On Balance: Two quick fix solutions to baseline estimation challenges: good enough for practical analysis?
Since 2010, I have been a practitioner of practical benefit-cost analysis at Environment and Climate Change Canada (ECCC), working with colleagues to inform policymakers and stakeholders about the likely impacts of proposed federal environmental regulations. I would like to examine a key issue in developing estimates of the benefits and costs of these regulations: the development of the baseline in a benefit-cost analysis.
In recent years, a number of articles in the Journal of Benefit Cost Analysis have addressed the question of how best to conduct—and evaluate—a regulatory benefit-cost analysis. Two of these subsequently resulted in posts to On Balance: Consumers Guide to Regulatory Impact Analysis, by Susan Dudley, and Two Decades of Benefits and Costs: Promise and Pitfalls, by Clark Nardinelli. Another article by Richard Morganstern, Retrospective Analysis of U.S. Federal Environmental Regulation, examines various estimates for environmental rules and analyzes issues relevant to developing credible baselines.
These articles remind us that baselines in a regulatory impact analysis can be slippery: in estimating benefits and costs the comparison is not between before-and-after regulation but between a counterfactual with-and-without regulation. In turn, the “counterfactual” should take into account the effect of other regulations, the evolution of the market in the absence of regulation, and other external factors. In short: developing this counterfactual requires understanding how the baseline has been changing and how it is likely to change.