New Bottom Line Volume 3.17 – Risky Business: Who Accounts for Regulations?

September 5, 1994

As I noted recently, leading US environmental organizations have undertaken an unprecedented joint campaign to turn back what they describe as “an all-out effort to weaken our most important environmental laws.” The outcome of this battle royal could have profound impact on the future course of environmental law–and on the profits of the businesses that must respond to it.

As the environmental coalition’s letter notes, “The opponents of strong environmental laws… have reduced their arguments to three simple but misleading anti-environment messages. We examined the “Takings” arguments previously. In this column, we consider the second argument: “Cost-Benefit Analysis and Comparative Risk Assessment.” (We’ll look at the question of ‘Unfunded Federal Mandates’ in coming weeks.)

The coalition charges that “Polluters want to force the government to justify the benefits of environmental safeguards in monetary terms.” The “free-market” advocates challenging environmental laws would put it a bit differently. They propose that all environmental laws and regulations be subjected to cost-benefit analysis (CBA), which would identify the costs of meeting a regulation, quantify the potential benefits, and ensure that the costs don’t exceed the benefits. In addition, they call for a process of comparative risk assessment (CRA), which would measure the risks being regulated, compare them to other risks, and ensure that public resources were being directed to controlling the most significant risks.

Like the “Takings” argument, these perspectives sound quite reasonable, but unravel on closer examination. One problem with cost-benefit analysis is that it is easier to measure costs than benefits; the costs are often more definable and predictable than the benefits. The benefits, moreover, can be hard to measure; what price would you put on your own child’s health? In addition, an accurate cost-benefit analysis would have to consider the economic costs of NOT protecting environmental quality–health care, lost wages, property damage and cleanup costs, reduced tourism–which the CBA advocates often neglect.

Cost-benefit analysis is not only expensive, the coalition notes; it is not accurate, both due to weaknesses in data and the difficulty of translating everything into financial terms. (Who was it who said that “a fool is someone who knows the price of everything and the value of nothing”?) The effect, if not the intent, of the right wing CBA challenge may be to “tie agency officials in knots”–to which Rush Limbaugh may say “great,” but most Americans strongly and consistently favor strong environmental protection over political gridlock.

Comparative risk assessment (CRA) is another methodological quagmire, because it inevitably compares apples & oranges–not only different domains of risk, but also on comparing risks that are largely socially preventable, like pesticides in foods or toxic emissions in air and water, with risks that are essentially individually preventable, like sports injuries. “Risk zealots,” the environmentalists maintain, “would stop us from reducing preventable risks just because we cannot eliminate all risks.” Moreover, they would give the benefit of doubt to polluters, rather that to people and ecosystems. The constitutional protection of “innocent until proven guilty” was meant for people–not for chemicals.

In some ways, though, both sides are on thin ice. The economistic arguments are flawed, for the reasons noted above. But the environmentalists seem to miss the unpleasant reality that people and institutions inevitably do make such choices, whether in a logical, structured way or more intuitively. Because money, time and attention are finite, we inevitably prioritize where to put those resources. Decision making tools may be flawed, facts may be inadequate, but “decision under uncertainty” remains an inescapable task of managers, both public and private.

The argument over which risks to focus on, which to tolerate, or how much to spend to prevent or mitigate them, however, is only partly methodological. It’s too easy for humans to be “smart but not wise” as Lloyd Kahn put it–masters of technique but missing the real point. Perhaps it’s time for the wisdom of common sense; we just have to figure out how to translate common sense into economic viability.

The environmentalists say “we can’t foul our nest.” The challengers say “we can’t destroy commerce.” Well, like the old chewing gum commercial said: “Stop, you’re both right.” And in that paradox is born the answer–which provides a powerful opportunity for businesses that are prepared to grasp the paradox, and find a way to do business in a way that profits from it.

The traditional business posture has been to side with the deregulators, to “get government off our backs”–externalizing social impact and cleanup costs. But in many ways, the interests of business–consumers themselves, and made up of people who need clean air to breathe–lie with sensible environmental regulation, and with the innovations that make partners of prosperity and environmental quality.

(c) 1994 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

May be posted intact–including this notice–in any non-commercial forum.
Please inquire at “reprint_rights at natlogic dot com” before reproduction in any commercial forum.