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
Objectives
1.
2.
3.
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
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
The Solution - Black Carp
- An effective molluscivore
- No native molluscivore as good
- Chemical pond treatment alternatives not generally
available or effective.
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
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 nonindigenous 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
 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
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.
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.
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
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
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
Possibilities for Allocating Risks in
Financial Markets

Recall conditions for bonding (Shogren et al.)
1.
2.
3.
4.
5.

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
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
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)
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