Document Type

Article

Publication Date

2012

Abstract

Recent adjustments by the Environmental Protection Agency (EPA) and the Department of Transportation (DOT) to their cost–benefit analysis procedures could cause tremendous changes to federal regulation. For decades, federal agencies have calculated the value of a statistical life (VSL) and have used that number when evaluating the costs and benefits of proposed regulations. If a regulation was expected to save lives, the number of lives saved could be multiplied by the VSL to monetize the benefits. Because, however, lives saved in the future were given the same nominal value as lives saved in the present, the real value of future lives was substantially eroded by discounting to present value, generally at annual rates of 3 and 7 percent. In other words, if a life saved today is worth $8 million, a life saved in ten or twenty years would be worth far less. A discount rate of 7 percent erodes half the value of a life expected to be saved in 2022 and three-quarters of one expected to be saved in 2032. This process hinders the regulation of slow-acting perils, such as workplace carcinogens and global climate change.Now the EPA and the DOT have begun inflating VSLs when calculating the benefits of regulations. Before subjecting lifesaving benefits to the same discounting applied to other costs and benefits, the agencies adjust the values upward to reflect the expected higher income (and associated willingness to pay to avoid risks of harm) enjoyed by future persons. This seemingly minor procedural change can radically alter the expected benefits of major regulations, and the regulated community will likely oppose the agencies’ efforts to more accurately calculate future benefits. Observers of federal regulation should track this battle carefully and contact other federal agencies as they decide whether to adopt the “VSL inflation” procedure.

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