In the United States, cost-benefit analysis plays a substantial role in government policy making in traditional regulatory areas, such as automobile safety and air quality. But the management of catastrophic risk has largely fallen outside the purview of cost-benefit analysis. The primary reasons that cost-benefit analysis has played a less important role in the context of catastrophic risks are procedural, rather than methodological. Although improvements can be made to cost-benefit analysis techniques to better account for catastrophic risks, the more important set of reforms—and the ones discussed in this proposal—are institutional.
In the U.S. regulatory context, cost-benefit analysis is embedded in the process of regulatory review, which is almost entirely reactive. Agencies initiate regulatory proposals and then work with the Office of Information and Regulatory Affairs (OIRA) to analyze the effects of their proposals and make revisions in light of that analysis. OIRA has very little influence over agency agenda setting, which is instead dominated by legal and political factors that are largely unmoored from cost-benefit considerations.
For traditional regulatory areas, the reactive posture of OIRA may not be ideal, but it is not altogether debilitating. In these areas, robust administrative agencies with substantial statutory mandates and long traditions of regulation are relatively well-positioned to identify and respond to policy needs. OIRA’s role of channeling and coordinating agency energies helps produce rules that are better justified and more likely to lead to net social benefits.
But the situation is very different for catastrophic risks. Regulatory review is well-suited for reining in overactive agencies or delaying or stopping imprudent agency action. But there are a wide range of catastrophic risks that are more likely to be exacerbated by government inaction than government action. Because OIRA does not evaluate agency agenda setting, cost-benefit analysis is not applied to the most consequential government decisions concerning catastrophic risks—the choice not to act.
The institutional reform discussed in this proposal is a Catastrophic Risk Review process, spearheaded by OIRA, that would examine catastrophic risks and potential government responses through a cost-benefit lens. This review process would build on earlier experiments in which OIRA has played a more proactive role in initiating regulatory actions. The two most successful of these experiments were the practice of prompt letters under the George W. Bush administration and the regulatory lookback undertaken by the Barack Obama administration. The Catastrophic Risk Review will also take advantage of OIRA’s experience in cross-agency coordination and harmonization, including the Obama administration’s interagency working group on the social cost of carbon, and the Bush administration’s Circular A-4 guidance document on cost-benefit analysis methodology.
The purpose of this process would be to find areas where tangible, cost-benefit justified policy steps can be undertaken to manage catastrophic risks. The Catastrophic Risk Review would be overseen and partially staffed by OIRA, but should also include an interagency coordination group. There should be at least one round of public comments to help identify risks and potential responses. The Review should have a relatively sweeping purview, examining regulatory as well as other governance tools, such as research subsidies or even new legislation, that may be appropriate.
Ideally, Catastrophic Risk Review would lead to an ongoing process of identifying and addressing this important category of risk. Right now, there is, essentially, a backlog of unaddressed catastrophic risk, so a substantial initial effort is needed. After that backlog has been cleared, a more regularized updating process can evaluate existing efforts on identified risks and determine whether new risks merit further attention.
The products of a Catastrophic Risk Review could include new actions undertaken by executive agencies, recommendations to Congress for legislation or funding, or guidance on methodological updates to cost-benefit analysis to better account for catastrophic risks.