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6/01 c1CIRC/DaleDuep65-p. 15

 

THE ECONOMICS OF AQUATIC NUISANCE SPECIES PREVENTION
IN THE GREAT LAKES

By

Benjamin E. Warolin

A PLAN B PAPER

Submitted to Michigan State University in partial fulﬁllment of the requirements for the
degree of

MASTER OF SCIENCE
Department of Agricultural Economics

2003

ABSTRACT

THE ECONOMICS OF AQUATIC NUISANCE SPECIES PREVENTION
IN THE GREAT LAKES

By

Benjamin E. Warolin

just over a decade ago, the zebra mussel came to the Great Lakes. This rapidly
expanding species brought new attention to an issue of great importance to the Great
Lakes, Aquatic Nuisance Species (ANS). The term Aquatic Nuisance Species refers to
aquatic organisms not indigenous to a particular ecosystem, in this case the Great Lakes,
which impose costs on the ecosystem and society. The devastating ecological consequences
and the considerable direct economic costs of certain introductions, and the potential for
future invaders, give the ANS issue importance and argue for efforts to prevent future
threats. This paper provides an introduction to the economics of the ANS issue for the
purpose of policy evaluation. The analysis in this paper utilizes a framework for policy
evaluation that focuses on two facets of good policy design: the basis, the measure to which
the policy is applied, and the instrument, which is the policy tool used. An effective policy
will use an appropriate basis and instrument. This paper contains an review of a variety of
different policy bases and instrument and explore their strengths and weakness with regard
to economic theory and the unique nature of ANS invasions as well as which bases might

be appropriate for which instruments.

ACKNOWLEDGMENTS

I gratefully acknowledge funding from the Michigan Sea Grant College Program, project
number R/EP-9 under grant number NA76RG0133 from the Office of Sea Grant, National
Oceanic & Atmospheric Association (NOAA), US. Department of Commerce, and funds
from the State of Michigan. The US. Government is authorized to produce and
redistribute reprints for government purposes notwithstanding any copyright notation
appearing hereon. I would like to thank my committee for its help, particularly Rick Horan
for his patience. I would also like to gratefully acknowledge the support of my wife,

Stephanie, and to thank the Lord for his provision.

TABLE OF CONTENTS

LIST OF TABLES
LIST OF FIGURES
CHAPTER ONE INTRODUCTION AND LITERATURE REVIEW
1. Introduction to the Aquatic Species Dilemma
II. ANS in the Great Lakes and Vectors of Introduction
III. Effects of ANS in the Great Lakes Region
IV. Prevention of ANS
V. ANS Prevention Policies
CHAPTER TWO MODELING ANS INVASIONS
I. A Model of ANS Introductions and Invasions
II. Economic Efficiency
III. Level of Governance
CHAPTER THREE ANALYSIS OF GOVERNMENT POLICY OPTIONS
I. Introduction
II. Economic Incentives and Command-and-Control Measures
CHAPTER FOUR CONCLUSION
BIBLIOGRAPHY
TABLES

FIGURES

iv

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76

LIST OF TABLES

Table 1.1—Selected Non-indigenous Species with Origins, Date of Entry, and
Introduction Vectors

Table 1.2—Effects of Selected Non-indigenous Species

Table 1.3—Selected Ballast Water Treatment Technologies and Behavioral Methods

Table 1.4—Descriptions of Selected Ballast Water Treatment Technologies

Table 1.5—Selected International ANS Prevention Policies

Table 1.6—Selected Policies, Legislation, and Actions Relating ANS
Invasions in the Great Lakes

Table 2.1-Quadrants of Risk, Profit, and Recommended Action

Table 3.1—Uses of Economic Incentives

68

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LIST OF FIGURES

Figure 1.1—ANS Taxonomic Groups in the Great Lakes
Figure 1.2—ANS Introduction Vectors Over Time

Figure 1.3—Diagram of Ballast Water Management Options
Figure 2.1—The ANS Invasion Process

