Cost-benefit analysis (CBA) of health and safety regulations

Tröster, Bernhard; Von Arnim, Rudiger; Raza, Werner Working Paper Cost-benefit analysis (CBA) of health and safety regulations Working Paper Forschungsförderung, No. 338 Provided in Cooperation with: The Hans Böckler Foundation Suggested Citation: Tröster, Bernhard; Von Arnim, Rudiger; Raza, Werner (2024) : Cost-benefit analysis (CBA) of health and safety regulations, Working Paper Forschungsförderung, No. 338, Hans-Böckler-Stiftung, Düsseldorf This Version is available at: https://hdl.handle.net/10419/300714 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/de/legalcode This Working Paper at a Glance Even though trade negotiations have increasingly come to focus on regulatory issues, the full impacts, that is, both social costs and benefits of regulatory changes, often remain unexamined in trade impact assessments. To bridge this gap, we scrutinize the theoretical foundations, methodologies and policymaking applications of cost-benefit analysis (CBA) in the context of health and safety regulations. CBA has become the main approach in economics to quantify the social costs and benefits of regulation. Gaining a thorough understanding of CBA processes, their applications and their limitations provides a valuable foundation for our upcoming research, the integration of the broader impacts of regulations into a global trade model. Das Working Paper auf einen Blick Ist die Angleichung unterschiedlicher Gesundheitsstandards zwischen Ländern im Kontext von Freihandelsabkommen ausschließlich positiv zu bewerten, oder besteht hier die Gefahr von Qualitätsverlusten mit hohen sozialen Kosten für die betroffene Bevölkerung? Die Angleichung unterschiedlicher nationaler Regulierungen spielt in der zeitgenössischen Handelspolitik eine wichtige Rolle. In diesem Papier werden Forschungsmethoden wie die Kosten-Nutzen-Analyse, die eine monetäre Bewertung der Auswirkungen von Gesundheitsstandards vornehmen, kritisch bewertet. Die Ergebnisse zeigen, dass die Vorteile von Regulierung deren Kosten deutlich überwiegen. Die handelspolitische Folgenabschätzung muss daher die gesellschaftlichen Kosten regulatorischer Qualitätsverluste systematisch berücksichtigen. © 2024 by Hans-Böckler-Stiftung Georg-Glock-Straße 18, 40474 Düsseldorf, Germany www.boeckler.de “Cost-benefit analysis (CBA) of health and safety regulations” by Bernhard Tröster, Rudi von Arnim and Werner Raza is licensed under Creative Commons Attribution 4.0 (BY). Provided that the author’s name is acknowledged, this license permits the editing, reproduction and distribution of the material in any format or medium for any purpose, including commercial use. The complete license text can be found here: https://creativecommons.org/licenses/by/4.0/en/legalcode The terms of the Creative Commons License apply to original material only. The use of material from other sources, such as graphs, tables, photographs and texts, may require further permission from the rights holder. ISSN 2509-2359 TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 3 Contents Executive Summary ............................................................................... 5 Zusammenfassung ............................................................................... 10 1. Introduction ...................................................................................... 12 2. Basics of cost-benefit analysis (CBA) ............................................... 15 2.1. Origins and theoretical foundations of CBA .............................. 15 2.2. Limits of cost-benefit analysis ................................................... 17 3. CBA of health and safety regulations ................................................ 19 4. Methodologies of health benefit estimations in CBAs ....................... 22 4.1. Cost-of-illness (COI) approach .................................................. 23 4.2. Friction-cost approach (FCA) .................................................... 25 4.3. Willingness-to-pay approaches ................................................. 26 4.4. Non-monetary measures........................................................... 30 4.5. Interrelations of different benefit measures and mixed applications ...................................................................................... 32 5. Methodologies of regulatory cost estimations in CBA ....................... 35 6. CBA applications in regulatory impact assessments (RIAs) .............. 37 6.1. RIAs in the United States and the EU ....................................... 38 6.2. Selected RIAs on health and safety regulations ........................ 41 6.3. Insights on RIAs ........................................................................ 54 7. Discussion and outlook..................................................................... 56 Literature .............................................................................................. 59 Authors ................................................................................................. 67 TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 4 Figure Figure 1: Schematic of CBA of health-affecting policies ....................... 20 Tables Table 1: Methodologies of Health Benefit Estimations in CBAs ............ 22 Table 2: Types of regulations focused on safety and health ................. 43 Table 3: Costs and benefits of different trans fat policy options ............ 47 Table 4: Approach to the monetization of ill health effects .................... 52 TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 5 Executive Summary This working paper is part of a research project funded by the Hans Böckler Foundation (HBS Project No. 2020-431-3) that seeks to incorporate comprehensive effects of regulations in an economy-wide model for trade impact assessments. Regulations and standards cause trade costs, and existing modeling approaches routinely focus on the estimation of potential gains from their removal. The omission of obviously existing economic benefits of regulation severely biases essentially all existing impact assessment models that report gains from “deep and comprehensive” free trade agreements (DCFTAs). The problematic nature of this approach has been at the center of the controversy around Transatlantic Trade and Investment Partnership (TTIP) and the EU-Canada free trade agreement (CETA). In the pursuit of ever freer global markets, Free Trade Agreements (FTAs) have become an increasingly popular policy instrument. The World Trade Organization (WTO) reports that the number of active bilateral or regional FTAs has increased from around 50 in 1990 to 360 in 2023 (WTO 2024). Likewise, FTAs are at the center of the trade policy agenda of the European Union (EU). However, in contrast to traditional FTAs with their focus on tariff removal, the so-called new generation FTAs put the emphasis on the alignment and removal, respectively, of national regulations, or, in trade parlance, “behind-the-border measures” or “non-tariff barriers” (NTBs). Thus, there is an increasing interconnection of trade liberalization with national policies and consequent macroeconomic, social and distributional as well as ecological effects. The content of DCFTAs potentially impacts core areas of national public policy, like health and consumer protection, labor standards or environmental regulations. The interlinkages between trade liberalization and regulatory change and their full economic and social effects are, however, not captured by prevailing trade impact assessment approaches. Therefore, a deeper understanding based upon an alternative methodology is needed, which takes the full range of potential social costs and benefits of regulation into account and equips our macroeconomic model for trade impact assessment to provide a more realistic picture of DCFTA impacts on critical areas of public policy. Only on the basis of such an analysis can informed decisions about the appropriate design of these trade agreements be made. The methodological challenge now consists precisely in identifying the nature of particular benefits of a regulation and in determining the scale and direction of its economic impact relative to its respective costs. To TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 6 narrow the scope, our project focuses on regulations that impact (i) human health and safety, as well as (ii) societal trust. A companion working paper delves deeper into the linkages between trust, regulation and trade. In this working paper, we assess research methods that focus on assessing the comprehensive impacts of regulations, particularly on costbenefit analysis (CBA). By scrutinizing the theoretical background, the methodologies of CBA and their applications in policymaking, we identify the opportunities and limits of this research approach. For this purpose, we examine the origins and theoretical foundations of CBA and illustrate the application of CBAs in the area of health and safety regulations, given that these issues have become an important area of CBA research. We further investigate the application of CBAs in regulatory impact assessments (RIA), by comparing the approaches and the recent developments in RIA applications in the EU and the United States. The methodologies and underlying databases of applied EU and U.S. RIAs in the areas of (i) food safety standards (SPS), (ii) chemicals regulations, (iii) standards for safety and health at work and (iv) environmental regulations on air and water pollution are presented. The findings of this assessment serve as the basis for potential new modeling approaches of costs and benefits of regulatory changes resulting from FTAs, which will be further developed in subsequent phases of the research project. Generally, CBA is an assessment method that aims at quantifying in monetary terms the value of all consequences of a policy or of various policy options to society. Over the past two decades, the research on CBA has witnessed a substantial surge in interest and has been applied in various research fields, including economics, environmental science and medical science. Most importantly, the CBA approach has gained much attention as a way of evaluating the impacts of regulations. In particular, CBA is gaining global traction in policymaking processes, serving as the central element of Regulatory Impact Assessments (RIAs). This is because the net benefits resulting from a CBA can act as a pivotal decision-making factor when choosing between various policy options. We argue that the fundamental concept of evaluating the impacts of regulations through cost-benefit analysis (CBA) is especially interesting when considering the role of regulations and regulatory divergence within the context of FTAs. From the CBA perspective, the treatment of regulations in standard trade impact assessments appears incomplete, since regulatory measures are only seen as barriers to trade and as costs for businesses. