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#510 - Dealing With Uncertainty, 04-Sep-1996

The problem of uncertainty has plagued environmental regulation from
the beginning. The common practice in the U.S. is to ignore or deny the
existence of uncertainty, or to apply arbitrary numerical "fudge
factors," then to proceed as if everything were known with a high
degree of certainty. For example, a deadly amount of a chemical may be
determined for mice; then a fudge factor of 100 or 1000 may be applied
to the mouse number to reach a standard called "safe" for humans. U.S
laws promote this sort of unscientific behavior. For example, our laws
typically require a regulatory agency to develop "safe" standards for
toxic chemicals. Science cannot determine "safe" levels of toxic
chemicals, so government agencies, environmental lobbyists, and the
polluters all respond identically, PRETENDING that "safe" levels of
toxics have been determined and that only "good science" has been
employed in the process. As a result of such widespread abuses of the
scientific method, many Americans have begun to lose confidence in
science as a way of knowing about the world.

When science is disconnected from the typical regulatory process, it
openly acknowledges uncertainty. There are two kinds of uncertainty:
first there is risk, which is an event with a known probability (such
as the risk of losing your life in your car this year --the accident
and death rates are known). Then there is true uncertainty, which is an
event with unknown probability. For example, no one can predict what
will happen to your immune system if you are exposed day after day to
smoggy air, pesticide-laced food, chlorinated water, fumes released
from carpets, perfumes and other fragrances, second-hand tobacco smoke,
and perhaps a couple of prescription drugs. The effect of such combined
exposures on your immune system is simply unknown. Most environmental
problems involve true uncertainty.

To deal with "risk" uncertainty, policy makers have created a process
called "risk assessment," which can be useful when the probability of
an outcome (for example, death by automotive collision) is known from
experience. However, risk assessment is often applied to problems
characterized by true uncertainty (unknown probabilities); in such
situations, risk assessment quickly turns into guesswork, and people
tend to make guesses that promote their economic goals. This, too,
erodes people's confidence in science as a way of knowing.

In recent years, two principles have developed for dealing with true
uncertainty: the precautionary principle, and the principle that the
polluter should pay.

As stated in Principle 15 of the 1992 Rio Declaration on Environment
and Development, the precautionary principle says that, "Where there
are threats of serious or irreversible damage, lack of full scientific
certainty shall not be used as a reason for postponing cost-effective
measures to prevent environmental degradation." Some people consider
that the principle of "reverse onus" is inherent in the precautionary
principle;[1] the principle of reverse onus says that the burden of
proof for safety belongs on the proponent of a technology or chemical,
not on the general public--in other words, new chemicals and
technologies should be considered dangerous until shown otherwise.

Unfortunately, the precautionary principle does not specify what should
trigger action, nor does it specify what action should be taken.[1] It
is therefore vague and difficult to craft into workable policies.
Likewise, the principle that the polluter should pay is often not
useful in the real world because it is not obvious how much the
polluter should pay, or when.

Now some innovative thinking has come along to improve the situation.
In recent years Robert Costanza, an economist at University of
Maryland, has been exploring ways to improve environmental decision-
making under conditions of uncertainty. One goal of his work is to make
the precautionary principle (including the principle of reverse onus),
and the polluter-pays principle, more useful in the real world.
Costanza's idea is formally known as "flexible assurance bonding"[2]
but sometimes it is called "4P" ("the precautionary polluter pays
principle").[3]

Costanza's idea is derived from two common concepts: performance bonds,
and bottle deposit laws. Bottle deposits are simple and familiar --you
leave a nickel deposit whenever you buy a soft drink in a bottle, and
you get your nickel back when you return the empty bottle. Performance
bonds are common in the construction industry. Before a job begins, a
construction company puts up a bond --an amount of money that is held
by a third party. If the construction is completed satisfactorily and
on time, the bond monies are returned to the construction company. On
the other hand, if the work is unsatisfactory, or is late, part or all
of the bond will be forfeited.

Costanza has combined these two ideas into an assurance bond, similar
to a performance bond. Here is how it would work: Before someone
introduced a new chemical, or a new technology, they would estimate the
worst-case consequences of their act.[4] The proponent would then put
up an assurance bond to cover the current best estimate of the largest
potential future environmental damages. The bond would be held in an
interest-bearing escrow account; the bond would be returned to the
proponents after the uncertainties were reduced and it was clear that
their actions would not cause harm. Alternatively, if harm occurred,
the bond would be used for environmental restoration, and to pay
damages to anyone who had been harmed.

This plan provides the following benefits:

** It creates an incentive for the proponent of a project to conduct
research to reduce the uncertainties about their environmental impacts.
If they could show that the worst case was very unlikely to happen,
part of their bond would be refunded to them. The proponent would thus
have an incentive to fund independent research or, alternatively, to
change to less damaging technologies. (A quasi-judicial body would have
to be created to resolve disputes about when and how much of the bonds
should be refunded.)

