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

1. 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 19–20

2. 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

3. 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

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

5. 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

6. 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

7. 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

8. 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.

9. Regulatory Process (cont’d) • 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.

10. Fish and Wildlife Service’s 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 Randall’s regulatory process may promote efficient releases

11. Fish and Wildlife Service’s 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

12. 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

13. 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

14. 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

15. 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)

16. 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