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 7 The CBA approach highlights instead, that in the face of market failures such as information asymmetries or negative externalities, regulations prove to be indispensable. It considers the broader impacts on different societal groups, who experience varying costs and benefits from regulations. Finally, the results of applied CBA and RIA studies mostly suggest that the benefits of regulation clearly exceed the costs. The systematic consideration of regulatory impacts challenges the simplistic assumption that removing or altering regulations that affect trade will inherently result in positive economic and societal outcomes. CBA has become particularly important for policymaking with respect to health, safety and environmental regulations. While it is widely recognized that these rules and regulations are essential for addressing market failures, CBA is advocated as a means to optimize the design of regulations for maximum efficiency. The application of CBA in RIAs is also promoted as the “economic-scientific” cornerstone for evidence-based policymaking. The perception of CBA as a central element in policymaking processes is closely tied to its theoretical links to welfare economics, as described in chapter 2. Within this framework, CBA is applied to enhance the efficiency of resource allocation so as to maximize overall societal welfare. This foundation also underpins the development of new CBA methodologies, which measure regulatory benefits via individuals’ preferences and “willingness to pay” methods. The methodological process commonly employed in CBA-based assessment exercises related to human health and safety consists of two steps: First, the analysis of benefits with three key elements: (i) identifying changes in hazardous factors, like pathogens in food or air pollution from regulatory changes; (ii) converting these changes into “health outcomes” such as premature deaths, hospital admissions and lost work days; and (iii) quantifying the benefits, usually in terms of the health issues that have been prevented. Second, the analysis of costs, which encompasses all costs associated with regulatory changes, such as compliance costs for companies. Various methodologies for estimating health benefits in CBAs are discussed in the literature, but two major methods prevail: • “Cost of illness” (COI): This approach estimates the economic costs associated with injuries, illnesses and premature deaths, by including both direct costs (e.g., medical expenses) and indirect costs (e.g., lost productivity due to morbidity and premature mortality). COI is often referred to as the “human capital” approach because it measures the economic losses due to the reduction of an individual’s labor power TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 8 and related productivity, although it omits non-monetary aspects of illness (e.g., pain and suffering) and potentially underestimates the effects for non-working population groups. • “Value of a Statistical Life” (VSL): The VSL is part of the “willingness- to-pay” (WTP) approach. WTP represents here the maximum amount of money an individual would voluntarily pay to reduce the risk of negative health outcomes. For valuing mortality risk reductions, the VSL represents the monetary value of avoiding one statistical death in society. The VSL and WTP approaches have become highly popular as they align with neoclassical welfare economics and policy goals, which generally aim to reduce health risks for the affected population. Given that the VSL often yields substantially higher monetary figures than COI estimations, it plays a significant role in driving benefit estimations, leading to the calculation of high net benefits of a regulatory policy. In chapter 6, applications of CBA and different methodologies to assess the benefits and costs of specific regulations or policy proposals in the United States and the EU are examined. While both the United States and the EU use RIAs, differences exist. In the United States, RIAs are an essential part of the implementation of regulations by federal agencies and have been required since the 1980s. The benefit estimations in U.S. RIAs largely apply the VSL methodology. In contrast, RIAs in the EU became more popular only after the 2000s and are used to assess proposals in the primary legislation process. Generally, the EU sees RIAs as evidential reasoning, whereas the United States places greater emphasis on CBA outcomes in policy choices and judicial reviews. Our examination of RIAs concerning health and safety regulations underscores that CBA applications within RIAs are typically tailored to the specific regulations at hand. RIAs are extensive studies where researchers have the freedom to choose databases and methodologies that suit their analysis. Moreover, the reviewed RIAs illustrate that certain elements on both the cost and benefit sides may defy reasonable quantification. In such instances, the EU’s approach, which places a stronger emphasis on adopting a more holistic perspective that encompasses economic, social and environmental dimensions, and incorporates supplementary techniques like multi-criteria analysis, may be better suited. Moreover, we discuss an evaluation of the economy-wide impacts of regulations based on CBA results using a CGE model. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 15 2. Basics of cost-benefit analysis (CBA) In general, the CBA approach is an assessment method of projects and policies that quantifies in monetary terms the value of all consequences of a project and policy to all members of society (Boardman et al. 2018). CBA seeks to identify economic but also environmental and other types of impacts of projects, regulations or interventions and shows the net benefits. The CBA can be used to compare the net benefits of different options in order to identify the most efficient project or policy option. The empirical applications of CBA are, firstly, project proposals, for instance for infrastructure projects. Secondly, CBA “is the principal analytical tool of quantitative [regulatory impact assessments]” (RIAs) (Antle 1999). RIAs are conducted as part of the public decision-making in many policy areas ranging from public healthcare, social welfare programs or environmental policies. The process of conducting a CBA generally follows several basic steps. These include: (1) determine the purpose and the scope of the analysis, (2) specify the policy options, (3) decide whose gains or losses will be considered, (4) predict benefits and costs over a predefined period into the future, (5) convert any impacts not normally measured in monetary terms into such terms as feasible and appropriate, (6) discount monetized impacts, (7) compute net benefit and/or benefit-cost ratio, (8) perform sensitivity analyses, and (9) interpret results. What benefits and costs can be quantified and what methodologies are applied, varies with the subject to be assessed and is often highly casespecific (Boardman et al. 2018). If impacts cannot be reasonably monetized, cost-effectiveness analysis or the inclusion of qualitative assessments are alternative approaches (Sunstein 2019). 2.1. Origins and theoretical foundations of CBA The discussion of the origins of CBA studies is side-lined in many CBA textbooks and articles. Some authors trace it back to early calculations of the benefits and costs of plague control policies in London in the 17th century (Boardman et al. 2018). Others name the applications of CBA studies in the United States in the 1930s (Mishan/Quah 2021). Jiang/ TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 16 Marggraf (2021), however, draw a line from French engineers and academics that developed CBA calculations for transport projects during the early 18th century to the work of Jules Depuit in 1844. Independent from this, CBA studies were conducted in the United States around water resource projects (op. cit.), and many scholars name the Flood Control Act in 1936, which required the Army Corps of Engineers to conduct CBAs for their water projects, as a major milestone for practical CBA application (Boardman et al. 2018; Mishan/Quah 2021). In the 1950s, however, scholars in the United States took up the theoretical concepts and their mathematical formulations by Jules Depuit such as the consumer surplus (“relative utility”) and consolidated them with other concepts of welfare economics. These microeconomic theories and principles became the foundation for the theoretical and applied aspects of CBA in the United States (op. cit.; Talvitie 2018). From a neoclassical economics perspective, the major aim of CBA is the contribution to a “more efficient allocation of resources” (Boardman et. al. 2018: 75). This can be achieved when public policies are designed to maximize overall societal welfare. Welfare economics as a microeconomic approach defines the overall welfare of society as the sum of consumer and producer surplus, which are derived from the aggregated wellbeing of utility-maximizing individuals and profit-maximizing companies (Boardman et al. 2018; Mishan/Quah 2021). This theoretical concepts have led directly to the CBA methodologies to measure the benefits of regulations through the expression of individuals’ preferences and the concept of “willingness to pay” and the costs of regulations as opportunity costs, as discussed in chapter 4 and 5. However, there is ongoing research on concepts and methodologies, for instance, by the inclusion of results from behavioral economics such as the differences in the valuations of gains and losses by individuals (op. cit.) The concept of efficiency is key in the neoclassical economic rationale for CBAs. However, the criterion of Pareto efficiency has been dismissed by most scholars in favor of theoretical concepts that speak to the practicality and ease of application of CBA. Boardman et al. (2018) argue that CBA can realistically support a more efficient allocation of resources, but might not lead to the most efficient due to “political concerns, or other reasons” (p.15). Efficiency is also the decisive factor in selecting the best policy option. In theory, the Pareto-efficient option out of a CBA should be chosen, in which net benefits allow to compensate those who bear costs so that no one is made worse off and at least one person is better off (Boardman et al. 2018). However, CBA scholars and regulators in the United States advocated for the Kaldor-Hick criterion as the key variable. