March 8, 2022
Cost-Benefit Analysis in Federal Agency Rulemaking
Since the 1970s, federal agencies have been required to
requirements by issuing various guidance documents, most
consider the costs and benefits of certain regulations that
significantly Circular A-4, which OMB issued in 2003.
are expected to have large economic effects. Under current
requirements, most agencies are to design regulations in a
Congress has enacted a handful of statutes with more
cost-effective manner and ensure that the benefits of their
narrowly applicable requirements for regulatory impact
regulations justify the costs.
analysis. These include the Regulatory Flexibility Act,
which requires agencies to consider the effects of their rules
Cost-benefit analysis of regulations is primarily required by
on small businesses; the Paperwork Reduction Act, which
Executive Order (E.O.) 12866, which was issued in 1993
requires agencies to estimate the paperwork burden their
and remains in effect. E.O. 12866 is one of the analytical
rules will impose; and the Unfunded Mandates Reform Act,
requirements that are part of the federal rulemaking
which requires agencies to consider whether their rules will
process, which includes other executive orders, guidance
impose an unfunded mandate on state and local
documents from the Office of Management and Budget
governments.
(OMB), and statutory requirements.
The Role of Cost-Benefit Analysis in Regulatory
This In Focus provides a brief overview and discussion of
Decisionmaking
the key cross-cutting executive orders and statutes that
Generally, the role of cost-benefit analysis in federal
require cost-benefit and other types of regulatory impact
rulemaking is not necessarily for the analysis to be
analysis in the federal rulemaking process.
determinative or dispositive. That is, agencies do not
typically make decisions solely on the outcome of their
Cost-Benefit Analysis vs. Regulatory Impact
cost-benefit analyses. Other factors will likely be part of an
Analysis
agency’s regulatory decision, such as statutory mandates
Cost-benefit analysis involves describing the potential costs
and considerations, as well as the political and policy
and benefits of a regulation in quantified and monetized—
priorities of the current Administration. Regulatory impact
that is, assigned a dollar value—terms when possible, and
analysis, including cost-benefit analysis, may be viewed as
otherwise in qualitative terms. Then, the potential costs and
one of the key inputs into federal agencies’ regulatory
benefits of a rule are compared, with regard to both the
decisions.
quantified and qualitative considerations. The analysis
federal agencies engage in during the rulemaking process
Executive Order 12866
often includes both quantified and non-quantified effects.
As noted previously, the principal analytical requirement
for most agencies’ regulations is in E.O. 12866.
The phrase regulatory impact analysis is sometimes used
interchangeably in general discussion with the phrase cost-
Section 1 of E.O. 12866, entitled “Statement of Regulatory
benefit analysis. However, regulatory impact analysis is
Philosophy and Principles,” references the consideration of
actually a broader, more encompassing term that includes
costs and benefits for all rules. For example, it encourages
cost-benefit analysis and other types of quantitative and
agencies to design their regulations “in the most cost-
qualitative analysis, such as cost-effectiveness analysis and
effective manner to achieve the regulatory objective” and to
distributional analysis.
ensure that the benefits of a regulation justify the costs.
Overview of Regulatory Cost-Benefit
Section 6(a)(3)(B) of the order requires agencies to assess
Analysis Requirements
the potential costs and benefits of “significant” rules and to
The principal requirements of the federal rulemaking
submit this assessment along with each rule to OMB’s
process were established by the Administrative Procedure
Office of Information and Regulatory Affairs (OIRA) for
Act (APA) of 1946. The APA itself does not include an
review. “Significant” rules are those that may:
explicit requirement for cost-benefit analysis, however.
Rather, the primary cross-cutting requirement for agencies
(1) have an annual effect on the economy of $100
is in E.O. 12866, which requires covered agencies to
million or more or adversely affect in a material
conduct cost-benefit analysis for “economically significant”
way the economy, a sector of the economy,
rules. E.O. 12866 also requires a less-detailed assessment of
productivity, competition, jobs, the environment,
costs and benefits for a broader category of rules
public health or safety, or State, local, or tribal
(“significant” rules), and it contains a number of
governments or communities; (2) create a serious
considerations (“principles”) relating to costs and benefits
inconsistency or otherwise interfere with an action
for all rules. OMB has expanded on the executive order’s
taken or planned by another agency; (3) materially
alter the budgetary impact of entitlements, grants,
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Cost-Benefit Analysis in Federal Agency Rulemaking
user fees, or loan programs or the rights and
repealed E.O. 13771 and issued a presidential memorandum
obligations of recipients thereof; or (4) raise novel
“reaffirm[ing] the basic principles” of E.O. 12866.
legal or policy issues arising out of legal mandates,
the President’s priorities, or the principles set forth
E.O. 12866 and Independent Regulatory Agencies
in the Executive order.
