2nd Toulouse-Montréal Conference on The Law, Economics and Management of Large-Scale Risks September 30 – October 1, 2005 On Precautionary Policies Pauline Barrieu London School of Economics Bernard Sinclair-Desgagné CIRANO, CIRAIG and HEC Montréal École polytechnique (Paris)

1. Some background Zoroaster: “When in doubt, abstain.” Zoroaster: “When in doubt, abstain.” Removal of the handle of the Broad Street water pump in London in 1854, an action that then stopped an epidemic of cholera (see, e.g., Charles E. Rosenberg, 1962). Removal of the handle of the Broad Street water pump in London in 1854, an action that then stopped an epidemic of cholera (see, e.g., Charles E. Rosenberg, 1962). This measure followed documented (but unconfirmed) suspicions by John Snow, a physician and much revered early epidemiologist, that the cause of the disease originated in the pump. (Afterwards, a detailed investigation determined that, more than 20 feet underground, a sewer pipe passed within a few feet of the well.) Vorsorgeprinzip – the “forecaring” principle – introduced into German environmental law in the 1970s. Vorsorgeprinzip – the “forecaring” principle – introduced into German environmental law in the 1970s.

The U.S-Canada Great Lakes Water Quality Agreement: The U.S-Canada Great Lakes Water Quality Agreement: “Such a strategy [a phase out of all toxic persistent substance] should recognize that all persistent toxic substances are dangerous to the environment, deleterious to the human condition, and can no longer be tolerated in the ecosystem, whether or not unassailable scientific proof of acute or chronic damage is universally accepted.” Science-based regulation (the National Environmental Policy Act, the Clean Water Act, the Occupational Safety and Health Act, the Federal Food, Drug, and Cosmetic Act, …) Science-based regulation (the National Environmental Policy Act, the Clean Water Act, the Occupational Safety and Health Act, the Federal Food, Drug, and Cosmetic Act, …) The U.S. Food Safety System stipulates that “conservative” risk management decisions be implemented when safety information on a hazard in a food is “substantial but incomplete.” The U.S. Food Safety System stipulates that “conservative” risk management decisions be implemented when safety information on a hazard in a food is “substantial but incomplete.”

Despite this widespread use, however, the Precautionary Principle remains controversial and is often the object of acrimonious debates. Despite this widespread use, however, the Precautionary Principle remains controversial and is often the object of acrimonious debates. Advocates argue that it provides potential victims a safeguard against sloppiness or manipulation in science-based regulation. Advocates argue that it provides potential victims a safeguard against sloppiness or manipulation in science-based regulation. But critics say that it gives undue veto powers to “environmental extremists” to block technological progress and opens the door to lobby groups to foster trade protectionism. But critics say that it gives undue veto powers to “environmental extremists” to block technological progress and opens the door to lobby groups to foster trade protectionism. Admittedly, in its present form the Precautionary Principle is subject to a wealth of interpretations. Admittedly, in its present form the Precautionary Principle is subject to a wealth of interpretations. A representative sample: David Appell (2001), Daniel Bodansky (1991), Kenneth R. Foster et al. (2000), David Freestone and Ellen Hey (1996), Olivier Godard (1997), I. M. Goklany (2001), John S. Gray and John M. Bewers (1996), Giovanni Immordino (1999), Myers and Raffensperger (2001), Tim O'Riordan and James Cameron (1994), Raffensperger and Joel Tickner (1999), and Alistair Scott et al. (1999). The potentially high stakes involved would make a clarification of its meaning and use quite timely. The potentially high stakes involved would make a clarification of its meaning and use quite timely.

The Precautionary Principle When an activity raises threats of harm to human health or the environment, precautionary measures should be taken even if some cause- and-effect relationships are not fully established scientifically. Versus…

The Boldness Principle When an activity raises potential benefits to human health or the environment, fostering measures should be taken even if some cause-and-effect relationships are not fully established scientifically.

What do you choose? 1/

Outline of the presentation 1. Historical background 2. The PP as an illustration of "Real Options" principles 3. Decision making under ambiguity 4. What is precaution? 5. Applications 6. Concluding remarks

2.The PP as a “Real Option” [Christian Gollier, Bruno Jullien and Nicolas Treich, 1999] Arrow and Fisher (1974), Henry (1974): Arrow and Fisher (1974), Henry (1974): Uncertainty + learning => reversibility (or flexibility) has a Uncertainty + learning => reversibility (or flexibility) has a positive value positive value Pindyck, Dixit and others develop the framework of real options as an extension of that of financial options. Pindyck, Dixit and others develop the framework of real options as an extension of that of financial options. Gollier, Jullien and Treich: Gollier, Jullien and Treich: Precautionary measures are preferred when the decision maker exhibits the “right” amount of prudence. Precautionary measures are preferred when the decision maker exhibits the “right” amount of prudence.