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 17 Thus, the desirability of a policy or a policy change is given, when the overall benefits to society outweigh the overall costs and the persons adversely affected could potentially be compensated. It is not required that everyone in society is made better off by a policy change. Instead, it focuses on the potential for net benefits, which allows for trade-offs between winners and losers (Mishan/Quah 2021). Consequently, efficiency became more relevant than issues of equity and distributional effects. The idea of CBA as a tool to advance efficiency on an “economic-sci- entific” basis (Nicola 2017) has been taken up by the U.S. administration, in many Anglo-American countries and several international organizations from the 1960s onwards. The CBA applications were broadened from infrastructure projects to various government activities from public health to education. While mainstream economists generally oppose regulations in many fields that could constrain market competition, health, safety and environmental regulations are seen as necessary to overcome market failures (Viscusi/Harrington/Sappington 2018). However, U.S. policymakers and scholars have argued that policymaking and regulations must be grounded in economic and scientific evidence and that social and environmental regulations must prove to be economically efficient. In the EU, the utilization of cost-benefit analysis (CBA) as a policymaking tool only gained traction in the 2000s and has been characterized by a more cautious approach, with an emphasis on striking a balance between economic priorities and the consideration of social and environmental factors (Bartl 2017). From a legal and economic perspective, Nicola (2017) therefore sees two genealogies to explain the difference between the U.S. and the EU-type CBA approaches (see also chapter 6 for more details). 2.2. Limits of cost-benefit analysis The theoretical foundations of CBA are criticized by many scholars. For instance, Ackerman/Heinzerling (2004) present several conceptual issues regarding CBA and highlight the limitations and potential shortcomings of CBA as a decision-making tool, particularly when dealing with complex and multifaceted issues. First, assigning monetary value to many intangible factors, such as human life, environmental quality or cultural heritage, is inherently subjective and controversial. Different individuals and societies may have divergent perspectives on how to value these factors, leading to potential biases and disputes in CBA outcomes. The methodologies to derive these values TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 18 based on the preferences of the individuals such as willingness to pay are theoretically flawed. Secondly, CBA employs discounting to account for the time value of money, giving less weight to future costs and benefits compared to present ones. Ackerman/Heinzerling (2004) argue that discounting future generations’ costs and benefits may undervalue the long-term impacts of policies, particularly for issues like climate change or intergenerational equity. Thirdly, there are distributional concerns: CBA typically focuses on overall net benefits, without explicitly considering the distribution of costs and benefits among different individuals or groups. This can result in inequitable outcomes, as the analysis may favor policies that generate large overall benefits but disproportionately harm vulnerable or marginalized populations (op. cit.). In particular, the focus on the Kaldor-Hicks criterion as the central principle of policy selection has emphasized the superiority of overall economic efficiency over equity and distributional aspects (Nicola 2017). Fourth, CBA relies on assumptions and predictions, which are often uncertain and rather speculative (Bartl 2017). Ackerman/Heinzerling (2004) contend that CBA can give a false sense of certainty, as it presents precise estimates and ratios that may not accurately reflect the inherent uncertainty and irreversibility of policy choices. CBA should therefore be conducted with supplementary uncertainty analysis (EPA 2011). Beyond the conceptual limitations, there are also empirical boundaries due to the limited availability of data and required inputs, as discussed below in the context of RIAs. This is most relevant for benefit monetarization, while compliance costs are typically easier to assess. Therefore, Sunstein (2019) dismisses benefit calculations and advocates instead for cost-efficiency analysis, which identifies the policy option that achieves a predefined policy goal at the lowest costs. Ackerman/Heinzerling (2004) argue that CBAs can be efficiency analyses that need to be complemented by other approaches that account for values and concerns beyond the narrow economic framework. An important extension to CBAs could be multi-goal analysis given that other goals other than efficiency matter. 1 1 The possibilities to use multi-goal analysis in the context of trade impact assessments will be discussed in later papers. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 19 3. CBA of health and safety regulations CBA of regulations concerning human health and safety typically follow an analysis process with several steps (Figure 1). The basis is the development of scenarios, which requires an initial understanding of the policy and its options and the identification of potentially affected benefit and cost categories (Boardman et al. 2018). Both benefit and cost categories can include various components when comprehensive social benefits and costs are considered. Therefore, most applications restrict the types of benefits and costs due to methodological and/or data limitations in the monetary valuation of these effects. On the one branch of the CBA analysis process of health-affecting policies, the benefit analysis starts with the assessment of changes to hazardous factors such as pathogen levels in the case of food safety standards or effects on pollutants in the case of environmental regulations (Crutchfield et al. 1997; EPA 2011). Next, the impact of these changes is translated to “health outcomes” (also called health endpoints) including variables such as premature mortality, hospital admissions, lost work or school days. In environmental regulation assessments, this step is conducted based on pollution exposure– response functions. In other cases, foodborne disease incidences and premature deaths data are linked to changes in pathogen levels, or doseresponse relations are assessed on health effects from the exposure to chemicals (ECHA 2016). These health outcomes can be used directly to calculate non-monetary benefit estimates such as Disability-Adjusted Life Years (DALYs) (WHO 2020). For a monetary measurement of benefits, several methodologies can be applied to express the changes in health outcomes in monetary terms. These can either monetize the effects as changes to incomes and expenditures (cost-of-illness approach, COI) or alternatively assess the value of changes to health risks (willingness to pay approach WTP). The WTP approach claims to be better aligned with policy goals as regulations reduce the risk of adverse health effects incurred by the affected population rather than preventing identifiable cases with certainty (Robinson/Hammitt 2018). In many applications, monetary methodologies are mixed to cover the full range of different health outcomes. Moreover, monetary and non-monetary approaches can be linked, as discussed below. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 20 Figure 1: Schematic of CBA of health-affecting policies Source: Authors’ own elaboration based on Crutchfield et al. 1997; EPA 2011 On the other side, cost analysis includes all costs associated with changes to regulations. These include in most CBAs at least direct costs borne by both industry and the consumers that are directly affected by the regulation, as well as administrative costs borne by taxpayers (Antle 1999). Direct costs are mostly compliance costs, that consist of one-time capital costs and recurring operating costs due to labor, input and maintenance expenditures. Compliance costs can be assessed using survey data from companies, which serve as the basis for an industry and sector-wide estimation (accounting approach, Antle 1999). In an engineering cost assessment, compliance costs are estimated based on input costs and quantitative models of production processes for plants with varying baseline characteristics, which are aggregated according to the heterogeneity of companies in the sector (EPA 2010). In addition, costs of a regulation might be borne by private households and costs for government entities might occur for inspections and quality controls. Beyond direct costs, economy-wide, indirect costs could be considered, which are incurred when goods and services will not be produced TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 21 and consumed, as regulation requires reallocation of resources (opportunity costs). Furthermore, distributive impacts and indirect effects can be assessed, which requires other models in the estimation of costs such as partial equilibrium, input-output or CGE models (op. cit.). All steps of the CBA assessment come with uncertainties, as they require assumptions and rely on the availability and quality of underlying data and parameters applied in the models. A CBA should therefore include a supporting uncertainty analysis (EPA 2011). TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 22 4. Methodologies of health benefit estimations in CBAs A major challenge for CBAs of regulations that affect human health and safety is “how to give value to changes in health status” (Mishan/Quah 2021: 260). Regulatory impact assessments employ various methodologies, encompassing both monetary and non-monetary measures, to assess different types of health outcomes (Table ). Table 1: Methodologies of Health Benefit Estimations in CBAs Effects Approaches Death Medical Expenses Productivity loss Disutility Monetary Cost of illness (COI) × × × Friction-Cost approach (FCA) × Willingness to pay (WTP) Mortality value of statistical life (VSL) ×* Morbidity × × × Nonmonetary Quality-Adjusted life years (QALYs) × × × Disability-Adjusted life years (DALYs) × × × Mixed Monetized quality-adjusted life years (MQALYs) ×* × × Notes: *Related to the reduction of mortality risks Source: Authors’ own elaboration The major difference among monetary metrics is the use of accounting approaches to measure the costs of adverse health effects and the value TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 23 of avoiding these effects. Studies often employ a combination of different approaches to account for key health endpoints such as premature mortality, medical expenses and opportunity costs resulting from foregone wages and productivity losses. U.S. federal agencies have historically used cost-of-illness estimates, which have its origins in the 1960s in the United States. Since the 1990s, the value of a statistical life (VSL) estimates, which express the value of reduced risk of death as a monetary measure, have replaced the incomebased COI measure of costs associated with premature death. Non-mon- etary measures such as the Quality-Adjusted Life Years (QALY) metrics are increasingly used to assess the comprehensive burdens of illnesses on society (Robinson/Hammitt 2013). 