Figure 2.2-Social Welfare

Figure 2.3—Different Marginal Demand and Proﬁt Curves
Figure 2.4—The Incentives the Firm Faces

Figure I’M—Government Mandated Limit

Figure 3.2—Tax

Figure 3.3-Subsidy

Figure 3.4—Marketable Permit

Figure 3.5—Cross Compliance Measure

vi

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Chapter One

Introduction and Literature Review

I. Introduction to the Aquatic Nuisance Species Dilemma

Just over a decade ago, the zebra mussel came to the Great Lakes. This rapidly
expanding species brought new attention to an issue of great importance to the Great
Lakes, Aquatic Nuisance Species (ANS). The term Aquatic Nuisance Species refers to
aquatic organisms not indigenous to a particular ecosystem, in this case the Great Lakes,
which impose costs on the ecosystem and society. While not all non-indigenous species are
necessarily nuisances, the effects of all non-indigenous species may not have been
comprehensively studied, and so this paper will consider all non-indigenous species to be
ANS for ease of exposition.

The zebra mussel may be one of the best known ANS, although it is certainly not
the only one. The Great Lakes host over 140 non-indigenous species, representing a wide
range of taxonomic groups. ANS have a variety of effects on the Great Lakes ecosystem
due to their predatory and competitive behavior which can result in habitat modification,
the introduction of various pathogens and parasites as well as genetic effects (Leach at at,
1999). Certain species, such as the sea lamprey, play a largely predatory role. It feeds on an
assortment of fish species such as trout and salmon, occupying a unique position in the
food chain. Other ANS have altered the Great Lakes ecosystem through their competition
with native species. The purple loosestrife competes with native plant species and has widely

modified habitat in the region.

While Aquatic Nuisance Species have indelibly changed the Great Lakes ecosystem,
many individual non-indigenous species have had little noticeable impact. Overall, the
damage to the ecosystem from ANS can result in a number of changes. These changes can
include the extermination of species, changes in the food chain, changing habitats, and loss
of recreational opportunities.

Along with the ecological effects of ANS lie the economic costs. The economic
costs of Aquatic Nuisance Species can be divided into the direct economic costs and the
indirect economic costs. The direct economic costs result from such ANS activities as the
zebra mussels’ fouling of ﬁshing gear or the sea lampreys’ effect on the trout ﬁshing
industry (Reeves, 1999). The indirect economic costs derive from the value lost due to a
changing ecosystem. For instance, the watermilfoil’s effect on its habitat imposes a cost to
society by altering the ecosystem.

Valuing the ecological changes due to Aquatic Nuisance Species poses many
challenges. However, estimates of the economic costs of the ANS give an idea of the
enormous consequences of ANS invasions. The zebra mussel alone has resulted in
hundreds of millions of dollars spent on clearing water intake pipes, while the sea lamprey
has potentially caused billions of dollars(Reeves, 1999) in lost revenue to the recreation and
commercial ﬁshing industries. Again, while not all ANS produce such serious problems, the
ecological and economic effects of some of these species are real and quite signiﬁcant.

The devastating ecological consequences and the considerable direct economic costs
of certain introductions, and the potential for future invaders, give the ANS issue
importance and argue for efforts to prevent future threats. This chapter provides an

introduction to the ANS issue. It proﬁles the ANS which have come to the Great Lakes,

reviewing their effects, the vectors used for introduction, current policies, and possible
prevention strategies. In so doing, this chapter provides the necessary background for later

analysis of the prevention policies.

11. ANS in the Great Lakes and Vectors of Introduction

ANS vary with respect to taxonomic grouping, economic costs, ecological effects
and notoriety. Aquatic plants are the best represented taxonomic group and include both
the Purple Loosestrife and the Eurasian Watermilfoil: two plants with signiﬁcant ecological
impacts in the Great Lakes region. The remaining taxonomic groups include ﬁsh, algae,
mollusks, crustaceans, oligochaets, disease pathogens, hydrozoans, insects, and flatworms.
Worth noting is the fact that a higher proportion of ﬁsh species, relative to other taxonomic
groups, have signiﬁcant economic and ecological costs. Figure 1.1 lists the different ANS
taxonomic groups and the number of species within each.