3. Decision making under ambiguity Aversion to ambiguity - the Ellsberg (1961) paradox: Aversion to ambiguity - the Ellsberg (1961) paradox: Urn A contains 50 red balls and 50 black balls Urn B contains 100 red or black balls. "You win $100 if a ball drawn from the urn you pick is red.“ Which urn do you pick? Which urn do you pick? Most people pick urn A. Most people pick urn A. Building on Gilboa and Schmeidler (1989), Building on Gilboa and Schmeidler (1989), Morgane Chevé and Ronan Congar (2002) show that: The PP amounts to deciding based on a maxmin rule, i.e. one tries to achieve the most under the least favorable scenario.

4. What is Precaution? [ Bernard Sinclair-Desgagné and Pauline Barrieu, 2005] All statements of the PP involve three key items: All statements of the PP involve three key items: AXIOM 1. [no scientific agreement] Scientific assessments form a set of n ≥ 2 Bernoulli distributions [ω 0,ω 1 ;q 1 ], [ω 0,ω 2 ;q 2 ], …, [ω 0,ω n ;q n ], where for at least one pair (i,j) we have that ω i ≠ ω j or q i ≠ q j Scientific assessments form a set of n ≥ 2 Bernoulli distributions [ω 0,ω 1 ;q 1 ], [ω 0,ω 2 ;q 2 ], …, [ω 0,ω n ;q n ], where for at least one pair (i,j) we have that ω i ≠ ω j or q i ≠ q j.

AXIOM 2. The regulator’s appraisal of scenarios and policies is such that: (i) [ordinal scores] Her evaluation of the various states of the world can be represented by a real- valued function u(∙) such that u(ω 1 ) ≤ u(ω 2 ) ≤ … ≤ u(ω n ); (ii) [potential threat] For at least one scenario i, u(ω i ) < u(ω 0 ); (iii) [scenario weighing] She attributes relative weights α i ≥ 0, ∑ i α i = 1, to each scenario; (iv) [weighted average criterion] She prefers scenarios and policies that increase the weighted average ∑ i α i (q i u(ω i ) + (1-q i )u(ω 0 )).

DEFINITION 1. [Precautionary strategies] A precautionary strategy is an action that modifies the probabilities or the alternative states in some scenarios and that, for at least one scenario i where u(ω i ) < u(ω 0 ), qualifies as self-protection or self- insurance. (a) self-protection p i p i < q i ; (b) self-insurance for some θ i for some θ i < 1, u(ῶ i ) - u(ω 0 ) = θ i (u(ω i ) < u(ω 0 )). u(ῶ i ) - u(ω 0 ) = θ i (u(ω i ) < u(ω 0 )). DEFINITION 2. [Impact of precaution] The impact of a precautionary measure is the vector d = (d 1,…,d n ) of weighted differences d i = α i (q i – θ i p i ).

Proposition The rule that “the regulator must adopt a precautionary strategy whenever Axioms 1 and 2 are verified” “the regulator must adopt a precautionary strategy whenever Axioms 1 and 2 are verified” is equivalent to having: (i) d 1 ≥ 0, (ii) d j + … + d n ≤ 0 when u(ω j ) ≥ u(ω 0 ), (iii) d 1 + … + d n = s for some s ≥ 0.

Captured often-precribed features of precautionary actions: Captured often-precribed features of precautionary actions: - cost-effectiveness: s ≥ 0 - proportionality: d 1 + … + d n = s - consistency: same s - flexibility: bigger n => higher degree of freedom

5. Application 1 - Fisheries conservation FAO’s Code of conduct for responsible fisheries: “The absence of adequate scientific information should not be used as a reason for postponing or failing to take conservation and management measures.” θ = (∑ i α i q i – s)/ ∑ i α i p i θ = (∑ i α i q i – s)/ ∑ i α i p i So: self-insurance is a substitute for self-protection the level of self-insurance necessary to compensate a decreawse in self-protection is bigger the larger θ already is and the more significant the overall current self-protection. the level of self-insurance necessary to compensate a decreawse in self-protection is bigger the larger θ already is and the more significant the overall current self-protection.

5. Application 2 - Nanotechnologies Royal Academy of Engineering of the UK’s report: “Until more is known about their environmental impact we are keen that the release of nanoparticles and nanotubes in the environment is avoided as far as possible. Specifically, we recommend as a precautionary measure that factories and research laboratories treat manufactured nanoparticles and nanotubes as if they were hazardous and reduce them from waste streams.” So, ∑ i α i q i > s, meaning that a complete ban is not what society wishes. But, no measure currently exists that would make d 1 + … + d n = s. d 1 + … + d n = s.

6. Concluding remarks Once the “price” society puts on alleviating a potential threat is elicited, precaution means to reduce the worst threat while making the total impact of the implemented measure equal to that price. Once the “price” society puts on alleviating a potential threat is elicited, precaution means to reduce the worst threat while making the total impact of the implemented measure equal to that price. What needs to be further dealt with: What needs to be further dealt with: - management of expertise, - political economy of safety regulation, - division of labor in implementation