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«Interim Canadian Cost-Benefit Analysis Guide Regulatory Proposals © Her Majesty the Queen in Right of Canada, represented by the President of the ...»

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Canadian Cost-Benefit Analysis


Regulatory Proposals

© Her Majesty the Queen in Right of Canada,

represented by the President of the Treasury Board, 2007

Catalogue No. BT58-5/2007

ISBN 978-0-662-05039-1

This document is available on the Treasury Board of Canada Secretariat

website at http://www.tbs-sct.gc.ca.

This document is also available in alternative formats on request.

Canadian Cost-Benefit Analysis Guide: Regulatory Proposals

Table of Contents

I. Introduction

II. The Need for Government Intervention

III. Impact Analysis

STEP 1: Identifying Issues, Risks, and the Baseline Scenario

1.1 Issue

1.2 Incremental impacts

1.3 Establishing the baseline scenario

1.4 Risk assessment

STEP 2: Setting Objectives

STEP 3: Developing Alternative Regulatory and Non-Regulatory Options

STEP 4: Assessing Benefits and Costs

4.1 Identification of significant impacts

4.2 Measurement of benefits

4.3 Measurement of costs

4.4 Criteria

4.5 Cost-effectiveness analysis

4.6 Impacts on stakeholders

4.7 Discount rates

STEP 5: Preparing an Accounting Statement

5.1 Cost-benefit analysis for each option (accounting statement section A)

5.2 Stakeholder analysis for each option (accounting statement section B)


Canadian Cost-Benefit Analysis Guide: Regulatory Proposals

I. Introduction

The Canadian Cost-Benefit Analysis Guide is provided for the use of federal departments and agencies as they perform cost-benefit analysis to support regulatory decisions. The guide incorporates the evolution of regulatory policy and developments in the analysis of the impacts of regulations in Canada and elsewhere over the past decade. In November 1999, the Government of Canada instituted the policy that a cost-benefit analysis must be carried out for all significant regulatory proposals to assess their potential impacts on the environment, workers, businesses, consumers, and other sectors of society.1 Regulatory authorities must make a convincing case that the regulatory approach recommended is superior to non-regulatory alternatives. They must demonstrate not only that the benefits to Canadians outweigh the costs, but also that they have structured the regulatory program so that the excess of benefits over costs is maximized.

In April 2007, the Cabinet Directive on Streamlining Regulation replaced the 1999 Government of Canada Regulatory Policy.2 One of the key requirements of this new directive is that departments and agencies assess regulatory and non-regulatory options to maximize net benefits to society as a whole. Hence, all regulatory departments and agencies are expected to show that the recommended option maximizes the net economic, environmental, and social benefits to Canadians, business, and government over time more than any other type of regulatory or nonregulatory action. Instrument choice is thus essential to the regulatory process. Departments and agencies are also expected to show how the costs and benefits are distributed across the various affected parties, sectors of the economy, and regions of Canada. As a best practice, departments and agencies are expected to prepare an accounting statement. The purpose of this guide is to provide guidance to departments and agencies on how to conduct a sound cost-benefit analysis.

Other countries and international communities such as the United States, Australia, the European Commission, etc. have also come to recommend that a cost-benefit analysis be the centre of regulatory analysis. A cost-benefit analysis has become one of the key analytical tools employed to assist in making this determination before approval is given for any significant new regulation.

Such an analysis highlights the importance of identifying and measuring the economic benefits and costs as an essential input into the design process of such regulatory actions. Increased government interest in the consequences of regulating has led to the development of various cost-benefit analysis guides in countries such as the United States and Australia; some international organizations have also developed guides on the subject.3

1. Government of Canada, Privy Council Office, Government of Canada Regulatory Policy, November 1999.

2. Government of Canada, Cabinet Directive on Streamlining Regulation, April 2007. There are generally around 350 federal regulations developed in Canada each year. Only proposals with impacts judged to be of medium and high significance will require a rigorous cost-benefit analysis. See Canada, Privy Council Office, Framework for the Triage of Regulatory Submissions, May 2006.

3. In the United States, guides were published by the Environmental Protection Agency (Guidelines for Preparing Economic Analyses, September 2000) and the Office of Management and Budget (Circular A-4, September 2003). In Australia, the Office of Regulation Review released A Guide to Regulation, second edition, December 1998. International organizations have released the following documents: the Organisation for Economic Co-operation and Development (OECD), Regulatory Impact Analysis (RIA) Inventory, April 2004; OECD, Cost-Benefit Analysis and Environment: Recent Developments, 2005;

and the European Commission, Impact Assessment Guidelines, June 15, 2005.

Treasury Board of Canada Secretariat

The cost-benefit analysis should be guided by the principle of proportionality. In other words, the effort to do the cost-benefit analysis should be commensurate with the level of expected impacts on Canadians. For further details, see the Framework for the Triage of Regulatory Submissions.4 In Canada, a guide was first published in 1995.5 The 1995 guide required updating to reflect the changes in the economy, new regulatory policies, and advances in analytical methods. This guide is designed to outline in brief the analytical methodologies, empirical techniques, and practical approaches to performing analyses of regulatory policies. Efficiency is not the sole criterion for decision making of a regulatory policy. The stakeholder analysis of who gains or loses as a result of a regulation can be critical to decision making; it is therefore included as part of the overall impact analysis in this guide. This guide will assist regulatory officials in employing techniques developed elsewhere to produce consistent high-quality cost-benefit analyses of proposed and existing regulations.

