Assurance Bonds as a Tool to Manage Assurance Bonds as a Tool to Manage Risks Associate with the Intentional Risks Associate with the Intentional

Release of Exotic Species.Release of Exotic Species.

Michael H. Thomas, Nicholas Stratis, and Terril Hanson,Michael H. Thomas, Nicholas Stratis, and Terril Hanson,with Jan Lewandrowski and Michael Livingstonwith Jan Lewandrowski and Michael Livingston

Progress Report and Preliminary FindingsProgress Report and Preliminary Findings

Economic Research ServiceEconomic Research ServicePREISM Review and WorkshopPREISM Review and WorkshopWashington DC, August 19Washington DC, August 19––2020

ObjectivesObjectives

1.1. Assess the potential for using assurance bonding Assess the potential for using assurance bonding within a regulatory process to promote the efficient within a regulatory process to promote the efficient releases of non-indigenous organismsreleases of non-indigenous organisms

2.2. Identify the economic and biological factors influencing Identify the economic and biological factors influencing the use of bonds by designing a regulatory process to the use of bonds by designing a regulatory process to govern the release of black carp in Mississippi that govern the release of black carp in Mississippi that maximizes the expected net present value of social maximizes the expected net present value of social welfarewelfare

3.3. Examine regulatory and institutional frameworks that Examine regulatory and institutional frameworks that may promote economic efficiencymay promote economic efficiency

An Empirical ProblemAn Empirical Problem Catfish are parasitized Catfish are parasitized

and destroyed by and destroyed by trematodestrematodes

The Rams horn snail is The Rams horn snail is an intermediate hostan intermediate host

Removing the snail Removing the snail removes the trematodesremoves the trematodes

More than 100,000 water acres devotedMore than 100,000 water acres devotedto aquaculture production in the delta to aquaculture production in the delta region of Mississippi, one of the poorestregion of Mississippi, one of the poorestU.S. regionsU.S. regions

The Solution - Black Carp The Solution - Black Carp - An effective molluscivore- An effective molluscivore- No native molluscivore as good- No native molluscivore as good- Chemical pond treatment alternatives not generally - Chemical pond treatment alternatives not generally available or effective.available or effective.

A Biocontrol Solution A Biocontrol Solution –– Black Carp Black Carp

ProsPros 100% efficacy against snails100% efficacy against snails Environmentally friendly (has not escaped during over Environmentally friendly (has not escaped during over

30 years of management30 years of management ConsCons

May escape and become invasive, like the grass carpMay escape and become invasive, like the grass carp Expensive to produce and certifyExpensive to produce and certify Complicates harvest and marketingComplicates harvest and marketing

The Regulatory TemplateThe Regulatory Template As part of a regulatory process, aquaculture firms petition a regulator to As part of a regulatory process, aquaculture firms petition a regulator to

introduce non-indigenous species (black carp).introduce non-indigenous species (black carp).

Petitioner assures performance with bond to cover expected social cost Petitioner assures performance with bond to cover expected social cost or cost of revoking the action.or cost of revoking the action.

Petition grantees are awarded the right but not the obligation to release non-Petition grantees are awarded the right but not the obligation to release non-indigenous organismsindigenous organisms

Bonds are tradable in financial marketsBonds are tradable in financial markets

Bonds are use to assure careful actions identified by regulator to prevent Bonds are use to assure careful actions identified by regulator to prevent release and refunded after successful performance.release and refunded after successful performance.

In special cases, the regulator agrees to cover actual costs in excess of 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: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 Petition grantees are fined for behaving in ways other than those specified in the regulationsthe regulations

Conditions Under Which Bonds May Conditions Under Which Bonds May Promote Efficiency (Shogren et al.)Promote Efficiency (Shogren et al.) Environmental costs are well understoodEnvironmental costs are well understood Activities that cause damage OR actual harm Activities that cause damage OR actual harm

easily observableeasily observable Number of parties causing harm few and Number of parties causing harm few and

easily identifiableeasily identifiable Time frame between action and harm is shortTime frame between action and harm is short Environmental outcomes should be well Environmental outcomes should be well

knownknown No irreversible effectsNo irreversible effects

Regulatory ProcessRegulatory Process(After Thomas and Randall 2000)(After Thomas and Randall 2000)

Stage One: Initial Review of PetitionStage One: Initial Review of Petition

Initial Analysis: Regulator examines expected present Initial Analysis: Regulator examines expected present value of proposed intentional release and shares value of proposed intentional release and shares analysis with the public.analysis with the public.

• If all agree that no third party may be harmed, award right to If all agree that no third party may be harmed, award right to release under specific introduction and compensation release under specific introduction and compensation regulations.regulations.

Affected Parties: If all potentially affected third parties Affected Parties: If all potentially affected third parties consent to the release under specific introduction and consent to the release under specific introduction and compensation regulations, award right to release.compensation regulations, award right to release.

