Assurance Bonds as a Tool to Manage Risks Associate with the Intentional Release of Exotic Species'

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Assurance Bonds as a Tool to Manage Risks
Associate with the Intentional Release of Exotic
Species.

• Michael H. Thomas, Nicholas Stratis, and Terril
  Hanson,
• with Jan Lewandrowski and Michael Livingston
• Progress Report and Preliminary Findings
• Economic Research Service
• PREISM Review and Workshop
• Washington DC, August 1920

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Objectives

• Assess the potential for using assurance bonding
  within a regulatory process to promote the
  efficient releases of non-indigenous organisms
• Identify the economic and biological factors
  influencing the use of bonds by designing a
  regulatory process to govern the release of black
  carp in Mississippi that maximizes the expected
  net present value of social welfare
• Examine regulatory and institutional frameworks
  that may promote economic efficiency

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An Empirical Problem

• Catfish are parasitized and destroyed by
  trematodes
• The Rams horn snail is an intermediate host
• Removing the snail removes the trematodes

More than 100,000 water acres devoted to
aquaculture production in the delta region of
Mississippi, one of the poorest U.S. regions
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The Solution - Black Carp - An effective
molluscivore- No native molluscivore as good-
Chemical pond treatment alternatives not
generally available or effective.
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A Biocontrol Solution Black Carp

• Pros
• 100 efficacy against snails
• Environmentally friendly (has not escaped during
  over 30 years of management
• Cons
• May escape and become invasive, like the grass
  carp
• Expensive to produce and certify
• Complicates harvest and marketing

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The Regulatory Template

• As part of a regulatory process, aquaculture
  firms petition a regulator to introduce
  non-indigenous species (black carp).
• Petitioner assures performance with bond to cover
  expected social cost or cost of revoking the
  action.
• Petition grantees are awarded the right but not
  the obligation to release non-indigenous
  organisms
• Bonds are tradable in financial markets
• Bonds are use to assure careful actions
  identified by regulator to prevent release and
  refunded after successful performance.
• In special cases, the regulator agrees to cover
  actual costs in excess of the sum of posted bonds
  and the liquidated assets of petition grantees
• Petition grantees are fined for behaving in ways
  other than those specified in the regulations

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• Conditions Under Which Bonds May Promote
  Efficiency (Shogren et al.)
• Environmental costs are well understood
• Activities that cause damage OR actual harm
  easily observable
• Number of parties causing harm few and easily
  identifiable
• Time frame between action and harm is short
• Environmental outcomes should be well known
• No irreversible effects

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Regulatory Process(After Thomas and Randall 2000)

• Stage One Initial Review of Petition
• Initial Analysis Regulator examines expected
  present value of proposed intentional release and
  shares analysis with the public.
• If all agree that no third party may be harmed,
  award right to release under specific
  introduction and compensation regulations.
• Affected Parties If all potentially affected
  third parties consent to the release under
  specific introduction and compensation
  regulations, award right to release.

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Regulatory Process (contd)

• Stage Two In-Depth Analysis and Bonding of
  Actions
• Petitioner conducts an extensive examination of
  the expected net present value of the release.
• The analysis is subjected to several rounds of
  review by the regulatory agency and the public.
• Bonding used to assure careful actions by
  petitioner and cover potential social cost or
  revocation.
• If all potentially affected third parties consent
  to the release under specific introduction and
  compensation regulations, award right to release.
• Deny right to release under all other
  circumstances.

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Fish and Wildlife Services Decision on the Black
Carp Petition

• Based decision not to award rights to release on
  an arbitrary metric
• Black carp may benefit Mississippi catfish
  industry less than 100 million
• Not awarding the right to release black carp
  amounts to an implicit tax on the industry
• Indicates Thomas and Randalls regulatory process
  may promote efficient releases

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Fish and Wildlife Services Approach

• Decisions based on apparently arbitrary
  methodology
• Petition grantees are not required to cover
  social losses
• Lacey Act approach is incentive incompatible
• Our approach may help promote efficiency

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Benefits of Our Approach

• Petitioners and regulator insure social losses
  with a bond, which is refundable if right actions
  taken
• Petitioner internalizes production costs
• Petitioner handles organisms appropriately
• History of success with the mining industry

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Possibilities for Allocating Risks in Financial
Markets

• Recall conditions for bonding (Shogren et al.)
• Environmental costs are well understood
• Activities that cause damage easily observable
• Number of parties causing harm few and easily
  identifiable
• Environmental outcomes well known
• No irreversible effects
• Add two more
• Use clear regulatory process (protocol) to guide
  actions
• Develop link between bonds and financial markets

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Bonding Template

• Regulator assists bonding agents to identify
  steps in the production process necessary to
  prevent social loss (escape).
• Actuarial tables are developed for these key
  steps.
• Petitioners (aquaculturists) and risk seekers
  enter risk market via bonding agent

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Preliminary Findings

• Not necessary to know environmental cost (often
  high uncertainty). Need only to know the cost of
  reversing the action (revocability). (Shogren
  1.).
• Large number of firms can actually help market
  function (Shogren 3.)(Eg., admin costs captured
  in value of bond)

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Remaining Tasks

• Determine steps in production that may prevent
  escape of black carp into sensitive environs
• Determine efficient levels for the
• Assurance bond
• Amount of posted monies refunded
• Length of period after which monies are refunded
• Fines for not complying with release restrictions
• Examine regulatory and institutional frameworks
  for
• Assurance bonds
• Returning monies to petition grantees
• Trading assurance bonds
• Enforcing the regulations