Regulatory Expenditures Understated: Army Chemical Weapons Disposal

6 Jul 2006 in Regulatory Economics

Sometimes, ex ante estimates seriously understate actual regulatory compliance expenditures. This can occur because analysts are overly optimistic, because unforeseen complications arose, or because unexpected political constraints intervened. All three problems seem to apply in this case. But what's especially interesting about it is that the regulated party that underestimated compliance expenditures.

Washington Post reporter Juliet Eilperin reported on July 4 that the U.S. Army's estimated expenditure to dispose 27,768 metric tons of chemical weapons has increased from $2 billion to $28 billion. The original estimate dates from 1987, so accounting for inflation through 2005 increases the earlier estimate to $3 billion. Still, an eight-fold increase in expenditures is significant, especially when the initial estimate was in the billions.

"We underestimated the job, the complexity of the job and this high-hazard environment we have to operate in," said Michael A. Parker, director of the Army's Chemical Materials Agency.

One of those hazards appears to have been unrelated to disposal technology.

Congress mandated disposal of the weapons a decade ago, and ever since, the Defense Department has been battling environmental activists and some members of Congress over its reliance on burning the chemicals.

Pentagon officials have argued that incineration is most efficient. But Craig E. Williams, director of the Chemical Weapons Working Group in Berea, Ky., said that emissions could have lasting effects on communities such as his. Working with Sen. Mitch McConnell (R-Ky.), he has spent nearly two decades pushing the Army to develop a chemical neutralization approach.

Sometimes technological innovation can reduce the cost of achieving environmental standards, and in these cases ex ante estimates may exceed actual expenditures on compliance. But this requires that standards be set based on performance measures rather than designs. Performance standards allow technical innovation, but design standards prescribe exactly what must be done to comply. When regulations prescribe design standards, economies of scale may be the only potential source of cost reduction.

According to Eilperin's report, the Army's expenditure estimate was overly optimistic with respect to the actual technical challenges posed by incineration. But it appears that the larger source of the cost overrun was effective political opposition to incineration, which resulted in the Army having to develop and implement neutralization technology.

"Incineration was a much more mature technology in the late '80s and early '90s," [Parker] said. "The department was put in an impossible bind. The Congress mandated some very aggressive disposal schedules, and in order to comply with the law the department pursued the single option that was available, which was to use incineration technology."

Showing our work:

2000 GDP index: 100
1987 GDP index: 73.196
2005 GDP index: 112.145
Gross change: 38.949
% change from 1987: 38.949/73.196 = 53%
Therefore, $2 billion ($1987) = $3 billion ($2005)
Source: Bureau of Economic Analysis.

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