The entire list of Aquatic Nuisance Species includes a large number of relatively
obscure organisms along with a few well-known species. Additionally, while a large number
of ANS have come to the Great Lakes, only a small portion, roughly 10%, have had
signiﬁcant effects on the ecosystem (Mills et a1, 1993). Table 1.1 lists a number of ANS
which have substantially affected the Great Lakes ecosystem, the year of their ﬁrst sighting
in the Great Lakes, as well as the probable modes of introduction.

The vectors of ANS introduction are identiﬁed in Table 1.1 by the following
acronyms: R(AQ) for release from an aquarium, R(F) for release of bait ﬁsh, R(A) for a
accidental release (a rather broad vector), R(D) for deliberate release like ﬁsh stocking, S(F)

for ship fouling, S(SB) for solid ballast, S(BVV) for ballast water, and C for canals. Two

other vectors also exist, unintentional release through cultivation as well as railroads and
highways.

These ten vectors can be arranged into ﬁve categories (Mills et 01., 1993). First,
deliberate release; this class of vectors includes both the stocking programs of governments
as well as the intentional introduction of non-indigenous species by individuals. These
vectors have not been responsible for any new introductions into the Great Lakes in more
than 40 years. The second category, unintentional releases includes the release of bait ﬁsh
and other organisms spread in that manner, release from aquariums, release from
cultivation, and accidental releases(a catch-all category). Unintentional releases have
contributed to the introduction of a large number of new ANS in the last ﬁfty years. Third,
shipping activities; this category includes solid ballast, hull-fouling, and ballast water. Ballast
water in particular has become a very important vector for ANS introduction. Highways
and railroads make up the fourth category, and they have largely ceased to be a signiﬁcant
vector. Canals are the ﬁnal vector. The Erie and Illinois Canals have allowed some ANS
into the Great Lakes, still posing a threat, though less so than certain other vectors.

Introductions of non-indigenous species into the Great Lakes were ﬁrst recognized
in the 1800's. ANS have utilized all the vectors listed above to enter the Great Lakes, while
the relative frequency of use has shifted over time among the vectors. Most of the 'ANS
currently in the Great Lakes came here as a result of human action, as can be seen in the list
of vectors. Table 1.1 lists the various vectors utilized by a selection of ANS. Figure 1.2
displays the different categories of introduction vectors, and when species utilized them.

Ships have played a role in introducing 29 non-indigenous species into the Great

Lakes from 1960-1991. That number constitutes over 60% of the ANS introductions

during that time period. Since the early 18005 the shipping industry has aided about 28% of
the ANS in the Great Lakes. While the percentage has increased, the means have changed.
Historically, ships have introduced ANS through solid ballast and hull-fouling (organisms
attaching themselves to the hulls of ships and being scraped off in different areas).
Throughout much of the last two centuries hull-fouling and solid ballast were important
vectors for ANS introduction due to ship construction and technology. Because of anti-
fouling methods and ballast tanks, these two vectors have declined in importance as a vector
of introduction. The hulls of wooden ships provided a place fOr organisms to attach
themselves and for other organisms to bore into. The general switch from wooden ships to
steel hulled ships generally thwarted hull-boring species, while the application of anti-fouling
paints on hulls and increased ship speeds further reduced the likelihood of hull-fouling.
However, hull-fouling still poses a threat for transporting organisms (Rainer, 1995), despite
the advances in the shipping industry.

Solid ballast has largely ceased to exist, and therefore poses no threat to introduce
potential ANS. However, solid ballast was responsible for certain introductions such as
purple loosestrife. When ships were not constructed with ballast tanks, they often required
weight to balance the ship properly. Solid ballast was that weight, and it could take many
different forms. Occasionally plants or other organisms were included in the ballast and
then deballasted in other regions. In this manner solid ballast transported potential
invaders.