** This plan puts the burden of proof on the economic agent that stands
to gain from a new chemical or new technology, not on the public.

** In keeping with the precautionary principle, this plan requires a
commitment of resources up front to offset the potentially catastrophic
future effects of current activity;

** The only cost to the proponent would be the difference (plus or
minus) between the interest on the bond and the return that might have
been earned by the business if it had invested in other activities. On
average, this difference should be small.

** The "forced savings" that the bond would require might improve
overall performance of national economies like that of the U.S., which
chronically undersaves.

** It is consistent with the principle that the polluter should pay, an
idea embedded in Principle 16 of the 1992 Rio Declaration on
Environment and Development. The 4P plan requires the polluter to pay
for uncertainties, as well as for environmental damage.

** By this plan, proponents of new technologies are not charged in any
final way for uncertain future damages. They can recover portions of
their bond (with interest) in proportion to how much better their
environmental performance is than the predicted worst-case scenario.

The bonds could be administered by an existing agency, such as EPA
(U.S. Environmental Protection Agency), or a completely new agency
could be created for the purpose.

Some people might object that such a plan would favor relatively large
businesses, which could afford to handle the financial responsibility
of activities that might damage the environment. This is true, but
businesses that cannot handle the financial responsibility should not
be passing the cost of potential environmental damage on to the public.

Small businesses could band together to form associations to handle the
financial responsibility, or they could change to more environmentally
benign technologies that did not require large assurance bonds. This
encouragement of new, environmentally benign technologies is one of the
main attractions of the bonding system.

4P assurance bonds could be used in the following instances (for
example):

** A developer would post an assurance bond to mitigate the hidden
environmental and economic costs of a new development. This would give
developers an incen-tive to design well because developers that had to
forfeit their bonds would not compete well in the market place against
those who could design more benign projects. Without taking away the
right to develop, the 4P system would impose the true costs of growth
on the parties that stood to gain from it, while providing strong
economic incentives to reduce impacts to a minimum.

** Factories and farms that use toxic chemicals would post assurance
bonds up front equal to the worst-case costs of releasing toxics into
their products and into the environment. To the extent that individual
enterprises performed better than the worst case, they would have
portions of their bonds refunded. Even individual homeowners would post
a bond for using potentially dangerous chemicals, and thus would have a
substantial incentive to seek less toxic solutions which, under the 4P
system, would be relatively cheaper. The system could be designed to
complement other regulatory schemes, would be self-policing, and self-
funding.

** A problem like global warming would be managed by an assurance bond
on releases of carbon dioxide. The bonds would be equal to the worst-
case estimates of the magnitude of future damages. The 4P bond would
work better than a carbon tax because such a tax would be based on
highly-uncertain estimates of what levels of emissions would eliminate
long-term problems.

The 4P system seems logical, fair and economically efficient. It
creates market incentives for good behavior, and for continuing
innovation to minimize environmental damage. It acknowledges
uncertainties up front, rather than denying their existence. And it
employs science to evaluate worst cases, which science is better-suited
to doing than it is to determining "safety." Furthermore, the 4P
approach provides a practical way of implementing the precautionary
principle and the principle that the polluter should pay.

--Peter Montague (National Writers Union, UAW Local 1981/AFL-CIO)

=====

[1] Daniel Bodansky, "The Precautionary Principle in US Environmental
Law," in Timothy O'Riordan and James Cameron, editors, INTERPRETING THE
PRECAUTIONARY PRINCIPLE (London: Earthscan Publications [120
Pentonville Road, London N1 9JN], 1994), pgs. 203-228.

[2] Robert Costanza and Charles Perrings, "A Flexible Assurance Bonding
System for Improved Environmental Management," ECOLOGICAL ECONOMICS
Vol. 2 (1990), pgs. 57-75.

[3] Robert Costanza and Laura Cornwell, "The 4P Approach to Dealing
With Scientific Uncertainty," ENVIRONMENT Vol. 34, No. 9 (November
1992), pgs. 12-20, 42.

[4] Our society has experience conducting worst-case analyses because
the Council on Environmental Quality required worst case analysis in
its 1977 regulations governing the writing of environmental impact
statements. See Council on Environmental Quality, "Regulations for
Implementing the Procedural Provisions of NEPA [National Environmental
Policy Act]," reprinted as Appendix F in Council on Environmental
Quality, ENVIRONMENTAL QUALITY-1979 (Washington, D.C.: U.S. Government
Printing Office, 1979), pgs. 760-794. The discussion of worst case
analysis, as a way of dealing with uncertainty, is found in Section
1502.22. These regulations appeared in final form in the FEDERAL
REGISTER Vol. 43 (1978), pg. 55987 and following pages. These
regulations were revised in 1986, removing the requirement for worst
case analysis.

Descriptor terms: regulation; precautionary principle; polluter pays
principle; uncertainty; decision-making; rio declaration on environment
and development; burden of proof; reverse onus; robert costanza;
flexible assurance bonding; assurance bonding; worst case analysis;
land use; development; global warming; market incentives;