4.1. Cost-of-illness (COI) approach The basic approach to monetize the benefits of avoided injuries, illnesses and premature deaths is the estimation of the costs of illness This metric has two components and measures all the economic costs associated with treatment and time lost due to illness. The first component are direct costs of medical expenditure for physician services, medication, hospital stays and other treatment-related activities paid by patients, their families and/or third parties such as insurance companies and employers. Second, indirect costs as the value of forgone market income and lost productivity due to morbidity (the impact of the illness on the ability to work or perform daily activities) and premature mortality (the economic value of lost years of life) (Buzby et al. 1996; Crutchfield et al. 1997; Robinson/Hammitt 2013). The rationale for the productivity loss component in the COI is that “the withdrawal of an individual’s labor due to premature death or permanent disability results in a loss to society of that individual’s future production” (Pike/Grosse 2018: 4). The COI is also known as “human capital” approach, as illness- and death-related productivity losses are associated with changes to human capital (Pike/Grosse 2018). The underlying assumption of the indirect cost components in the COI approach is that the market goods and services produced by an individual during his lifetime reflect his value to society (Mishan/Quah 2021). The basis of calculations in many studies is the full cost of employee compensation that include payroll taxes and other employer-paid benefits (Robinson/Hammitt 2013). The COI estimate provides a relatively straightforward accounting approach to be applied and explained, which nevertheless relies on various economic data and projections. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 24 For instance, the costs of premature mortality are equivalent to the individual’s present value of future economic production over the expected remaining lifetime at a given age and sex. This estimation requires future market production projections based on labor force participation and employment rates, life table survival probabilities and hourly gross earnings, categorized by age and sex (Pike/Grosse 2018). The COI approach on indirect costs is not limited to wages major to avoid underestimation of total costs for society. U.S. studies typically consider the adverse effects of illness and premature death on unpaid work through opportunity cost (own or imputed wages) or replacement cost methods (average wage in similar services). COI studies in European countries are instead mostly focused on paid work, which is more relevant in cases of illness with short-term effects (op. cit.; Tranmer et al. 2005). Even though the COI is widely applied, the method is also criticized for i) methodological assumption, ii) the missing coverage of important burdens of health effects and utility/wellbeing (see also discussion on WTP methods below) and iii) the potential inaccurate reporting of costs for particular parts of the population. First, the COI assumes that the direct and indirect costs approximate the market value of reduced health, despite potential distortions in medical and labor markets (Kuchler/Golan 1999). The estimations mainly reflect current wage and medical expenditure structures, with limited consideration for projected changes in wages and medical advancements (op. cit.; EPA 2010). The COI also overlooks that individuals’ health expenditures contribute to contribute to the incomes in other sectors in a general equilibrium framework. Second, earnings are a proxy for the market value of livelihood rather than a value of life per se (Tranmer et al. 2005). The COI method does not cover other elements of illnesses such as pain and suffering that affect wellbeing (Kuchler/Golan 1999; EPA 2010). More generally, measuring the value of the individual to society in terms of income ignores the individualistic perspective of welfare economics and the theory of value (Freeman/Herriges/Kling 2014). Third, scholars emphasize the impact of unequal wage distribution, leading to the undervaluation of health for specific societal groups, notably women and migrants. COI measurements also tend to overlook the very young and elderly individuals who are often affected by illnesses and premature death, as the focus primarily centers on wage incomes. This is further connected to the uneven distribution of health expenditures, which closely correlates with income levels (Kuchler/Golan 1999). Similarly, the COI approach suggests that illnesses are more severe in high-income countries compared to low-income nations (Tranmer et al. 2005). TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 31 measures are time-based measures that are applied in cost-effectiveness assessments as an alternative to CBAs. Both measures claim to provide a way of measuring the overall impact of diseases and health conditions by combining both objective and subjective measures (Freeman/Herriges/Kling 2014; Hoffmann/Anekwe 2013; Robinson/Hammitt 2013). Conceptually, the non-monetary measures incorporate a trade-off. Instead of exchanging health-risk reduction against wealth as in the WTP approach, it is a trade-off between different health states of varying duration (Mishan/Quah 2021). For instance, the QALYs assume that preferences over health and longevity depend only on health consequences and do not depend on other characteristics of the individual or the risk as the WTP (Hammitt 2002). The QALYs are calculated by multiplying the duration of a health state as the objective element, by the utility score associated with that health state, and the so-called health-related quality of life (HRQL) as the subjective element of the measure. The HRQL is based on surveys of people’s self-reported levels of pain, discomfort or other negative impacts on quality of life resulting from a particular disease or health condition. The survey may also include assessments of the ability to perform daily activities of living or to participate in social activities. The HRQL outcomes range between 0 (death) and 1 (perfect health). QALYs estimate the overall welfare impact of health changes, including changes in both quantity (years of life) and quality of life. The effects of policies can be calculated by comparing the QALYs with and without intervention (Freeman/Herriges/Kling 2014; Hammitt 2002; Hoffmann/ Anekwe 2013). DALYs are calculated by summing the years of life lost (YLLs) due to premature mortality and the years lived with disability (YLDs). One DALY represents the loss of the equivalent of one year of full health. YLLs are calculated as the difference between a reference life expectancy and the age at death, weighted by a factor reflecting the reduced health in years of life due to disease or injury. YLDs are derived by multiplying the prevalence of a health condition by the disability weight associated with that condition and the duration of the condition. The disability weight reflects the severity of the health state on a scale from 0 to 1, where 0 is equivalent to full health and 1 is equivalent to death. DALYs are mainly used to compare the magnitude of different health problems within and across countries. In addition, it can be used to compare the burden of diseases that cause premature death but little disability (such as drowning or measles) to that of diseases that do not cause death TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 32 but do cause disability (such as cataracts causing blindness) (op. cit.; Robinson/Hammitt 2018; WTO 2012). 