II. The Need for Government Intervention

The Cabinet Directive on Streamlining Regulation notes that, “Regulation is an important tool for protecting the health and safety of Canadians, preserving the environment, and securing the conditions for an innovative and prosperous economy.” In a perfectly competitive market, the outputs of the goods and services of the economy and the set of prices for these outputs are determined in the marketplace in accordance with consumers’ preferences and incomes, as well as producers’ minimization of cost for a given output. In this market, the outcome is efficient and social welfare is maximized. However, in some situations, markets fail to achieve such efficient outcomes. Market failure refers to situations in which the conditions required to achieve the market-efficient outcome are not present. Market failure is an important reason for the need for government intervention. Common examples of market failure are the existence of significant externalities, the exercise of market power by a small number of producers or buyers, natural monopolies, and informational asymmetry between producers and their customers.6 For example, many motorists are not aware of the environmental consequences of the pollutants emitted by their automobiles, nor do they bear a significant amount of the externalities of the environmental costs that they create by using a motor vehicle. Similarly, many consumers may not be aware of the longer-term effects of the improper use of pesticides on their health, or the health of others, nor do they personally bear a significant share of the medical expenditures that may be imposed on provincial governments by the illness created. When negative externalities exist, part of the cost to society is not recognized by private decision makers. In such situations, it is important for the government to put in place regulatory policies or market-based instruments to restrict the behaviour that leads to such negative externalities or social welfare losses so that Canadians as a whole will be better off.

4. Government of Canada, Privy Council Office, Framework for the Triage of Regulatory Submissions, May 2006.

5. Government of Canada, Treasury Board of Canada Secretariat, Benefit-Cost Analysis Guide for Regulatory Programs, August 1995.

6. See e.g. the Office of Management and Budget, Circular A-4, September 2003; OECD, Cost-Benefit Analysis and Environment: Recent Developments, 2005.

Canadian Cost-Benefit Analysis Guide: Regulatory Proposals

Regulatory actions are instruments of command and control that address particular problems in society. An advantage to this approach is the relative ease with which governments can be seen to undertake actions to address the problem. At the same time, command and control actions may not be as cost-effective as other policy tools such as market-oriented approaches. Many of the costs of regulations are hidden from public scrutiny because the compliance costs are often imposed on the private sector and are buried in the normal costs of doing business.

Regulations may also deaden innovation by not providing market-based incentives to encourage technological advances to reduce pollution, safety, or security beyond what is required by the regulations. Thus, market-oriented approaches or performance-based standards are alternatives that have the potential to achieve the same goals in perhaps a more efficient and cost-effective manner. Both regulatory and non-regulatory approaches, however, create compliance costs that the private sector must bear and will impose additional administrative costs on governments, as they will need to monitor and/or enforce these policies.

Any new regulations or review of existing regulations requires a proper assessment to ensure they will not impose excessive burdens on Canadian businesses that would reduce their international competitiveness. While it is important to protect the environment and safeguard the health and safety of Canadians, regulatory actions need to be carried out in a way that allows for private-sector innovation to take place.

In order to minimize the negative impacts of regulations, and enhance their effectiveness, it is important that all relevant information about how they will affect Canadians is obtained before they are implemented. This will require extensive consultation with all Canadian stakeholders that will be impacted by the proposed regulation. It is primarily through these consultations that the impacts will be best understood.

III. Impact Analysis

This guide presents an analytical framework and steps to facilitate a disciplined approach to assessing the regulatory policy and its alternative options so that informed recommendations can be made to decision makers. The following steps outline the process of selecting the best option and conducting an impact analysis of a regulatory policy.

Step 1: Identify the public policy issues, assess the nature of the issues and related risk, and define the baseline situation.

Step 2: Set out the objectives the policy intends to achieve.

Step 3: Develop alternative regulatory and non-regulatory policy options and how they affect the baseline scenario.

Step 4: Conduct an impact analysis—including cost-benefit analysis and stakeholder/distributional analysis—of alternative options and make recommendations for actions to be taken.

Step 5: Prepare an accounting statement.

Treasury Board of Canada Secretariat During the process of identifying the issues, and developing and assessing alternative policy options, consultations should be carried out with Canadians and affected parties so that inputs and feedback can be properly taken into consideration.

STEP 1: Identifying Issues, Risks, and the Baseline Scenario

1.1 Issue The first step in any policy analysis is to identify and define precisely the key features and sources of the issues. The issues may decline in importance or become increasingly serious in the future without government intervention. Certain public policy issues such as health and the environment are often characterized by risks associated with the baseline scenario, i.e. the scenario without a policy. Understanding and assessing the nature of the risks in this case becomes one of the key decision factors for government intervention.

1.2 Incremental impacts One of the important concepts for defining the impact of a policy is to assess the incremental impact of the policy on the issue. This is to measure the impact—benefits and costs—that occur over and above what would have occurred in the absence of the policy. This means that one should identify only the benefits and costs that are associated with the policy in question and not include any other effects that would exist whether or not the policy is undertaken. With this concept in mind, one can then properly determine the true contribution of the policy. In other words, when conducting a policy’s impact, one should conceptualize two scenarios: one that does not include the policy (i.e. the baseline scenario) and one that does include the policy (i.e.

the “with regulation” scenario).

To the degree that this is feasible, one should evaluate the economy-wide impact of the policy.

Although one is likely to be more focussed on the direct impacts of the policy on the affected sectors and individuals that must comply with it, indirect impacts can also be significant and therefore should also be measured. One should then attempt to establish which other sectors of the economy the policy might affect.7

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