At present, shipping activities, particularly ballast water, and unintentional releases
are the main vectors responsible for ANS introductions. Ballast water has become a quick

route for species to migrate. Ships that take on ballast in fresh water ports around the

world and unload the ballast in Great Lakes ports allow freshwater organisms to avoid
saltwater which provides a buffer zone for the Great Lakes ecosystem. Unintentional
releases result through many different ways including boaters, gardeners, ﬁshermen, and
aquarium owners. Identiﬁcation of the vectors of introduction will aid in the formulation of

policies to prevent ANS introduction.

III. Effects of ANS in the Great Lakes Region

As noted earlier, the consequences of ANS in the Great Lakes vary greatly among
species and may or may not have signiﬁcant economic impacts. Generally, these economic
effects can be separated into two categories, the direct economic costs caused by ANS
along with the economic values of the changes in the Great Lakes ecosystem. Certain
species, such as the sea lamprey produce both economic costs and changes in the
environment with signiﬁcant economic value. First, the sea lamprey causes losses in the
ﬁshing industry by killing valuable sport and food ﬁsh. Secondly, through its predatory
behavior on the ﬁsh population, the sea lamprey has changed the Great Lakes ecosystem,
thereby posing an economic cost for those who enjoyed the Great Lakes in their unaltered
state. Other organisms, like the purple loosestrife, create economic impacts largely through
its ability to change the ecosystem. Table 1.2 presents some of the most economically and
ecologically damaging Aquatic Nuisance Species along with their effects.

Counting the costs imposed by the ANS on the economy presents far less difﬁculty
than valuing changes in the ecosystem. Randall and Gollamudi (1998) write that “As beﬁts
the attempt to value what is basically a state of the world, non-use values, non-market

values, and values arising from uncertain future uses of various kinds loom large in the

analysis.” Many of the abovementioned species as well as other ANS compete with native
species and have the potential to greatly change their environment. Some changes, like the
reduction of trout populations by the

sea lamprey, pose readily measurable direct economic costs for industry which may run into
the billions of dollars (Reeves, 1999), along with the changes produced in the Great Lakes

ecosystem.

IV. Prevention of ANS

As outlined above, ANS can have signiﬁcant effects on the Great Lakes ecosystem
and economy, thus prevention is an important topic to consider. \Vithin the last two
hundred years a number of policies potentially may have helped prevent the introduction of
ANS. For instance, stricter policies on ﬁsh stocking would have kept certain ﬁsh species
out. This relatively inexpensive measure may have prevented the introduction of several
different ANS. (Prohibiting the stocking of non-indigenous ﬁsh would have had mixed
results though, since the sport ﬁshing industry beneﬁts from their presence.) However,
deliberate ﬁsh stocking has ceased to be a major vector for non-indigenous species entering
the Great Lake.

Within the last forty years two vectors have been responsible for new ANS
introductions, it is these two vectors which merit targeting: shipping (mainly through ballast
water) and unintentional releases. Both of these vectors contain its own set of difﬁculties
and requires a unique approach. The shipping industry presents a somewhat stochastic
threat to the Great Lakes ecosystem from ships that vary according to age, origin,

condition, and amount of ballast water among other factors. Each ship coming from a

foreign port carries either ballast or sludge (in the case of a NOBOBs, ships with no ballast
on board), which may contain potential ANS. Different alternatives exist to neutralize these
organisms. Currently, the US. government mandates that ships partially exchange ballasts
water in the open ocean to flush fresh water organisms and exchange them with organisms
native to the open ocean which will have a much greater difﬁculty adapting to the Great
Lakes ecosystem. This requirement does not apply to NOBOBs however, which account
for the majority of the ships entering the Great Lakes. Figure 1.3 diagrams the scope of
ballast water management. The treatment measures currently receiving the most attention
are onboard treatment measures.

The other recently-utilized vector, unintentional releases, is broader and thus its
many facets will require different tools. Many of the prevention options for ballast water
will not work for unintentional releases, particularly the technical options, which are tailored
for the ballast water problem. Other more general tools, such as education, subsidies, and
regulations may work well in different forms for both vectors.

