On Balance: So You Want to Conduct a Benefit-Cost Analysis? Experts Share Their Stories

This blog series is a partnership of the Society for Benefit-Cost Analysis On Balance blog and Dr. Zoë Plakias’ Spring 2021 Benefit-Cost Analysis (AEDECON 5330) class at The Ohio State University. Students interviewed experts in benefit-cost analysis to learn about what they do and why they do it. All interviews have been edited for brevity and clarity with the help of Dr. Plakias and are shared with the approval of the interviewer and interviewee.

  • Expert: Dr. Charles Griffiths
  • Interviewer: Katrina Hadley

Dr. Charles Griffiths is a Senior Economist at the U.S. Environmental Protection Agency. He has also taught courses on benefit-cost analysis at Johns Hopkins University and the University of Maryland and served as a Senior Economist for Environment, Energy and Natural Resources on the Council of Economic Advisers during the George W. Bush administration.

The views expressed in this interview are those of the interviewee and do not represent the position of the U.S. Environmental Protection Agency (EPA).

Q: I see that some of your recent publications have had to do with sea level rise and its effects in the Chesapeake Bay watershed. Are you currently conducting any more research related to this topic?

A: Only indirectly. That particular paper came out of a project we did in which the EPA was implementing the total maximum daily load (TMDL) requirements for the Chesapeake Bay. The EPA has a number of controls it can put on industry to reduce the amount of pollution, but when it runs out of controls it basically tells the states that they need to meet certain standards, and the states then have the responsibility of implementation. That can be done through a number of creative ways such as trading or using various controls that might not be available to the EPA. We had to collect data on how the TMDL’s would affect the Bay and in the process, we had enough data to look at the effect of sea level rise. My colleague was the one who said, “hey, this is a good application,” so we were able to do that benefit-cost analysis with the data that we already had in hand. I’m also working on climate change issues, so indirectly there’s a bit of sea level rise assumptions built in there but at the moment I’m not working on anything directly related to sea level rise.

Q: What kinds of things are you working on directly right now?

A: My primary mission at the moment is to assist with the social cost of greenhouse gas estimates that are coming out of the reformed Interagency Working Group.

Q: What exactly is the Interagency Working Group?

A: At the end of the Bush Administration, the Supreme Court ruled that the EPA had to include a price of carbon in its benefit-cost analysis on carbon reductions or explain why it wasn’t going to include one. The Bush Administration decided that it would put a price on carbon, but the Obama Administration then came in and decided that it wanted a single number and didn’t want agencies to set their own individual values. The Obama Administration formed a group, including a number of people from the EPA, to come together and make decisions on how that number would be calculated. It was named the Interagency Working Group because it was a bunch of different agencies coming together. The Trump Administration then wrote an executive order disbanding the Interagency Working Group. On day one of the Biden Administration, the group was reconstituted afresh and they’re now in the process of creating a new set of social cost of greenhouse gas estimates. Our office does a lot of those calculations and that’s what I’m involved in at the moment.

Q: I see that you have worked under several different presidential administrations during your time with the EPA. Are there any major ways this has affected your research or the ways that you conduct policy analysis?

A: This is a good question and one that I think is misunderstood a lot by the general public. I think there is a misperception that bureaucrats are easily manipulated and directed by political appointees. We like to think that we would answer the same question the same way regardless of who asked it, it’s just that the policy makers get to ask the particular questions. There are bounds within it; you can say, “these are the ways that economic science is looking at things, so you could view it this way or that way,” and this gives policy makers some ability to determine how they’re going to take their question and answer it for policy making. My job is largely the same under any administration. I am required to do good economic science and make sure it is defensible. Each administration comes in and, particularly when there is a change in the party, they usually want to take a new direction, but my ask is almost always the same: here’s the problem and here’s the economics you’re supposed to look at. My office director, who’s not a political appointee, basically says, “I don’t care what answer you come up with, but it must be defensible and the best work you can possibly do.”

Q: What would you consider to be a few of the cutting-edge topics in the field of cost-benefit analysis?

A: One topic is standing. In benefit-cost analysis you have to decide whose costs and benefits count. OMB Circular A-4 dictates that cost-benefit analysis should be done for those within the U.S., but it isn’t really clear about how you determine that. Almost all of our regulations until the Obama Administration and their greenhouse gas work looked at only U.S. citizens as having standing. If there were cross border effects, they usually were not included in the analysis. But because greenhouse gases are global pollutants and have impacts throughout the world, if we’re looking to get to the optimal level and there’s a negative externality, you’re going to have to include everyone’s costs and benefits in the calculation. Therefore, there was a shift towards looking at greenhouse gas reduction using a global perspective. The Trump Administration then wanted to follow Circular A-4 directly, so only the domestic number was looked at once again, and the Biden Administration has now signaled that they would like to go back to the global perspective. So standing is one of the major issues being wrestled with now. The second issue is discounting. The OMB specifies that there are two rates you use for cost-benefit analysis for the federal government. One is a 7% discount rate which Circular A-4 says reflects the opportunity cost of capital. The other is a 3% rate which the OMB says reflects the consumption rate of discount. There are a number of issues that arise with this and one is whether these numbers accurately represent those concepts. There’s a fair amount of literature that suggests that if you look at the opportunity cost of capital, it should be less than 7%, and certainly with the consumption rate of discount the capital markets have moved in such a way that 3% seems high for that particular rate. The question then becomes what the correct rate is.

Another issue is whether the opportunity cost of capital is even valid for climate damages simply because climate impacts are not really displacing capital. We’re talking about something that affects consumption over an intergenerational time frame, so it’s a question of whether we should even use the higher number.

Q: Do you have any upcoming projects that you would like to discuss?

A: One piece that I’m working on relates to environmental federalism. This is a branch of literature that has a long history, and basically the thinking is that there may be gains from non-uniform standards applied at the state level depending on certain conditions, such as whether the states are going to suffer from a race to the bottom type of effect or whether there are cross-state externalities. But in some cases, society may do well to differentiate the regulation based upon the state itself. Now that’s not directly what I’m studying, but what it means is that states have the opportunity to vary their regulation based upon the local conditions. The federal government sets the floor for how states regulate, so when it says that states have to meet certain environmental standards, all states must meet them. However, if the federal government deregulates, all states don’t necessarily need to decrease their regulation. During the Trump Administration there was some deregulation of water quality standards, but California, Massachusetts and some of the more forward leaning states were already regulating their water quality to the level that was set during the Obama Administration. If the federal standard is decreased, some of those states might not decide to decrease their water quality standards as far as the federal government is giving them permission to do. As a matter of fact, there’s some expectation that the forward leaning states won’t decrease their standards. If we expect them not to do it, should that fact be included in the baseline? In other words, are we going to include all the foregone benefits and cost savings associated with that backsliding if we have a good suspicion that these forward leaning states aren’t going to decrease their water quality standards? This is one thing that is generally not considered in the baseline so it’s a benefit-cost baseline question.

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