4.5. Interrelations of different benefit measures and mixed applications The different methodologies to assess the burdens of illness effects – or in other words the benefits of avoiding these adverse health effects – differ not only in the values they assign to different components of non-fatal and fatal health effects, but most importantly in their ability to capture specific components of these effects and in their theoretical foundations. While the COI is based on the human capital theory, the WTP-based methods are grounded in microeconomic welfare economics. It is, therefore, argued, that the latter methods are most suitable to the underlying theoretical framework of CBAs (Freeman/Herriges/Kling 2014; EPA 2010). However, most CBA and RIA studies combine the estimates of different methodologies to overcome the weaknesses of the single approaches. For instance, Hoffmann/Maculloch/Batz (2015) use the COI to capture medical expenditures and income losses and the VSL to monetize the mortality risk in order to derive the economic burden of major foodborne illnesses in the United States. The CBA of comprehensive regulations that target multiple issues such as the U.S. Clean Air Act (EPA 2011), the EU Clean Air Policy Package (Vrontisi et al. 2016) and the REACH (ECHA 2016) regulation also combine COI, VSL and morbidity WTP estimates to derive the benefits of these regulations (see details below). There are also attempts to combine monetary and non-monetary measures as both cover specific aspects of burdens of illnesses. An approach to monetizing QALYs and DALYs is to estimate the value of a statistical life year (VSLY). This involves assigning a monetary value to a single year of healthy life, which can then be used to monetize the gains in QALYs or losses in DALYs resulting from a particular intervention. For example, if the VSLY is estimated to be 100,000 dollars and a particular intervention results in a gain of five QALYs, the value of the intervention would be estimated to be 500,000 dollars (Freeman/Herriges/ Kling 2014). It is important to note that monetizing QALYs and DALYs is controversial, particularly because both approaches have different theoretical foundations, making the results inconsistent with the benefit-cost analysis TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 33 framework (Robinson/Hammitt 2013). Beyond other conceptual challenges, for instance, the use of constant VSLY over a lifetime, it remains debatable whether it is appropriate to use the VSL (WTP to reduce small risks of death) as a proxy for WTP to reduce risk of nonfatal illness (Hoffmann/Anekwe 2013). In contrast to the extensive discussions and numerous studies on the burden of illness or the benefits of regulations to reduce health risks, there is little description of the methods used to estimate the costs of regulations. These include compliance costs, administrative costs as well as opportunity and social costs (EPA 2010). In CBA and RIA, the cost estimations are often performed in a very case-specific way. As indicated in chapter 2, regulatory compliance costs borne by firms and administrative costs are most commonly assessed. Compliance costs, which consist of one-time capital costs and recurring operating costs due to labor, input and maintenance expenditures, can be estimated through company surveys about these cost categories (accounting approach) or through engineering cost assessments based on input costs and quantitative models of production processes (engineering approach) (op. cit.). Both methodologies result in sectoral cost estimations, by considering the heterogeneity of companies in the sector. CBA of regulations with broad impacts and multiple stakeholders in the economy, such as the U.S. Clean Air Act Amendments or the EU Clean Air Policy Package, assesses direct compliance costs through a combination of different cost estimations. For instance, in the CBA on the Clean Air Act Amendments (CAAA) (EPA 2011) regulations are assessed for six source categories that are responsible for emissions such as industrial point sources, on-road engines or electric generating units and for different types of emission. Unit costs were estimated by collecting information on the costs associated with specific control measures required by CAAA regulations, or costs were calculated using estimates of the average cost per ton of pollutant emission reduced. In addition, the costs were modeled in different EPA- own emissions reduction models. Similarly, cost estimations for the CBA of the EU Clean Air Policy Package require inputs from the air pollution mitigation model GAINS that estimates abatement costs for 5 key air pollutants for companies and private households in the EU (Vrontisi et al. 2016). Outside CBA and RIA studies, compliance costs to regulations are assessed in studies on exporters that have to comply with regulations and standards set by importing countries. These estimations are typically based on surveys and show that exporters have to carry significant compliance costs. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 34 For the example of agricultural exports from Tunisia to the EU, Tröster et al. (2023) show that export companies spend up to five percent of sales for wages of employees engaged in these processes and need more chemical and services inputs. The report also includes a literature review on compliance cost estimations for different countries and in the context of association agreements between the EU and Eastern European countries and in the EU enlargement in the 2000s. EPA (2010) recommends the use of partial equilibrium, econometric, input-output or CGE models to analyze other types of costs, including opportunity costs (which refer to the foregone benefits that result from allocating resources elsewhere) and social costs (which occur when costs are passed on to consumers through higher prices for goods and services). In particular, when sectors are highly interconnected with other sectors in the economy, the impact on total costs could be assessed by applying CGE models. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 35 5. Methodologies of regulatory cost estimations in CBA In theory, regulatory costs are derived from the concept of opportunity cost, which places a value on the inputs required to implement policies. Thereby, “the opportunity cost of using an input to implement a policy is its value in its best alternative use.” (Boardman et al. 2018: 31) In contrast to the numerous empirical studies that monetized the burden of illness - or in other words, the benefits of health-risk reducing regulations - and costs of adverse health effects, methodologies to estimate the costs of regulations are hardly ever described. For example, one of the standard textbooks on CBAs by Boardman et al. (2018) contains no chapter nor an extensive debate about regulatory cost evaluation. In many cases, only the type of costs associated with regulations are listed. These include compliance costs, administrative costs as well as opportunity and social costs (EPA 2010). As indicated in chapter 3, regulatory compliance costs borne by firms and administrative costs are most commonly assessed. Compliance costs, which consist of one-time capital costs and recurring operating costs due to labor, input and maintenance expenditures, can estimated through company surveys about these cost categories (accounting approach). Alternatively, engineering cost assessments based on input costs and quantitative models of production processes (engineering approach) (op. cit.). Both methodologies result in sectoral cost estimations, by considering the heterogeneity of companies in the sector. In cases of CBA of regulations with comprehensive effects and different actors in the economy, the direct compliance costs are assessed through a combination of different cost estimations. For instance, in the CBA on CAAA (EPA 2011) six source categories that are responsible for emissions such as industrial point sources, on-road engines or electric generating units, and different types of emissions are assessed. Unit costs were estimated by collecting information on the costs associated with specific control or abatement measures required by CAAA regulations, or costs were calculated using estimates of the average cost per ton of pollutant emission reduced. In addition, costs were modeled in different EPA-own emissions reduction models. Similarly, cost estimations for the CBA of the EU Clean Air Policy Package require input from the air pollution mitigation model GAINS that estimates abatement costs for five key air pollutants for companies and private households in the EU (Vrontisi et al. 2016). TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 36 Outside CBA and RIA studies, compliance costs to regulations are assessed in studies on exporters that have to comply with regulations and standards set by importing countries. These estimations are typically based on surveys and show that exporters have to carry significant compliance costs. For the example of agricultural exports from Tunisia to the EU, Tröster et al. (2023) show that export companies spend up to five percent of sales for wages of employees engaged in these processes and require more chemical and services inputs. The report also includes a literature review on compliance cost estimations for different countries and in the context of association agreements between the EU and Eastern European countries and the EU enlargement in the 2000s. The EPA (2010) recommends using partial equilibrium models, inputoutput econometric models or CGE models to analyze other types of costs, including opportunity costs (referring to the benefits lost by allocating resources elsewhere) and social costs (arising when costs are passed on to consumers through higher prices for goods and services). In particular, when sectors have strong linkages to other sectors in the economy, the overall cost effects could be assessed through CGE model applications. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 37 6. CBA applications in regulatory impact assessments (RIAs) The major applications of CBA are regulatory impact assessments (RIAs). Starting in the United States in the 1970s, RIAs are perceived not only as a tool but as a general concept of “evidence-based policymaking” (OECD 2020; Rantala/Alasuutari/Kuorikoski 2023). RIAs can be used to select the most suitable policy option for new regulations, but also for the re-assess- ment of current regulations and potential adjustments. RIAs are supposed to enable regulators and policymakers to identify market-oriented and less-burdensome alternative regulatory options, gather and analyze information to assess the impact of regulations on society, and to make regulatory decision-making more transparent and accountable (Nicola 2017). Various methods are available to assess the impact of regulations and their options, but CBA remains the most relevant methodology in RIAs. 2 CBA is perceived as a neutral and quasi-scientific numerical exercise that can legitimize policy actions (op. cit.). However, RIAs are tools that can be highly politicized, and the CBA outcome can be utilized for different purposes, as demonstrated during the Trump administration (Livermore/Revesz 2020). Therefore, organizations such as the OECD and the EU advocate for stakeholder involvement and for using the outcomes of CBAs as just one factor in the policymaking process. Government institutions have developed processes on how to conduct RIAs (Abelson 2020), such as U.S. agencies (EPA 2010; HHS 2016), the European Commission, national governments and ministries or the OECD (OECD 2020). As theoretical work on CBAs, numerous empirical CBAs and benefit estimations or estimations of variables such as social discount rates are conducted independently from RIAs, new conceptual approaches and methodologies affect government guidelines, which are therefore updated on occasion (Groom et al. 2022; McGartland et al. 2017). Although RIA are widely used in many countries, the origins and the applications and role of CBA vary. Nicola (2017) traces the first CBA applications back to the 20th century “socialization” of private law, which put forth economic and social aspects for regulations. 