With all these different prevention options, why has the government only instituted
regulations that basically direct captains to exchange ballast water when possible?

Economic efﬁciency and cost-effectiveness concern both the shipping industry and the
government. The government could adopt more severe behavioral regulations mandating
every ship entering the St. Lawrence Seaway to attaint a high salinity standard, such as 95%,
regardless of weather or safety issues. This however would immediately decrease the
proﬁtability of the shipping industry by forcing ﬂeets to keep some ships out of the Great
Lakes altogether or face high retroﬁtting costs. The fact that many policies do pose a threat

to the proﬁtability of the shipping industry means that it will have the incentive to oppose

the ANS prevention policies it views as too stringent. While table 1.3 does-list a number of
options, they do not share equal levels of feasibility. Also, the potential for new and
improved technical solutions exists, which has provided an argument against the
implementation of current options. Table 1.4 gives more detailed descriptions of a selection
of the prevention technologies that have received attention.
The Role ofSlu'ppingin ANS Innoduca'ons

For purposes of analysis, the Great Lakes shipping industry contains roughly three
segments (Reeves, 1999). US. lakers comprise the ﬁrst group. These U.S. ships stay within
the Great Lakes and pose no risk for introducing ANS to the Great Lakes, however, they
could be a potential vector for aiding the spread of species among the lakes. Canadian
lakers and salty lakers make up the second group. The lakers operate entirely within the
Great Lakes while the salty lakers generally stay within the lakes and coastal waters. The
salty lakers pose a risk, although much less than the ﬁnal group, the third party salties. This
ﬁnal segment of the shipping industry presents the greatest threat to the Great Lakes.
Third party salties, as their name suggests, carry the ﬂags of countries other than the US.
and Canada and engage in transatlantic commerce. They can introduce Aquatic Nuisance
Species by taking on ballast water in a foreign port and then dumping it in the Great Lakes.
This process works most effectively when the third party salties take on ballast in a
freshwater port, preferably with a similar climate to the Great Lakes. It is in this way that
the zebra mussel immigrated to the Great Lakes from Western Europe. The US. currently
has in place a policy whereby all ships must partially exchange ballast outside the EEZ
(exclusive economic zone, about 200 miles) to obtain a 85% level of ballast exchange, unless

the ship’s captain considers it unduly risky (Reeves, 1999). This measure was instituted to

kill as many potential ANS as possible by switching freshwater organisms in the ballast
water with saltwater species. This policy deﬁnitely helps, but it certainly does not eliminate

the risk of ships introducing new organisms to the Great Lakes through their ballast water.

V. ANS Prevention Policies

Conservation legislation has existed in the United States for many years in some
form, but only recently have laws been enacted which address Aquatic Nuisance Species in
the Great Lakes. The most recent major piece of national legislation was the National
Invasive Species Act of 1996 (N ISA, 1996), which ultimately had the effect of enacting
mandatory reporting requirements for ballast water exchange. Along with this important
contribution to the ANS solution have come efforts from around the world as Table 1.5
shows.

Policies that effect the Great Lakes have come from three fronts. Most importantly,
both the US. and Canadian governments have passed legislation in an attempt to prevent
the introduction of potential ANS. International organizations, such as the International
Maritime Organization have issued guidelines for dealing with this challenge. Indeed, non-
indigenous species pose a threat to many countries beside the US. and Canada. Thirdly,
many states and provinces have issued management plans to deal with the further spread of
Aquatic Nuisance Species. Table 1.6 contains some of the actions taken by different
governments and groups in confronting the ANS threat. While steps have been taken to
prevent ANS introductions, more work remains. The following chapters analyze the

economics of this issue and policies to deal with it.

