2nd Toulouse-Montr

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2nd Toulouse-Montréal Conference onThe Law,
Economics and Management ofLarge-Scale
RisksSeptember 30 October 1, 2005

• On Precautionary Policies
• Pauline Barrieu
• London School of Economics
• Bernard Sinclair-Desgagné
• CIRANO, CIRAIG and HEC Montréal
• École polytechnique (Paris)

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1. Some background

• Zoroaster When in doubt, abstain.
• Removal of the handle of the Broad Street water
  pump in London in 1854, an action that then
  stopped an epidemic of cholera (see, e.g.,
  Charles E. Rosenberg, 1962).
• This measure followed documented (but
  unconfirmed) suspicions by John Snow, a physician
  and much revered early epidemiologist, that the
  cause of the disease originated in the pump.
  (Afterwards, a detailed investigation determined
  that, more than 20 feet underground, a sewer pipe
  passed within a few feet of the well.)
• Vorsorgeprinzip the forecaring principle
  introduced into German environmental law in the
  1970s.

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• The U.S-Canada Great Lakes Water Quality
  Agreement
• Such a strategy a phase out of all toxic
  persistent substance should recognize that all
  persistent toxic substances are dangerous to the
  environment, deleterious to the human condition,
  and can no longer be tolerated in the ecosystem,
  whether or not unassailable scientific proof of
  acute or chronic damage is universally accepted.
• Science-based regulation (the National
  Environmental Policy Act, the Clean Water Act,
  the Occupational Safety and Health Act, the
  Federal Food, Drug, and Cosmetic Act, )
• The U.S. Food Safety System stipulates that
  conservative risk management decisions be
  implemented when safety information on a hazard
  in a food is substantial but incomplete.

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• Despite this widespread use, however, the
  Precautionary Principle remains controversial and
  is often the object of acrimonious debates.
• Advocates argue that it provides potential
  victims a safeguard against sloppiness or
  manipulation in science-based regulation.
• But critics say that it gives undue veto powers
  to environmental extremists to block
  technological progress and opens the door to
  lobby groups to foster trade protectionism.
• Admittedly, in its present form the Precautionary
  Principle is subject to a wealth of
  interpretations.
• A representative sample David Appell (2001),
  Daniel Bodansky (1991), Kenneth R. Foster et al.
  (2000), David Freestone and Ellen Hey (1996),
  Olivier Godard (1997), I. M. Goklany (2001), John
  S. Gray and John M. Bewers (1996), Giovanni
  Immordino (1999), Myers and Raffensperger (2001),
  Tim O'Riordan and James Cameron (1994),
  Raffensperger and Joel Tickner (1999), and
  Alistair Scott et al. (1999).
• The potentially high stakes involved would make a
  clarification of its meaning and use quite timely.

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The Precautionary Principle

• When an activity raises threats of harm to human
  health or the environment, precautionary measures
  should be taken even if some cause-and-effect
  relationships are not fully established
  scientifically.
• Versus

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The Boldness Principle

• When an activity raises potential benefits to
  human health or the environment, fostering
  measures should be taken even if some
  cause-and-effect relationships are not fully
  established scientifically.

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What do you choose?
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Outline of the presentation

1. Historical background
2. The PP as an illustration of "Real Options"
   principles
3. Decision making under ambiguity
4. What is precaution?
5. Applications
6. Concluding remarks

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The PP as a Real OptionChristian Gollier,
Bruno Jullien and Nicolas Treich, 1999

• Arrow and Fisher (1974), Henry (1974)
• Uncertainty learning gt reversibility
  (or flexibility) has a
• positive value
• Pindyck, Dixit and others develop the framework
  of real options as an extension of that of
  financial options.
• Gollier, Jullien and Treich
• Precautionary measures are preferred when the
  decision maker exhibits the right amount of
  prudence.

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3. Decision making under ambiguity

• Aversion to ambiguity - the Ellsberg (1961)
  paradox
• Urn A contains 50 red balls and 50 black balls
• Urn B contains 100 red or black balls.
• "You win 100 if a ball drawn from the urn you
  pick is red.
• Which urn do you pick?
• Most people pick urn A.
• Building on Gilboa and Schmeidler (1989),
• Morgane Chevé and Ronan Congar (2002) show that
• The PP amounts to deciding based on a maxmin
  rule, i.e. one tries to achieve the most under
  the least favorable scenario.

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4. What is Precaution?Bernard
Sinclair-Desgagné and Pauline Barrieu, 2005

• All statements of the PP involve three key items
• AXIOM 1. no scientific agreement
• Scientific assessments form a set of n 2
  Bernoulli distributions ?0,?1q1, ?0,?2q2,
  , ?0,?nqn, where for at least one pair (i,j)
  we have that ?i ? ?j or qi ? qj.

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• AXIOM 2. The regulators appraisal of scenarios
  and policies is such that
• ordinal scores Her evaluation of the various
  states of the world can be represented by a
  real-valued function u() such that u(?1) u(?2)
  u(?n)
• potential threat For at least one scenario i,
  u(?i) lt u(?0)
• scenario weighing She attributes relative
  weights ai 0, ?i ai 1, to each scenario
• weighted average criterion She prefers
  scenarios and policies that increase the weighted
  average ?i ai(qi u(?i) (1-qi)u(?0)).

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• DEFINITION 1. Precautionary strategies
• A precautionary strategy is an action that
  modifies the probabilities or the alternative
  states in some scenarios and that, for at least
  one scenario i where u(?i) lt u(?0), qualifies as
  self-protection or self-insurance.
• (a) self-protection ltgt pi lt qi
• (b) self-insurance ltgt for some ?i lt 1,
• u(?i) - u(?0) ?i (u(?i) lt u(?0)) .
• DEFINITION 2. Impact of precaution The impact
  of a precautionary measure is the vector d
  (d1,,dn) of weighted differences di ai(qi
  ?ipi).

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• Proposition
• The rule that
• the regulator must adopt a precautionary
  strategy whenever Axioms 1 and 2 are verified
• is equivalent to having
• (i) d1 0 ,
• (ii) dj dn 0 when u(?j) u(?0) ,
• (iii) d1 dn s for some s 0 .

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• Captured often-precribed features of
  precautionary actions
• - cost-effectiveness s 0
• - proportionality d1 dn s
• - consistency same s
• - flexibility bigger n gt higher degree
• of freedom

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5. Application 1 - Fisheries conservation

• FAOs Code of conduct for responsible fisheries
• The absence of adequate scientific information
  should not be used as a reason for postponing or
  failing to take conservation and management
  measures.
• ? (?i ai qi s)/ ?i ai pi
• So self-insurance is a substitute for
  self-protection
• the level of self-insurance necessary to
  compensate a decreawse in self-protection is
  bigger the larger ? already is and the more
  significant the overall current self-protection.

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5. Application 2 - Nanotechnologies

• Royal Academy of Engineering of the UKs report
• Until more is known about their environmental
  impact we are keen that the release of
  nanoparticles and nanotubes in the environment is
  avoided as far as possible. Specifically, we
  recommend as a precautionary measure that
  factories and research laboratories treat
  manufactured nanoparticles and nanotubes as if
  they were hazardous and reduce them from waste
  streams.
• So, ?i ai qi gt s, meaning that a complete ban is
  not what society wishes.
• But, no measure currently exists that would make
• d1 dn s .

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6. Concluding remarks

• Once the price society puts on alleviating a
  potential threat is elicited, precaution means to
  reduce the worst threat while making the total
  impact of the implemented measure equal to that
  price.
• What needs to be further dealt with
• - management of expertise,
• - political economy of safety regulation,
• - division of labor in implementation