2 Occasionally the terms CBA and RIA are used interchangeably. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 38 The second strain emerged particularly in the 1970s and is linked to the Chicago Law and Economics approach to private law and the theoretical framework of neoclassical welfare economics. While the first strain has been the basis for the approach to RIAs, the second has prevailed in U.S. RIAs. However, the approaches to RIAs on both sides of the Atlantic have evolved further. 6.1. RIAs in the United States and the EU The growing importance of cost-benefit analysis (CBA) in the United States began in the 1970s during the Ford and Carter administrations. This was spurred by the emergence of major risk and environmental regulation agencies, including the Environmental Protection Agency (EPA), the National Highway Traffic Safety Administration, the Consumer Product Safety Commission and the Occupational Safety and Health Administration (OSHA) (Viscusi/Harrington/Sappington 2018). These agencies play a crucial role in creating regulatory actions by making rules for the implementation of laws by specifying requirements and conditions (ITU 2014). In theory, CBAs were supposed to make these regulations as efficient as possible. In 1982, the Reagan administration mandated that major new regulations must pass a monetized benefit-cost test, which was controlled by the Office of Information and Regulatory Affairs (OIRA), which is part of the White House’s Office of Management and Budget (OMB). The OIRA is responsible also for establishing and enforcing regulatory assessment standards. An official reason for the use of CBAs and the control mechanism at that time was to prevent undue influence from political forces on bureaucrats. However, the approach also faced criticism and controversy as a tool to justify deregulation (Antle 1999; Nicola 2017). During presidencies of the Democratic Party, the use of CBA in policymaking and the oversight by the Office of Information and Regulatory Affairs (OIRA) under the White House was solidified. The Government Performance and Results Act in 1993 under President Clinton restricted the need for RIAs to significant regulations that may have an annual effect on the economy of at least 100 million dollars or other substantial effects on jobs or specific sectors (McElfish 2017). Further, the Presidents Clinton, Obama and Biden strengthened qualitative methods, the role of behavioral economics and the consideration of distributional aspects in U.S. RIAs. Under President Trump, however, the deregulatory agenda focused on regulatory costs and for every new regulation, two existing rules should TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 39 be eliminated (Krutilla/Graham 2023; Livermore/Revesz 2020). Generally, advocates in favor of CBA as part of RIAs highlight the progressive development of the methodologies and the broadening of the concepts away from pure neoclassical welfare economics. Furthermore, Livermore/ Revesz (2020) emphasized that RIAs also enabled various environmental regulations in the first place because they demonstrated large net benefit to society. In the EU, several member-states such as the UK and the Netherlands were frontrunners of RIAs in national policymaking processes since the 1970s and 80s with a focus on assessing the regulatory impact on business. First attempts on the EU level followed this approach with the Business Impact Assessment (BIA) in 1986, which focused on compliance costs only and did not consider societal welfare impacts (Weiland 2022). Only in the late 1990s, the European Commission (EC) and several member states triggered a process to establish a systematic assessment of the potential impacts of proposed EU regulations before their adoption. Also growing skepticism against the EU in many member states was conducive to this, as the EC saw RIAs as a way to justify EU regulations as being cost-efficient (Pircher 2023). The EC subsequently adopted an integrated RIA model that covers the economic, social and environmental impacts of regulatory proposals as part of a wider “Action Plan for Better Regulation” in 2003 (Weiland 2022). The EU RIA approach has been continuously developed further in procedural and methodological terms, and the EC Impact Assessment Guidelines have been revised in 2009 and 2021. In the current system, the lead Commission service determines the need for a Regulatory Impact Assessment (RIA) early in the internal political validation process. An inception impact assessment (IIA) is published for all proposals subject to an impact assessment, outlining the policy problem, options and expected impacts. Following public feedback, the Commission conducts a full impact assessment, including data collection, consultations and expert input. The results are summarized in an impact assessment report reviewed by the Regulatory Scrutiny Board (RSB), which has been introduced as part of the Better Regulation Package of 2015. After internal consultation, the regulatory proposal and its accompanying impact assessment are published for feedback and sent to co-legislators for negotiation (OECD 2019). With the Better Regulation Initiative, the EC “seeks to design and prepare EU policies and laws in such a way that they achieve their objectives in the most efficient way. ‘Better regulation’ is not about regulating or de- TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 40 regulating. It is a way of working that allows political decisions to be prepared in an open and transparent manner, informed by the best available evidence, including via the comprehensive involvement of stakeholders.” (EC 2021a: 5). The evidence includes the “quantification of impacts, including costs and benefits” (ibid.: 7), but also opinions, stakeholder inputs as well as scientific and expert advice. Further, the evaluation methodologies include multi-criteria analysis and CBA and should consider distributional impacts (EC 2021b). There remains skepticism about the actual focus of the comprehensive RIA approach. Firstly, the EC initiated several programs to target “red tape,” for instance through the REFIT program, in which RIAs are used to evaluate current regulations, or the “one-in, one-out” principle for regulations in the same policy area (op. cit.). Further, the EC has recently communicated the renewed focus on a growth-enhancing regulatory framework as part of its competitiveness strategy (EC 2023). Secondly, the structure, the review processes and the influence of the Regulatory Scrutiny Board are criticized as biased toward the more business-friendly EC positions in the policymaking process (Pircher 2023). As the different origins and developments in RIAs and the applications of CBAs with these assessments indicate, there are several differences between the United States and the EU approaches. In the policy process, the U.S. RIAs do not apply to primary legislation. The U.S. agency system requires RIAs for the implementation of regulations. In the EU, RIAs are required for proposals of primary legislation. As the scope of the requirements and methodologies in the EU RIAs is broader, the role of monetized costs and benefits is much weaker compared to the United States (Krutilla/Graham 2023), as the EU approach is a system with multiple objectives (Weiland 2022). For instance, many U.S. agencies recommend in their guidelines to use specific VSL estimations for the monetarization of benefits (EPA 2014; HHS 2016), while the EU guidelines are open to different types of evaluation methods (EC 2021b) and only around 35 percent of EU RIAs have fully quantified benefits. Thus, Radaelli (2007) argues that the EU Better Regulation initiative is a “meta-regulation” discourse, which influences the regulatory process, rather than providing substantive regulation. Further, the creation of “evidence” as the basis for policymaking is much broader in the EU and is part of the political debate through negotiations and stakeholder participation (Capano/Lippi 2017). Rantala/Alasuutari/Kuorikoski (2023) therefore speak in the EU context of “RIA as evidential reasoning” rather than “evidence-based RIA.” TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 47 ((EC) No 178/2002) has been evaluated in the context of the REFIT program but without cost and benefit quantifications. Instead, surveys are used that indicate that the benefits exceed the costs of the regulation (EC 2018b). An example of a RIA on secondary food regulations is that on trans fat (EC 2019). It assesses social impacts through direct and indirect health care costs and disability-adjusted life years, given that the level of industrial trans fat intake has detrimental effects on health. The economic impacts include direct costs for businesses and public authorities, impacts on consumers such as higher prices, competitiveness and trade impacts as well as impacts on small and medium enterprises (op. cit.). The analysis of environmental impacts indicates that the EU RIAs are potentially more comprehensive and follow multi-goal objectives. For all impacts, monetized measures are used to compare different options including voluntary agreements or legally binding measures on the limits of trans fat contents, obligatory declaration of trans fats and the voluntary or legally binding prohibition of hydrogenated oils. The estimated cost and benefits show a clear preference for legally binding measures (Option 1b) or prohibitions (Options 3b) (see Table 3). Table 3: Costs and benefits of different trans fat policy options Source: EC 2019: 64 The health-related savings are direct healthcare costs related to the use of health resources (i.e., primary care costs, outpatient costs, emergency costs and medication used during hospitalization) and indirect costs related to the disease, such as the loss of productivity and informal care. The calculations of the benefits are conducted with an adjusted model by the EC’s Joint Research Centre (JRC) that links trans fat contents and coronary heart disease and reports changes in health treatment costs and disability-adjusted life years as a non-monetary benefit (ibid.: annex 4). Thus, this RIA does not rely on VSL estimates but rather uses cost of productivity losses due to premature deaths. The costs are calculated also based on a separate JRC model, which takes into account the specific TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 48 structure of the food sector. The effects on competitiveness and trade are assessed qualitatively, stating positive effects (better access to markets with regulations on trans fats) and negative impacts (impacts on imports, adverse effects from higher costs on competitiveness). In comparison, the CBA results play a major role in the U.S. RIAs on food regulations. They serve to propose a rule and are adjusted to the final rule and prominently show up in the final rule. The methodologies applied for benefits quantification are based on the VSL, which is also indirectly used to monetize the QALY/QALD measure. The EU RIA on a food safety standard is not showing up in the final regulations, even though the recommended legally binding limits are taken up. However, the RIA and the CBA calculations are one input in the policymaking process. Further, the methodologies to quantify benefits do not take up the VSL approach. 