10

Chapter Two

Modeling ANS Invasions

Invasive species are a form of biological pollution, and so it is natural to turn to the
economic literature on pollution control to search for potential solutions. Very often
people think about air pollution problems when they think about the economics of
pollution control. This literature is well-developed (e.g., Hanley et al., 1997) and offers
some relatively simple solutions that are being increasingly used in practice (US. EPA,
2001). But biological pollution exhibits some complexities that make the application of
conventional solutions problematic. For instance, biological emissions are stochastic and
essentially unobservable, which makes implementation of the sorts of emissions-based
policies that are usually proposed infeasible. Rather, biological pollution is more like
nonpoint source pollution such as agricultural runoff, although there are still differences that
make biological pollution unique. In this chapter, a model of ANS invasions is developed
and used to study the economic tradeoffs associated with the control of this type of

pollution. The next chapter uses the results to address policy design issues.

I. A Model of ANS Introductions and Invasions

Complexities abound in the ANS introduction process, but a model will help to
elucidate the process and aid analysis. Figure 2.1 graphically illustrates the different
components of the ANS invasion process and their interaction. ANS introductions are a

particular environmental outcome which can cause economic damages. The contributing

11

factors to the environmental outcomes are the choices ﬁrms make regarding production
and pollution control in order to maximize its own economic beneﬁts as well as random
forces of nature. These two factors interact to produce environmental outcomes which
may cause economic damages. The following paragraphs explore in more detail the
components presented in ﬁgure 2.1.

The choices that ﬁrms make are the ﬁrst component of the ANS introduction
process. In the ANS case, the ﬁrms referred to can be almost anyone, although this analysis
concentrates on the companies which operate commercial shipping vessels in the Great
Lakes. Firms make a number of production choices with biosecurity consequences that
affect the likelihood or probability of introducing a new ANS, which I refer to as the risk of
ANS introduction. These choices may involve decisions of whether to purchase certain
inputs or technologies, such as ﬁlters, which can drastically reduce the probability of an
ANS introduction, or management practices regarding the handling of ballast water, i.e.,
open—ocean ballast exchanges, ballasting locations, and ballast loading practices. The
production choices ﬁrms make can be either discrete or variable. Discrete choices, with a
ﬁxed number of options, include decisions relating to whether or not to adopt a particular
technology such as water ﬁlters or whether or not to exchange ballast water. Variable
choices, as the name suggests, include choices without a ﬁxed number of options such as
biocide applications.

Conventional pollution analyses often focus on emissions, which in the ANS case,
can be deﬁned as introduced species. However, in the ANS case, ﬁrms cannot prevent
emissions or introductions with certainty. In addition to ﬁrms’ choices, ANS introductions

depend on such random factors as environmental variables affecting whether an organism

12

gets into the ballast tank, survives the journey and is dumped into the new environment.
The stochastic nature of introductions can be illustrated by the fact that two ships ballasting
in the same port will not receive the same species in the same proportion, nor will two
identical sets of organisms dumped from two ships in the same port experience equal
survival rates. For instance, a ship with far more organisms in its ballast tank could
introduce fewer organisms into an area than a ship with far fewer organisms because such
factors as the length of the voyage and ballast water temperature and salinity affect whether
an introduction will actually occur. Another factor reducing the ability of ships to control
ANS introductions is the issue of detecting ANS emissions. Analogous to nonpoint
pollution problems, these introductions are largely unobservable given current monitoring
technologies. The inability to detect introductions means that ﬁrms will not know how
much effort to expend on biosecurity improvements to cost-efﬁciently achieve a desired
level of introductions. Nonetheless, the choices a ﬁrm makes certainly affects the
environmental outcome, although there is by no means a perfect correlation between the
two. Firms' choices therefore only affect the risk of introduction, and any reduction in the
probability of ANS introduction will have to originate from this component of the process.
An introduction may or may not lead to an invasion, which is the establishment of a
measurable and sustainable population within a region. Just as random factors affect the
occurrences of ANS introduction, so too does randomness (e.g., water temperature and
salinity in the new ecosystem, unﬁlled niches or existence of predators) affect whether an
introduction leads to an invasion. An invasion is therefore a complex process that is ﬁlled
with uncertainties. Still, at least part of the risk of an introduction is controllable through

