How agencies weigh costs and benefits before regulating business

Federal regulatory agencies must calculate the financial burden of every significant new rule before imposing it. But the way they do these calculations—and what counts as a benefit or a cost—has become a flashpoint in debates over how much to regulate business. The methodology governs whether rules protecting health and the environment get adopted or shelved.

When an agency wants to adopt a rule affecting the economy by $100 million or more annually, it must conduct a cost-benefit analysis. This threshold, set by Executive Order 12866 in 1993, applies to major environmental, health, safety, and financial regulations. The agency estimates what compliance will cost affected businesses and individuals, what benefits the rule will produce, whether alternatives would work better, and whether the benefits justify the costs.

The $100 million threshold and OIRA review

The analysis goes into a Regulatory Impact Analysis (RIA), a document that can run hundreds of pages. The Environmental Protection Agency, Occupational Safety and Health Administration, and Food and Drug Administration routinely produce RIAs of this magnitude for major rulemakings. These documents get submitted to the Office of Information and Regulatory Affairs (OIRA), the White House office that reviews all significant rules before they are published for public comment. OIRA circulates the analysis to other agencies and can delay or reject rules it deems inadequately justified.

The review process itself takes time. Historically from 1994 to 2011, OIRA reviews averaged 51 days. In recent years since 2020, average completed reviews have taken approximately 72 days. But some politically sensitive regulations remain under OIRA review for months or even years, extending the total rulemaking timeline significantly.

The nine-step analytical process

Agencies follow a structured approach. According to OMB guidance, conducting a proper regulatory impact analysis involves nine steps: describe the need for the regulatory action; define the baseline against which to measure changes; set the time horizon of analysis; identify a range of regulatory alternatives; identify the consequences of each alternative; quantify and monetize the benefits and costs; discount future benefits and costs to present value; evaluate benefits and costs that cannot be quantified in monetary terms; and characterize uncertainty in the results.

This framework applies across agencies. The EPA, when tightening air pollution standards, estimates what equipment factories must buy and what health benefits result from reduced illness and premature death. The CFPB, when setting consumer financial protections, weighs compliance costs against benefits to borrowers and savers. The FDA, reviewing drug approvals, assesses whether a drug's expected health benefits outweigh its risks, using qualitative judgment alongside quantitative data.

What counts as a cost or benefit

Costs are relatively straightforward: a new workplace safety rule might require inspections, equipment upgrades, or paperwork. The EPA estimates compliance costs from pollution control equipment or process changes. Financial regulators calculate how lending restrictions will affect credit availability and lending volumes.

Benefits are harder to measure. How much is a life saved by a pollution reduction worth? How should a rule be credited for protecting water that no one currently drinks from, or for preventing harm years in the future? These questions determine whether a rule passes its cost-benefit test. The EPA values a statistical life at approximately $7.4 million to $12.5 million depending on the rule and year. When the agency tightened ozone standards in 2015, it estimated compliance costs of $1.4 billion but health benefits of $2.9 billion to $5.9 billion annually. Avoided premature deaths accounted for 94 to 98 percent of that benefit figure.

The discount rate debate

How to value benefits and costs occurring years in the future is the central technical debate in cost-benefit analysis. All agencies convert future money to present-day dollars using a discount rate. A higher discount rate makes future benefits seem less valuable today. A lower discount rate gives them more weight.

For decades, federal guidance used 3 percent and 7 percent discount rates. In November 2023, the Biden administration updated OMB Circular A-4, the seminal guidance document. It lowered the default discount rate to 1.7 percent, calculated from Treasury Inflation Protected Securities yields. It also introduced declining discount rates for very long-term effects: 2.0 percent for impacts in 2023 through 2079, gradually falling to 1.1 percent for impacts in 2164 to 2172. This change made long-term health benefits like disease prevention count for substantially more in the analysis.

The 2023 update also expanded what counts as a benefit. It allowed agencies to base regulations on "promoting distributional fairness and advancing equity," not just correcting market failures. It permitted analysis of how rules affected subgroups of people, not just aggregate net benefits. It allowed consideration of "benefits and costs to people outside the United States." And it strengthened encouragement to analyze benefits that cannot easily be monetized.

The 2025 reversal and new constraints

On January 31, 2025, President Trump issued "Unleashing Prosperity Through Deregulation." The order rescinded the 2023 Biden updates and reinstated the 2003 OMB Circular A-4, restoring the 3 percent and 7 percent discount rates. This change makes future benefits appear less valuable in the analysis and is expected to make rules protecting long-term health—like those addressing climate, clean air, and toxic substances—more difficult to justify. The order also eliminated the requirement to analyze effects on specific subgroups and removed permission to count benefits to people outside the United States.

Traditionally, Executive Order 12866 applied only to agencies within the executive branch. On February 24, 2025, Trump issued Executive Order 14215, extending OIRA review and cost-benefit analysis requirements to independent agencies like the Securities and Exchange Commission, the Consumer Financial Protection Bureau, and the Federal Communications Commission for the first time. This means agencies like the CFPB now must justify new rules through the same economic analysis and White House review process as traditional agencies.

The same January 2025 order imposed a new constraint on the entire regulatory system. For every new regulation an agency finalizes in fiscal 2025, it must eliminate regulations costing at least ten times as much. This exceeds the Trump administration's own "two-for-one" rule from 2017. The order also requires that all new regulations in each fiscal year produce net cost reductions. Starting in fiscal 2026, OMB will assign each agency an annual regulatory cost allowance, functioning as a regulatory budget. Agencies can fund new rules only by eliminating old ones or by staying under their allowance. The 2026 regulatory plan targets 702 federal rules with a projected $1.5 trillion in cost savings, with roughly $1.1 trillion in net savings finalized by July 2, 2026, the vast majority from EPA's single rule repealing the endangerment finding for greenhouse gas emissions.

The measurement gap remains

The fundamental challenge is what cannot be easily quantified. Agencies measure concrete costs accurately—how much a factory must spend on pollution equipment—but estimating benefits involves judgment calls. When the FDA approves drugs, it conducts qualitative benefit-risk assessments, weighing expected benefits against known risks even when full data are unavailable. Different methodologies can produce vastly different conclusions. Historical analysis found that the FDA's Prescription Drug User Fee Act process from 1998 to 2005 produced between $14 billion and $31 billion in social surplus, but incorporating data about the drug Vioxx—later withdrawn for causing heart attacks—suggested the process caused a net reduction in social welfare of between $1 billion and $201 billion.

The shift in OMB guidance reveals competing views of regulation. More rigorous cost-benefit analysis with higher discount rates protects businesses from regulations with long-term or difficult-to-quantify benefits. Less rigorous analysis or lower discount rates allow agencies to move faster on health, environmental, and social protection. Both depend on numbers involving judgment no analyst can fully remove.