6.2.2. Safety and health regulations on chemicals CBAs are a common tool to inform public policymaking concerning the production, utilization and disposal of chemicals. In such analyses, the economic values of changes in human health and environmental outcomes from various policy alternatives are compared to the associated costs. Key inputs in this process are assessments of human exposure to specific chemicals and the expected health incidents (Chiu 2017). However, obtaining such data may not always be straightforward when calculating economy-wide effects. Prominent examples of chemical regulations and the accompanying CBAs within the context of policymaking processes are the REACH regulation in the European Union (EU) and the Toxic Substances Control Act (TSCA) in the United States. The EU’s REACH regulation, an acronym for registration, evaluation, authorization and restriction of chemicals, establishes a regulatory framework for the entire EU to manage and control the risks posed to human health and the environment by chemicals. The policymaking process for REACH began with a proposal from the European Commission in 2003, and the regulation became effective in 2007 (Gabbert et al. 2014; Getzner/Schulz-Zak 2018). The scope of the REACH regulation is comprehensive, encompassing most chemical substances and mixtures manufactured, imported or used within the EU market. This includes the uses by both industrial entities and private consumers and places particular emphasis on substances of very high concern (SVHCs), which are subject to evaluation, authorization or restriction processes. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 49 The CBAs within the framework of REACH are pertinent in two key respects. First, they are instrumental in quantifying the net benefits stemming from regulations that impact all chemicals and their users. This entails evaluating the comprehensive ramifications of the REACH regulation on various stakeholders, including chemical corporations, their workforce and private consumers. Secondly, CBAs are applied for assessing the costs and benefits associated with specific drivers of the regulations, such as the authorization or restriction of hazardous chemicals (Ciatti et al. 2021). On the benefit side, REACH CBAs typically include avoided health impacts from improved worker safety, avoided leisure or home accidents and productivity gains generated by registration, information, authorization and restriction processes. Furthermore, these analyses can factor in the productivity-enhancing effects of the REACH regulations, which stem from innovations, as well as environmental impacts (op. cit.). Cost estimations involve accounting for compliance expenses incurred by companies, notably the testing and registration costs, along with the operational costs associated with managing the newly established European Chemicals Agency (ECHA) and other regulatory bodies in member states. In the early stages, impact assessments, such as the one conducted by the European Commission (EC) in 2003, centered on the anticipated costs of REACH due to the limited information available regarding the properties of chemicals (EC 2003). This information was expected to be acquired progressively through the compilation of dossiers related to chemical risk in the course of REACH’s implementation. The initial EC CBA estimated costs of 2.3 billion euros for testing and registration, based on a business impact study. Employing a microeconomic model tailored to the chemical industry, the total costs for the sector and its upstream users were projected to reach up to 5.2 billion euros in scenarios involving the withdrawal of specific chemicals. Additionally, the EC CBA delved into discussions about the implications for innovation, competitiveness and the potential health benefits. Other studies conducted comprehensive CBAs, for instance, Getzner/ Schulz-Zak (2018) for the case of Austria. In this study, the authors compile the health benefits from various sources and integrate data from diverse sources. They assess the health effects on workers by estimating the proportion of cancer cases officially recognized as occupational diseases related to chemicals, as documented in the literature. Furthermore, the authors utilize a database detailing other occupational skin and respiratory diseases attributed to chemical exposure in Austria. The occurrences of allergies and multiple chemical sensitivities TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 50 as well as the cases of poisoning and burns in chemicals-related home accidents are also included. Out of these disease estimations, the corresponding types of medical treatments have to be derived and related to their costs. In the case of mortality from cancer, the authors employ VSL estimations for Austria. Furthermore, the study approximates environmental benefits by considering reduced expenses arising from decreased soil and water contamination, as well as the treatment of chemical waste. Lastly, the authors also factor in the advantages accruing to businesses due to productivity enhancements stemming from new production technologies. On the cost side, Getzner/Schulz-Zak (2018) assess the compliance costs associated with REACH by conducting surveys among companies within the chemical industry. The results include the expenditures on dossiers on chemicals, fees or consultancy services. However, these costs are not categorized by their sources, such as higher labor costs. The overall cost estimate is further corroborated by data from the European Chemicals Agency (ECHA), and two distinct scenarios are developed for all pertinent sectors. Overall, the authors report a net benefit of approximately 2.9 billion euros for the Austrian economy up to the year 2044, with a cost-benefit ratio of 1 to 10.6. This result is primarily driven by the VSL estimates concerning cancer mortality and the associated health costs incurred due to cancer cases. Another application of CBA in the context of REACH was undertaken by ECHA, specifically focusing on the costs and benefits of proposed chemical restrictions since 2000 (ECHA 2021). The basis are REACH restriction dossiers and the opinions provided by ECHA’s Committees for Risk Assessment and for the Socio-Economic Analysis, which are part of the restriction processes. Among the 33 restriction proposals included in ECHA (2021), all provided cost estimations, while only 12 quantified benefits. The primary sources of regulatory costs are substitution costs incurred by the industry when transitioning to alternative substances. Benefits, when quantified, are based on diverse methodologies, including VSL, costs associated with changes in IQ points, COI, WTP to avoid allergy and symptoms days and monetized values of QALY changes. In the 12 cases where both costs and benefits were monetized, the cumulative net benefits amount to 1.6 billion euros, a cost-benefit ratio of 1 to 4.6. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 51 6.2.3. Safety and health at work Regulations on occupational safety and health are rules and standards established by regulatory bodies to safeguard the well-being and safety of workers within their workplaces. These regulations have a twofold objective: preventing workplace accidents, injuries and illnesses, and fostering a safe and healthy working environment for employees. In the United States, the Occupational Safety and Health Administration (OSHA) is responsible for developing and enforcing workplace safety and health regulations on a federal and state level. Furthermore, OSHA conducts RIAs on proposed rules (Federal Register 2024). In the EU, the European Agency for Safety and Health at Work (EU-OSHA) is a specialized EU agency promoting and improving occupational safety and health across Europe. The EU-OSHA also compiles data and produces reports concerning occupational safety and health in Europe (EU-OSHA 2023). An illustrative example of a comprehensive RIA within this context is the evaluation of amendments to the EU directive regarding the protection of workers from risks associated with exposure to carcinogens or mutagens in the workplace (EC 2018a). This assessment delves into the economic, social and environmental effects of regulations of varying occupational exposure limit values (OELs) for five carcinogens. These carcinogens are of paramount significance in safeguarding workers and impact over one million workers within the EU. For each substance, the assessment encompasses a baseline scenario based on current policies and measures, alongside three alternative options, each with distinct OELs. This undertaking necessitates a multifaceted evaluation integrating exposure-risk relationships, which show the excess risk of developing cancer due to occupational exposure, and doseresponse relationships for non-cancer health endpoints. When combined with workforce data and assumptions such as the duration of exposure, the resulting outcomes encompass the number of new cases for each