The analytical requirements in E.O. 12866 apply to most
regulatory agencies, but they do not apply to the statutorily
Although the order indicates agencies should conduct an
designated “independent regulatory agencies” that are listed
assessment of costs and benefits for significant rules, the
in Title 44, Section 3502(5), of the U.S. Code and include,
key requirement for cost-benefit analysis in E.O. 12866 is
for example, the Federal Reserve Board and the Federal
in Section 6(a)(3)(C), which requires a more rigorous and
Communications Commission. However, the independent
detailed cost-benefit analysis for “economically significant”
regulatory agencies may be required to conduct regulatory
rules. “Economically significant” rules are those that fall
impact analyses under their own authorizing statutes or
into the first category of “significant” above (e.g., rules that
under the cross-cutting statutes discussed below.
have a $100 million effect on the economy).
Presidents have chosen to exempt these agencies from E.O.
Specifically, Section 6(a)(3)(C) states that agencies should
12866, because Congress designed them to be independent
assess the costs, benefits, and “reasonably feasible
of the President and, by extension, OIRA and OMB. In
alternatives” to the planned rule. The assessment is to
recent years, some Members of Congress and others have
include “to the extent feasible, a quantification” of costs
supported extending the analytical requirements of E.O.
and benefits that are anticipated from a regulation, as well
12866 to the independent regulatory agencies.
as the costs and benefits of “potentially effective and
reasonably feasible” alternatives.
Other Statutory Requirements for Cost-
Benefit and Regulatory Impact Analysis
OMB Circular A-4
Congress has also enacted various statutory requirements
In September 2003, OMB finalized Circular A-4 on
for agencies to consider specific regulatory impacts.
“Regulatory Analysis,” which states that it was “designed
to assist analysts in the regulatory agencies by defining
The Regulatory Flexibility Act (RFA) of 1980 requires
good regulatory analysis … and standardizing the way
agencies to conduct regulatory flexibility analyses for
benefits and costs of Federal regulatory actions are
proposed and final rules that will have a “significant
measured and reported.” The circular recommends that an
economic impact on a substantial number of small entities”
analysis include elements such as
(defined as small businesses, governmental jurisdictions,
and certain nonprofit organizations). For proposed rules,
a statement of the need for the proposed action,
such an analysis is referred to as an “initial regulatory
including any statutory or judicial directive;
flexibility analysis,” and for a final rule, it is a “final
an examination of alternative approaches; and
regulatory flexibility analysis.” These analyses are to
include elements such as a description and estimate of the
an evaluation of qualitative and quantitative benefits and number of small entities to which a rule would apply and “a
costs of the proposed action and the main alternatives.
description of the steps the agency has taken to minimize
The circular also provides guidance on when varying
the significant economic impact on small entities.”
analytical approaches may be appropriate (e.g., when to use
cost-benefit analysis vs. cost-effectiveness analysis).
The Paperwork Reduction Act (PRA) of 1980 established a
Circular A-4 remains the current OMB guidance for
requirement for agencies to estimate the paperwork burden
resulting from regulations and other actions that result in a
agencies preparing analyses under E.O. 12866.
collection of information. The PRA is not a rulemaking
Other Developments Related to E.O. 12866
statute per se, as its primary purpose is to empower OMB to
monitor and reduce the government’s overall paperwork
In 2011, President Barack Obama issued E.O. 13563, which
emphasized his Administration’s support for E.O. 12866.
burden. However, many rules contain a reporting or
E.O. 13563 encouraged agencies to choose regulatory
disclosure requirement, which would trigger the PRA’s
alternatives that “maximize net benefits” and to tailor their
requirements for estimating paperwork burden and
regulations “to impose the least burden on society,
obtaining OMB approval for the information collection.
consistent with obtaining regulatory objectives, taking into
account, among other things, and to the extent practicable,
Title II of the Unfunded Mandates Reform Act of 1995
added requirements for agencies (other than independent
the costs of cumulative regulations.”
regulatory agencies) to analyze costs resulting from
In January 2017, President Donald Trump issued E.O.
regulations imposing federal mandates upon state, local,
13771, which established a “one-in, two-out” requirement
and tribal governments and the private sector. This
for agencies to eliminate equivalent costs associated with at
analytical requirement is triggered when a rule may result
least two previously issued rules when issuing a new rule.
in the expenditure of over $100 million (adjusted annually
for inflation) in any one year. If an agency anticipates such
E.O. 13771 also created a regulatory budgeting program,
which involved setting cost caps for agencies’ new
a mandate, it is to conduct an assessment of quantitative
regulations. Although this order shifted focus more onto
and qualitative costs and benefits and other economic
regulatory costs, it did not directly amend or repeal E.O.
effects of the mandate.
12866. On January 20, 2021, President Joseph Biden
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Cost-Benefit Analysis in Federal Agency Rulemaking
Maeve P. Carey, Specialist in Government Organization
and Management
IF12058
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