Andri G. Wibisana
4. THE PRECAUTIONARY PRINCIPLE
4.4. The Precautionary Principle and CBA
A reference to economic considerations when applying the precautionary prin- ciple has been provided in Principle 15 of the Rio Declaration. However, some advocates of the precautionary principle argue that such a reference is not an integral part of the precautionary principle. We could refer this argument to Bernstein, for example, who states, ‘caveat about cost-effectiveness is foreign to the principle and originates from sources that are hostile to it, notably the U.S. government’.75
On the other hand, critics of the precautionary principle have also been trig- gered partly by the assumption that the precautionary principle has ignored the possible large costs that society could incur when applying the principle.
Indeed, several critiques of the precautionary principle have plausible reasons to argue that the principle might lead to inefficient outcomes.76 In this case, Brombacher, as quoted by Resnik, argues that the precautionary principle could lead to a highly conservative measure, which in turn might impede
72 Vogel (2003, p. 40).
73 Wiener argues that when the US government tried to justify the doctrine of pre-emptive strike, they employed a reason similar to that of the precautionary princi- ple. In criticizing the advocates of the precautionary principle, Wiener has argued:
‘. . . the terrorism example illustrates that the new U.S. doctrine of preemptive self- defense is based on the same logic as the precautionary principle. In advocating precau- tion, European leaders – especially Greens – make the same point that President Bush has made about terrorism: if we wait to confirm that the threat is real, it will be too late’
See Wiener, 2003, p. 240.
74 Sandin (1999, p. 898).
75 Bernstein (1999, p. 153).
76 Sunstein (2002, p. 103).
scientific and technological progress as well as economic growth.77Thus, fail- ing to consider the costs of taking precautionary measures may create a worse situation than the initial risks that the principle wishes to prevent.78
For this reason, some economists have argued that the implementation of the precautionary principle should be accompanied by an economic evalua- tion, namely cost–benefit analysis. David Pearce, for example, has hypotheti- cally drawn a conclusion regarding various regulatory standards resulting from different combinations in implementing the precautionary principle. The author argues that the strictest implementation of the precautionary principle will result in the highest regulatory standards. This is the case when the imple- mentation of the precautionary principle disregards the costs of taking precau- tionary measure relative to the benefits of doing so. Subsequently, the reference to the best available technology (BAT) will render lower regulatory standards compared to the strictest version of the precautionary principle.
However, the reference to BAT could also be insufficient to reduce the abso- lutism of the precautionary principle, because what constitutes the best avail- able technology could be economically prohibitive. In this case, the obligation to apply BAT could be construed in a less rigid manner, namely by taking into account the economic capability to provide such technology. Therefore, the implementation of the precautionary principle can be accomplished with refer- ence to the concept of BATNEEC (Best Available Technology Not Entailing Excessive Cost).79 In addition, Pearce concludes that these three regulatory standards, which result from the application of various versions of the precau- tionary principle, remain stricter than those resulting from the application of CBA alone.80
Although Pearce does not provide any empirical proof to support his thesis, he provides an important insight, namely that by referring to cost- effectiveness, the precautionary principle would create standards that are economically more feasible. On the other hand, reference to the precautionary principle would contribute to a more thorough evaluation of CBA. In this regard, Jordan and O’Riordan argue that the cost-effectiveness of an action is similar to the application of proportionality of response designed to show that there should be a regular examination to identify the social and environmental gains arising from an action to justify the costs.
77 Resnik (2003, p. 330).
78 Goklany concludes that errors resulting from the implementation of the precautionary principle could forego benefits, and therefore would increase the overall risks. See Indur (2000, p. 24).
79 The concepts of BAT and BATNEEC are discussed in Section 3.2.
80 Pearce (1994, p. 147). See also Ramchandani and Pearce (1992, pp. 16–21).
See also Nollkaemper (1996, p. 92).
