphasizing the other in that way is arbitrary and capricious. After stumbling in court, even those agencies have come to recognize that they must grapple with those forgone benefits.

Now that the repeal phase is beginning, the question is whether an agency’s decision to forgo benefits through a repeal squares with the agency’s statutory mandate. An example—one of several possible—illustrates how agencies seeking to forgo benefits may face difficulties. Consider that the Clean Air Act directs the EPA to “promote the public health and welfare” and prevent and control pollution. Yet EPA proposed recently to delay an emissions limit on wood heaters, sources of significant and harmful local air pollution. The agency has fully admitted that the delay raises emissions and so results in foregone health and environmental benefits.

If EPA finalizes either a delay or a repeal of the wood heaters rule, the question for a court will be whether a rule that raises emissions is within the range of reasonable options authorized under a statute that directs the agency to do the opposite: prevent and control emissions. It may be that a decision to raise emissions will impose costs (in the form of foregone health and environmental benefits) that outweigh the reduced compliance costs. Given the statutory goals, such a decision may be found to be arbitrary.

If, on the other hand, the agency’s analysis finds cost savings that exceed forgone benefits, that finding might itself raise red flags. Most, if not all, of the rules subject to rollback were issued recently and originally had net benefits. The question is how, without significant new data or information, the agency changed the analysis so that the cost savings now outweigh the forgone benefits. In those circumstances, agencies will face questions about whether the new math is flawed. But if the agency can produce an adequate economic analysis showing that the rollback is indeed justified in cost-benefit terms, then a court may defer.

As litigation over repeals heats up, courts are likely to maintain a laser-like focus on agencies’ attempts to provide an economic justification for the repeals. The important question in many of those cases will be whether the choice to impose forgone benefits is reasonable under the relevant statute. Stay tuned.

Bethany Davis Noll is litigation director of the Institute for Policy Integrity at New York University School of Law and a former assistant solicitor general at the New York State Attorney General’s Office. She graduated from Stanford Law School and clerked on the U.S. District Court for the Southern District of New York and U.S. Court of Appeals for the Second Circuit.

REFERENCES

Aaron L. Nielson, Sticky Regulations, 85 U. Chi. L. Rev. 85 (2018) 

Air Alliance Houston v. EPA, 906 F.3d 1049 (D.C. Cir. 2018) (explaining that the agency had to assess the impact of delaying the Chemical Disaster Rule against a status quo that includes the Chemical Disaster Rule and all the “ongoing compliance efforts by regulated parties to meet the compliance deadlines set in that rule”).

Bethany A. Davis Noll & Denise A. Grab, Deregulation: Process and Procedures That Govern Agency Decisionmaking in an Era of Rollbacks, 38 Energy Law Journal 269 (2017).

California v. United States BLM, 277 F. Supp. 3d 1106 (2017) (“Without considering both the costs and the benefits of postponement of the compliance dates, the Bureau’s decision failed to take this ‘important aspect’ of the problem into account and was therefore arbitrary.”). 

EPA, Postponement of Certain Compliance Dates for Effluent Limitations Guidelines and Standards for the Steam Electric Power Generating Point Source Category, 82 Fed. Reg. 19,005 (Apr. 25, 2017).

Merrick B. Garland, Deregulation and Judicial Review, 98 Harv. L. Rev. 507 (1985).