health endpoint over the 60-year assessment period, along with the corresponding direct, indirect and intangible costs (refer to Table 4 and methodological details in EC, 2018c). TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 52 Table 4: Approach to the monetization of ill health effects Source: EC 2018c: 18 For each carcinogen, a matrix containing all impacts for the different options is provided, which states costs and benefits relative to the baseline scenario. These impacts include a range of economic, social and environmental variables, some of which are quantifiable, while others have no or limited reported impacts. The economic impacts of exposure limits include compliance costs, benefits from reduced cancer cases and other diseases leading to cost savings for employers and the public sector (see table 4). Furthermore, the effects on the EU internal market, international competitiveness and small and medium enterprises are considered. The social impacts comprise avoided illness costs for workers and families, including intangible costs measured in terms of VSL and DALY. Overall, the presented RIA offers a comprehensive overview of the potential effects of different exposure limits for workers exposed to specific carcinogens. The RIA is also supported by methodological background information detailing the assumptions and models used to quantify costs and benefits, as well as the values associated with VSL and monetarized DALY (EC 2018c). Moreover, the impact matrix serves as the foundation for a multicriteria analysis aimed at identifying the preferred policy option. For this purpose, the various impact variables are combined to rank the policy options based on their effectiveness (measured by the number of deaths and cases of ill health), efficiency (net benefits) and coherence TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 53 (alignment with other EU objectives), as compared to the baseline scenario. This RIA structure is in accordance with the RIA guidelines of the European Commission (EC 2021a). 6.2.4. Environmental regulations Environmental regulations, such as the Clean Air Act, have significantly benefited from the application of cost-benefit analysis (CBA) in the policymaking process. The results provided by the CBA studies conducted by the Environmental Protection Agency (EPA) have served as compelling evidence that these regulations offer substantial societal advantages and net benefits, primarily driven by the reduction of illness effects caused by air or water pollution. CBA results of similar EU environmental regulations support these findings (Vrontisi et al. 2016). The Clean Air Act Amendments (CAAA) of 1990 made it necessary for the EPA to create regular CBA reports outside the regulatory policymaking process. These studies aim to offer detailed cost and benefits estimations and improvements in human health, welfare and ecological resources. In addition, an evaluation of the broader impacts on the U.S. economy is conducted using a CGE model. In the 2011 CBA on the CAAA (EPA 2011), the analytical process of CBA as discussed in chapter 3 is applied by the EPA. For the benefit estimations, first emissions are estimated and used in an air quality model. Next, the air quality results are related to health and other welfare outcomes, which are monetized if possible. The costs are derived in a modeling approach for different sectors and actors, as discussed in chapter 5. The comparison of the cost and benefit estimations for the period from 1990 to 2020 show clear positive net benefits. The main benefits estimate exceeds costs by a factor of more than 30 to one. The monetized benefits are driven primarily by the avoided mortality due to better air quality and especially lower levels of particulate matter due to stricter emission rules. According to the CBA, the CAAA regulations prevent 230,000 premature deaths annually. This avoided mortality is monetized with VSL estimations, which sum up to more than 90 percent of the estimated benefits. 5 Given that the CAAA form a comprehensive regulation that affects all sectors of the U.S. economy, including industry as well as individual households, the EPA uses a CGE model to supplement the CBA (ibid.: chapter 8). The EPA has developed its own CGE model (EMPAX-CGE) 5 The use and results of CBA by the EPA have also been subject to criticism, particularly during the Trump administration (McCarthy/Lattanzio 2017) TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 54 based on standard, neoclassical assumptions for the U.S. economy as a whole and five U.S. regions. On the benefit side, changes in the medical expenditures associated with pollution-related illness, in workers’ time endowment due to pollutionrelated mortality, and in workers’ time endowment due to pollution-related morbidity are incorporated into the model. Thereby, the major channels of benefit effects are changes in the labor supply and changes in consumption patterns. On the costs side, the expenditures assessed in the CBA are included. The CGE model results are reported for the expenditure effects, which would cause a decline in U.S. GDP by 0.5 percent. When taking into account positive labor supply and consumption effects due to avoided mortality and morbidity, GDP would only grow slightly by 0.02 percent. Thus, the macroeconomic benefit effects can compensate for the expenditure effects, but the large cost-benefit ratio as stated in the CBA which was driven by the VSL values is not accounted for in the CGE modeling exercise (ibid.: 8–23). 6.3. Insights on RIAs Regulatory Impact Assessments (RIAs) have gained global significance as they serve as fundamental tools for evidence-based policy development. However, disparities exist in their utilization between the United States and the EU. In the United States, cost-benefit analyses are integral to rulemaking, where federal agencies define rule specifications and conditions. CBAs are adapted during this process to quantify the concrete net benefits associated with various rule designs as shown in the example of food safety regulations. On the other hand, in the EU, RIAs are mandated for primary legislative proposals. EU RIAs encompass a broader range of requirements and methodologies, with a relatively diminished emphasis on monetized costs and benefits compared to the U.S. approach (see for instance the EC RIA the protection of workers from risks associated with exposure to carcinogens or mutagens in the workplace in 6.2.4). Nevertheless, RIAs became more important in the EU policymaking over the last two decades. The various examples of Regulatory Impact Assessments (RIAs) presented in this chapter shed light on recurring trends in the outcomes and the inherent challenges faced by RIAs. Firstly, it is evident that benefit calculations are significantly influenced by VSL estimates. While this approach is predominantly employed in U.S. RIAs, it is increasingly finding application in the EU as well. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 55 Secondly, it is crucial to recognize that each RIA is a distinct evaluation, intricately linked to the nature and complexity of the regulation under scrutiny, data availability and the methodological preferences of the researchers overseeing the assessments. These factors heavily shape the RIA process and its outcomes. Thirdly, the multifaceted nature of regulations often renders certain aspects impossible to quantify in monetary terms. To address this, some EU RIAs have tried to recognize the aspects that cannot be measured precisely by including qualitative evaluations using multi-criteria analysis (see also 6.2.3). This approach allows for a more comprehensive evaluation of the regulation’s effects, transcending the limitations of purely monetary assessments. Finally, selected RIA studies also aim to include economy-wide effects and apply CGE models. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 56 7. Discussion and outlook The CBA approach has gained much attention as a way to evaluate the impacts of regulations. Even though the CBA approach is criticized due to its theoretical foundations, as well as due to its conceptual and empirical limitations, the rationale for and the procedures of CBAs question the basic assumptions of how regulatory changes are taken up in conventional CGE modeling of trade impact assessments. From the CBA perspective, the conceptual approach on the role and effects of regulations adopted in trade impact assessments appears incomplete, since regulatory measures are perceived solely as restrictions on business activity and thus as barriers to trade. By integrating the CBA perspective into trade modeling, it becomes clear that changes in regulations through FTAs affect both benefits and costs. Boardman et al. (2018) list major steps and basics of CBA that provide important entry points to how CBA approaches and applications in RIAs can be taken up in the context of FTAs and NTMs modeling. First, the purpose of a CBA needs to be explained. This relates to the question about the rationale for considering a change in a policy. In standard CGE models, the rationale for changes in regulations is based on the perception of regulatory differences or NTMs as “sand in the wheels” or “frictions” to trade. Changes in NTMs could therefore foster trade, lead to a more efficient allocation of production and consumption, and thus increase welfare. Other policy impacts are not considered. Beghin et al. 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WTO – World Trade Organization (2012): World Trade Report 2012. Geneva: WTO. All websites were last visited on May 7, 2024. TRÖSTER / VON ARNIM / RAZA: BENEFITS AND COSTS OF REGULATIONS | 67 Authors Werner Raza is Director of the Austrian Foundation for Development Research (ÖFSE) in Vienna. His work areas are international trade, development economics and policy. Bernhard Tröster is Senior Researcher at the Austrian Foundation for Development Research (ÖFSE) in Vienna with a focus on commodities and development, global value chains and production networks, and international trade. Rudi von Arnim is Professor of Economics at the Department of Economics at the University of Utah in Salt Lake City. His research interests extend from macroeconomic theory, with a focus on the links between growth, the business cycle and the distribution of income to economic development, with a focus on structural heterogeneity. ISSN 2509-2359