Thus, there are two possibilities that should be taken into account by the decision-maker. On the one hand, the net social cost of adopting precaution- ary measures might be extremely large, especially if the adverse environmen- tal impacts turn out to be less important than previously predicted. On the other hand, ignoring irreversible consequences simply because they are uncer- tain might also result in an inefficient outcome, namely where consequences that have not been prevented finally occur. Given these two possibilities, some environmental economists believe that a realistic CBA would be one that incorporates the wider social and environmental costs of development.81 In this respect, Jordan and O’Riordan argue that the decision-maker should make a presumption in favour of high environmental quality, namely that a project should only be allowed if its benefits are much greater than (rather than simply greater than or equal to) the associated costs.82The arguments above confirm the need to incorporate the precautionary principle with CBA, indicating that one should seriously take into account the costs side of applying the principle.
However, one might wonder how CBA would calculate the benefits and costs of a proposed project when the decision-maker is faced with uncertainty.
In this case, the so-called quantitative CBA83might be subject to serious limi-
81 Some economists argue that environmental impacts and other non-market goods or services are relevant in both analysis and decision-making, hence, they deserve equal considerations with those for goods or services that can be priced through market mechanisms. See Hanley and Spash (1993, p. 10). Consequently, CBA needs to consider the total economic value (TEV) to embrace a more comprehensive evaluation. This value comprises several values, as put forward by Pearce, namely:
direct use value, for instance value that can be measured from market and survey data;
indirect use value, which correspond to the concept of ecological functions;
option value, expressing individuals’ willingness to pay (WTP) to undertake conserva- tion for future use. It is thus a value for keeping open the possibility of enjoying bene- fits of some goods or services in the future. It is a very significant value for CBA, given the fact that some developments could forego the benefits forever;
existence value, which reveals people’s preference for environmental assets unrelated to either current or future use of those assets.
In addition to these values, another important value should also be considered by the decision-maker when faced with uncertainty and irreversibility. This is the quasi- option valuedeveloped by Arrow and Fisher in 1974.
82 Jordan and O’Riordan (1999, p. 26). In comparing a developmental project and preservation, for example, the presence of risks of irreversible damage which could probably result from development implies that the decision-maker needs high benefits of development to reject preservation. See Crowards (1998, pp. 308–10).
83 This approach links up quantitative risk assessment and the decision-making process. Once risks associated with an activity or technology have been assessed, the decision-maker should decide whether the activity or technology will be regulated.
Thus each option will be valued on the basis of each risk. The term risk indicates that
tations. First of all, one might recall all the debates on the value of life and the environment and on the discount rates that are inevitable when carrying out CBA.84
Secondly, one might also doubt whether CBA will seriously take into account the issue of uncertainty.85 Thirdly, risk assessment, on which the quantitative CBA will be based, often does not reflect people’s perception of risk. This raises the question of whether the decision-maker should solely follow the results of scientific risk assessment.86
Finally, associating costs and benefits with quantitative risks, which means that the decision-maker places too much emphasis on the expected value of outcomes, might fail to reflect people’s attitude towards risk. This is because people’s attitudes towards risks are sometimes motivated by the level of util- ity associated with uncertain outcomes.87In this case, the decision-maker can no longer rely on the assumption of risk-neutrality. Instead, risk aversion should be used as an assumption.
Consequently, if CBA is to be applied alongside the precautionary principle, it should seriously take into account the issues of uncertainty and irreversibil- ity. It should give value to precautionary measures. This could be done by applying the quasi-option value, while assuming risk-neutrality.88In addition,
the magnitude of damage should be multiplied by its probability. See Fraiberg and Trebilcock (1998, p. 857).
84 Many commentators consider CBA as ethically problematic, since it is accused of ‘monetizing’ human life, health, safety, and the environment, calculating these assets as commodities. See for example Asford (1999, p. 200). For a more opti- mistic view towards CBA, see for example Kornhauser (2000, pp. 1037–57). Also Posner (2000, pp. 1153–77). Added to these debates, there are also difficulties as to how to measure the value of life. Fraiberg and Trebilcock argue that individuals may value their lives differently. Such differences may contribute to the problem of uncer- tainty surrounding quantitative CBA. See Fraiberg and Trebilcock (1998, pp. 858–64).
85 Van den Bergh criticizes the use of quantitative CBA applied to climate change policy, where uncertainty is pervasive. Van den Bergh (2004, pp. 386–7).
86 This issue will be discussed in the next section.
87 Neo-classical economic theory argues that a rational decision-maker will chose an option that maximizes its utility. Frank (1999, p. 201).
