Reforming Cost-Benefit Calculations Under Circular A-4: Implications For Environmental Rulemaking

Would you rather pay your bills tomorrow or next year? What about your paycheck? Intuitively, most people want delayed costs and immediate benefits, and so want checks now and liability later. This poses a challenge for policymakers when weighing the costs and benefits of a new policy: is reasonable to pay 90 cents today for a dollar tomorrow—and what if tomorrow's dollar is a benefit other than money? When federal agencies undergo notice-and-comment rulemaking, they have to make these calculations. Immediate costs and benefits must be considered, while future factors are discounted to their present value to account for the intervening time. Selecting the discount rate can have material implications for any economic analysis, and especially for environmental rules which tend to involve front-loaded compliance costs and primarily future benefits.