Dealing With Uncertainty


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.                   DEALING WITH UNCERTAINTY                    .
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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;


Environmental Research Foundation provides this electronic version of RACHEL'S ENVIRONMENT & HEALTH WEEKLY free of charge even though it costs our organization considerable time and money to produce it. We would like to continue to provide this service free. You could help by making a tax-deductible contribution (anything you can afford, whether $5.00 or $500.00). Please send your contribution to: Environmental Research Foundation, P.O. Box 5036, Annapolis, MD 21403-7036.

--Peter Montague, Editor

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