88 The theory of ‘quasi-option value’, first developed by Arrow and Fisher, uses the assumption of risk neutrality, namely by focusing on the expected value of possi- ble outcomes. However, it is assumed that some valuable information will be acquired in the future. In this case, the authors conclude that if a proposed development involves irreversible changes to the environment, and if there is uncertainty about the payoff to the investment in the development, the decision-maker should err on the side of under- investment, namely conservation, rather than over-investment, namely development.
This is because the development is irreversible, and hence the mistake of over-invest- ment cannot easily be remedied. In addition, the possibility of obtaining information in the future means that the expected benefit of development under uncertainty is less than that under certainty. Arrow and Fisher (1974, pp. 312–9).
CBA could also assume a certain type of risk aversion, and apply the theory of precautionary effect.89Alternatively, if one considers that there is a pure uncer- tainty, indicated by inability to assign probabilities to each outcome, one could apply the maximin rule90or the minimax-regret rule,91in order to compare the benefits and opportunity costs of implementing the precautionary principle.
Certainly, the best decision is one based on full information about all possi- ble outcomes. The best thing a decision-maker can do is to strive to resolve the uncertainty. However, it will take some time until the decision-maker resolves
89 According to the precautionary effect theory developed by Gollier et al., more uncertainty should induce a prudent decision-maker to take more precautionary deci- sions today in order to reduce exposure to risk in the future. According to the authors, the precautionary principle is justified if the prospect of improving knowledge induces the decision-maker to increase its current level of prevention. This situation will be achieved when ‘the precautionary effect’, measured by the level of prudence (P), is greater than twice the ‘wealth effect’, measured by the level of absolute risk aversion (A). In short, the precautionary principle is justified when P≥2A. In defining absolute risk aversion, the authors refer to the so-called Arrow–Pratt coefficient of absolute risk aversion, namely –U´´(.)/U´(.), and in defining the absolute prudence, the authors refer to the so-called Kimball coefficient of absolute prudence, namely –U´´´(.)/U´´(.), where U(.)indicates the utility function of the decision-maker. Gollier et al. (2000, pp.
229–53). Quite similarly, Kuntz-Duriseti also interprets the precautionary principle as the precautionary premium which is measured by the level of absolute prudence (P).
However, in this case, the author argues that the precautionary principle is justified when P≥A. See Kuntz-Duriseti (2004, pp. 291–301).
90 The maximin rule, in which the decision-maker focuses only on possible losses and choses an alternative that offers the lowest possible losses, is used by Bishop to explain the concept of Safe Minimum Standard (SMS), first developed by Ciriacy- Wantrup in 1968. The SMS is a decision rule which suggests that the decision-maker should avoid the use of resources in a zone where the depletion of resources becomes irreversible. By using the maximin rule, Bishop argues that in the presence of uncer- tainty and irreversibility, the SMS should be implemented unless the costs of doing so are ‘unacceptably large’. Bishop (1978, pp. 10–18). See also Ciriacy-Wantrup (1952, pp. 252–7) and Ready and Bishop (1991, pp. 309–12).
91 Palmini revises Bishop’s maximin model by employing a minimax-regret rule. In this regard, the decision-maker should choose an alternative that offers the lowest regret, namely the reduction of welfare resulting from making a wrong decision.
Here, the author uses not only the possible direct costs, but also the possible opportu- nity costs of each alternative. Similar to the conclusion of Bishop, Palmini argues that one needs large social costs of preservation (the SMS) or large benefits of development to reject the preservation. This conclusion confirms a shift of the basic assumption proposed by Ciriacy-Wantrup, namely that preservation is assumed to be highly bene- ficial unless it is proven that the preservation will require ‘immoderate’ social costs.
Palmini (1999, pp. 463–72). The shift of basic assumption regarding the benefits of preservation will result in a shift in the burden of proof. It is the proponents of devel- opment who bear the burden of showing that preservation involves an unacceptably high social cost. See Tisdell (1990, p. 84).
the lack of scientific certainty. Implementing the precautionary principle and CBA will recognize the issue of uncertainty and irreversibility in the decision- making process. This will create a decision that is flexible enough to allow a revision to be made, once necessary information has been acquired sometime in the future.