Regulatory Process (cont’d)Regulatory Process (cont’d) Stage Two: In-Depth Analysis and Bonding of ActionsStage Two: In-Depth Analysis and Bonding of Actions

Petitioner conducts an extensive examination of the expected Petitioner conducts an extensive examination of the expected net present value of the release.net present value of the release.

The analysis is subjected to several rounds of review by the The analysis is subjected to several rounds of review by the regulatory agency and the public.regulatory agency and the public.

Bonding used to assure careful actions by petitioner and cover Bonding used to assure careful actions by petitioner and cover potential social cost or revocation.potential social cost or revocation.

If all potentially affected third parties consent to the release If all potentially affected third parties consent to the release under specific introduction and compensation regulations, award under specific introduction and compensation regulations, award right to release.right to release.

Deny right to release under all other circumstances.Deny right to release under all other circumstances.

Fish and Wildlife Service’s Decision Fish and Wildlife Service’s Decision on the Black Carp Petitionon the Black Carp Petition

Based decision not to award rights to release on Based decision not to award rights to release on an arbitrary metric:an arbitrary metric: Black carp may benefit Mississippi catfish industry Black carp may benefit Mississippi catfish industry

less than $100 millionless than $100 million

Not awarding the right to release black carp Not awarding the right to release black carp amounts to an implicit tax on the industryamounts to an implicit tax on the industry

Indicates Thomas and Randall’s regulatory Indicates Thomas and Randall’s regulatory process may promote efficient releasesprocess may promote efficient releases

Fish and Wildlife Service’s Fish and Wildlife Service’s ApproachApproach

Decisions based on apparently arbitrary Decisions based on apparently arbitrary methodologymethodology

Petition grantees are not required to cover social Petition grantees are not required to cover social losseslosses

Lacey Act approach is incentive incompatibleLacey Act approach is incentive incompatible

Our approach may help promote efficiencyOur approach may help promote efficiency

Benefits of Our ApproachBenefits of Our Approach

Petitioners and regulator insure social Petitioners and regulator insure social losses with a bond, which is refundable if losses with a bond, which is refundable if right actions takenright actions taken Petitioner internalizes production costsPetitioner internalizes production costs Petitioner handles organisms appropriatelyPetitioner handles organisms appropriately

History of success with the mining industryHistory of success with the mining industry

Possibilities for Allocating Risks in Possibilities for Allocating Risks in Financial MarketsFinancial Markets

Recall conditions for bonding (Shogren et al.)Recall conditions for bonding (Shogren et al.)1.1. Environmental costs are well understoodEnvironmental costs are well understood2.2. Activities that cause damage easily observableActivities that cause damage easily observable3.3. Number of parties causing harm few and easily Number of parties causing harm few and easily

identifiableidentifiable4.4. Environmental outcomes well knownEnvironmental outcomes well known5.5. No irreversible effectsNo irreversible effects

Add two moreAdd two more Use clear regulatory process (protocol) to guide Use clear regulatory process (protocol) to guide

actionsactions Develop link between bonds and financial marketsDevelop link between bonds and financial markets

Bonding TemplateBonding Template

Regulator assists bonding agents to Regulator assists bonding agents to identify steps in the production process identify steps in the production process necessary to prevent social loss (escape).necessary to prevent social loss (escape).

Actuarial tables are developed for these Actuarial tables are developed for these key steps.key steps.

Petitioners (aquaculturists) and risk Petitioners (aquaculturists) and risk seekers enter risk market via bonding seekers enter risk market via bonding agentagent

Preliminary FindingsPreliminary Findings

Not necessary to know environmental cost Not necessary to know environmental cost (often high uncertainty). Need only to (often high uncertainty). Need only to know the cost of reversing the action know the cost of reversing the action (revocability). (Shogren 1.).(revocability). (Shogren 1.).

Large number of firms can actually help Large number of firms can actually help market function (Shogren 3.)(Eg., admin market function (Shogren 3.)(Eg., admin costs captured in value of bond)costs captured in value of bond)

Remaining TasksRemaining Tasks Determine steps in production that may prevent Determine steps in production that may prevent

escape of black carp into sensitive environsescape of black carp into sensitive environs

Determine efficient levels for the:Determine efficient levels for the:• Assurance bondAssurance bond• Amount of posted monies refundedAmount of posted monies refunded• Length of period after which monies are refundedLength of period after which monies are refunded• Fines for not complying with release restrictionsFines for not complying with release restrictions

Examine regulatory and institutional frameworks Examine regulatory and institutional frameworks for:for:

• Assurance bondsAssurance bonds• Returning monies to petition granteesReturning monies to petition grantees• Trading assurance bondsTrading assurance bonds• Enforcing the regulationsEnforcing the regulations