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Regulating chemicals: is putting a price on health impacts unrealistic and misleading?

Image of money and medicine

If a chemical threatens health or the environment, shouldn’t it just be replaced by safer alternatives? Or should regulators try to calculate a ‘cost’ for this harm to health or the environment (e.g. the cost of someone getting breast cancer), and then compare this with any costs involved in replacing the chemical? You may think it strange, but this is what often really happens when regulators decide whether to ban or restrict harmful chemicals.

Today CHEM Trust publishes a report we commissioned from the New Economics Foundation (NEF) to examine the way in which such ‘socioeconomic assessment’ is used in decision making on regulating industrial chemicals through the main EU  chemical law REACH. The study focusses on a procedure called discounting, where an impact that happens in the future is valued as much less important than one that is happening now. It also looks at some broader problems with socioeconomic assessment.

NEF’s study

The study, “Discounting Future Damage“,examines a number of decisions made by the European Chemical Agency’s Socioeconomic Assessment Committee (SEAC) when discussing whether chemicals should be restricted or have their use authorised.

CHEM Trust commissioned this study as we were concerned that these assessments were not properly considering both likely impacts in the future, and uncertain impacts which were not fully understood. REACH is underpinned by the precautionary principle, which enables decision makers to adopt precautionary measures where scientific evidence about environmental or health hazards are uncertain – any socioeconomic assessment should be reflecting this.

NEF focussed on two aspects of these assessments:

  • How did the assessment address impacts in the future – in what way did they use discounting?
  • How comprehensive was that assessment of health costs, for example were any health outcomes ignored due to lack of information?

Discounting

Discount rates are a way to incorporate the value of time to decisions about costs and benefits; they are like the opposite of an interest rate, with the value of a future impact reduced by a percentage for every year between now and the event. The higher a discount rate used, the more the ‘value’ of events in the future is ‘discounted’, or considered less important. As NEF explain:

“Unless a low discount rate is chosen, future outcomes that occur over 100 years hence are considered pretty much insignificant (discount rates must be 0.7% or lower for values to be worth even half of their current value after 100 years)

If we use a high discount rate, a single present life may be ‘worth’ more than one million lives in the future. With a rate of 1 percent, these million lives must be far in the future: over 1,000 years in the future in fact. With a rate of 10 percent, the distance is only 145 years”

Moreover, the report explains how “the choice of discount rate, and how it is used is not just a dry academic exercise, but is laden with implicit moral decisions and value judgement about the importance of future impacts relative to current costs

The review

NEF reviewed a selection of 12 Restriction proposals and 21 Authorisation applications under REACH to look at how socioeconomic assessments had been done. This analysis showed a complex picture, with a number of different approaches to the use of discount rates, and in some cases they weren’t used at all (particular in the Restrictions process).

Many of the analysed studies used a 4% discount rate, which is currently outlined in the ECHA guidance ‘based on an analysis of risk free longterm interest rates across Europe in 2007‘. However, NEF point out that the influential Stern analysis of climate impacts in 2006 used a lower discount rate:

Following Stern’s general approach, it is analogous to recommend a social discount rate for chemicals regulation where future generations are affected of 2%. The assumptions underlying this are that all generations should be treated equally, and that future growth rates across the EU will be approximately 2% – the best estimate of economists

How comprehensive was the assessment?

NEF also found that there were major problems with what was costed in the cases they reviewed:

“where impacts were uncertain, or there was not sufficient evidence, there was no attempt to quantify impacts. This was particularly the case with uncertain health and environmental impacts. These impacts are typically those that occur the furthest in the future. If more attempts were made to include such uncertain effects in analyses, the discount rate would matter even more.”

If complex and uncertain impacts are left out of the analysis, then an imbalanced picture is created:

“the benefit-cost analysis is only a partial analysis, and may not be particularly useful in determining what should be done under the precautionary principle”

A recent study by the NGO ChemSec, “Lost at SEA’, highlights the way companies tend to over-estimate the costs of moving away from the chemical of concern, including the real availability of alternatives and the societal need for the product. As NEF state:

“This disparity of treatment between economic costs (where likely inaccurate data is used in the absence of better information), and the opposite approach for health and environmental harms, creates systematic bias in reporting and is in direct opposition to the precautionary principle”

Recommendations

The NEF report discusses the issues around monetisation of non-economic effects, for example suggesting an approach that better considers the precautionary principle:

“Decision makers should explicitly adopt criteria that have the precautionary principle at their heart – such as a sustainability requirement that a certain amount of harm to humans or the environment will not be tolerated, regardless of economic effects.”

Beyond this, they question whether this socioeconomic approach works at all, and whether it would better not to monetise health and environmental impacts:

“Ensuring that non-economic effects such as health, are not converted into a monetary value, would mean that the trade-offs are clear, and would create less of a bias against consideration of effects that are more uncertain and harder to quantify”

Given this, NEF propose a number of recommendations for the current system, including:

  • Do not encourage monetisation and aggregation of impacts where there is only partial quantification and a high level of uncertainty over some impacts – particularly health and environmental impacts. Insist that rapporteurs do not focus on getting a precise but inaccurate answer, rather on understanding what future impacts will meaningfully be.
  • Investigate better methods for reporting on and judging scientific uncertainty in the knowledge of chemicals, so that where impacts cannot be quantified, decision makers can still understand the possible consequences of their decision based on the best knowledge available.

CHEM Trust’s analysis

Dr Michael Warhurst, Executive Director of CHEM Trust said:

“This report shows that there are major holes and inconsistencies in the way health and environmental impacts are costed in socioeconomic assessments within REACH. It is not acceptable – and is against the precautionary principle – for more complex or uncertain impacts to just be ignored. CHEM Trust is also very concerned about the ethical acceptability of discounting future health and environmental impacts.

Given that it is widely accepted that the regulation of chemicals needs to be faster and more effective, in CHEM Trust’s view it is time to focus on substituting the most hazardous groups of chemicals, rather than continuing with complex and misleading attempts to monetise health and environmental impacts.”

CHEM Trust will now be sending this report to relevant REACH decision makers, including European Chemical Agency’s Socioeconomic Assessment Committee.