We Overestimate How Much Environmental Regulations Cost – And Here’s Why

December 11, 2018

By Alice Irene Whittaker-Cumming

The moment is right to discuss the costs of environmental regulations. Across Canada, the national debate around carbon pricing continues to heat up as we head into an election year. Fact and opinion continue to swirl about which policies are best for both the economy and the environment. Recent polling data show that Canadians overwhelmingly want both a protected environment and a vibrant economy.

In October 2018, the government announced Climate Action Incentive payments that will put money back into household pockets in certain provinces. This is a key component of the federal government’s comprehensive national carbon pricing plan, in their effort to move Canada to a low-carbon economy. In the same month, climate change made international headlines more than usual: William Nordhaus and Paul Romer received the Nobel Prize for Economics in recognition of his work on carbon pricing, and the United Nations brought attention to the urgency of climate change action in their 5th Intergovernmental Panel on Climate Change report. Later in the Fall, both Ontario and British Columbia released their climate plans with different approaches around carbon pricing.

Public conversation around the right climate action has sustained in the wake of these high-profile moments, and seems to be more widespread than usual. At the same time, environmental regulations remain deeply contested and cause concern for some that the costs will simply be too high. 

That is why Smart Prosperity Institute is updating and re-releasing an updated and expanded version of our 2016 publication on overestimating the cost of compliance with environmental regulations, part of the Green Tape Measures Up series. We believe it is critical to look retroactively at positive and negative regulatory impacts, to inform our national conversation as well as smart policy design. We need to test our assumptions and examine past analysis and case studies while asking ourselves, “Do environmental regulations cost as much as we think they do?”

Estimating the cost of regulations is not a perfect science. It Is difficult to determine what happens in the absence of regulation, as well as to separate myriad complex factors from the equation. That said, we can look retroactively at real-world case studies such as the Light Duty Vehicle Greenhouse Gas Emissions and Standards, Sulphur in Gasoline Regulations, the Acid Rain program, the Montreal Protocol and the Clean Air Act. Examining how these regulations played out, it becomes clear that the cost of environmental regulations is not nearly as high as we think. In fact, costs of environmental regulations are often overestimated by at least double, and often by a factor of 10.  We tend to overestimate the costs to companies and households, just as we underestimate the social and environmental benefits. And what’s more: these benefits outweigh the cost. 

There are a number of reasons why we overestimate these costs. One is our inability to account for the potential for innovation, which history shows is a creative response to regulations. A second reason is the challenge in identifying baselines or control groups. And a third reason is the lack of accounting for flexibility provisions incorporated into regulatory design, which are sometimes added or changed at a later stage of the regulatory process.

The outdated traditional view pits the environment against the economy, inferring that regulation is detrimental to economic prosperity. Yet an alternative view exists and persists. One that says potential economic benefit occurs from innovation as a creative response to regulation. Instead of fearing the loss of the status quo, this view says that change and disruption are a part of the process – and they lead to clean innovation and growth. Demand is growing rapidly for clean technologies, practices and products - for clean innovation - and represents both a critical environmental and economic opportunity.

Rarely before has there been more need for balanced and credible analysis of the cost of environmental regulations. This Policy Brief helps build a better understanding of the cost and benefits, so that we can design policy that is more efficient, effective and equitable. We can design environmental regulations that spur strong economic performance and a more sustainable relationship to the environment. After all, healthy ecosystems are at the root of a strong and sustainable economy.