ﬁrms’ choices: if ﬁrms can undertake biosecurity measures to reduce the risk of an

13

introduction then the risk of invasion is also reduced. To make appropriate biosecurity
choices, it is helpful to know which species might pose the greatest risk of an invasion. This
can be a difﬁcult task. Peterson and Vieglais (2001) and Ricciardi and Rasmussen (1998)
demonstrate that the identity of likely potential invaders can be predicted by considering the
similarity between the species’ native ranges and the potential area of invasion as well as the
niche an invader could ﬁll. Random factors affect the occurrences of ANS introduction,
and whether an introduction leads to an invasion, which is the establishment of a
measurable and sustainable population within a region.

Ultimately, our concern lies with the economic outcomes of ﬁrms’ choices. Firms’
choices directly create both beneﬁcial and damaging economic outcomes. The economic
beneﬁts of a ﬁrms’ production have both private and public portions; the private being the
proﬁts that ﬁrms earn, while the public portion is the consumer surplus, or the beneﬁt that
consumers gain from having a certain amount of risk-creating shipping. In the ANS case,
the economic damages of production derive from ANS invasions. While the effects of
future invaders are unknown, their predecessors have shown that certain ANS do inﬂict
serious economic damages, however the economic damages that any particular future ANS
will create are quite uncertain. Economic damages can include the costs of adapting to the
new ecosystem, lost recreational opportunities and lower aesthetic values (e.g., zebra
mussels on docks, fewer sport ﬁsh due to sea lamprey and dead alewives on beaches).
Certain ANS, particularly sport ﬁsh such as salmon, can actually create a degree of
economic beneﬁt through their introduction, but most other species, such as zebra mussels

and sea lampreys, have caused economic damages. While estimates of economic damages

14

should be read with caution, the economic damages of the zebra mussel have been
estimated at $3 billion a year (Pirnentel, 1999).

What can be done to prevent future environmental outcomes of increasing numbers
of ANS and potentially large economic damages? Before answering this question, it is
useful to consider how much prevention is desirable. To do this, I focus on economic

tradeoffs that emerge as control efforts are increased.

11. Economic Efﬁciency

Tradeoffs are the central theme of ANS policy analysis. The overarching tradeoff or
the risk of ANS introductions is between the beneﬁts and damages to society. This relates
to the idea of economic efﬁciency. Economic efﬁciency refers to the maximization of social

welfare, which is the difference between social beneﬁts and social costs.

Social Welfare

Reducing the risk of ANS invasions and the resulting expected economic damages is
possible, however, this will generally come at a cost. It is worth asking whether society
would beneﬁt from less risk at the price of less production, assuming a correlation exists
between invasions and production. Figure 2.2 visually depicts the economic tradeoffs for
the single ﬁrm case, with risk of ANS introduction on the horizontal axis and dollars on the
vertical axis. The risk of introduction is modeled on the horizontal axis because
introductions (not invasions) are most closely tied with an individual ﬁrrn’s choices and we
wish to illustrate the economic/ environmental tradeoffs facing individual ﬁrms (in a

multiple ﬁr setting, the risk of invasion depends on the choices of all ﬁrms). The downward

15

sloping line represents the marginal social beneﬁt (MSB) of risk (unless otherwise noted,
ﬁrm-level risk refers to the risk of an introduction). Here, ﬁrms choose the level of risk
indirectly based on their production and biosecurity choices, which in turn create beneﬁts to
ﬁrms, consumers, and factors of production such as labor. The upward sloping line
represents the expected marginal damage (MD), or the expected marginal cost imposed on
society, of the risk of ANS introduction.’

The existence of a social beneﬁt from risk derives from the fact that it is linked to
production, and the production of a certain quantity of a product gives society a greater
beneﬁt thanthe damage of the pollution it creates, up to a point. Total social beneﬁts of
producing a particular level of risk are deﬁned as the area under the MB curve at that risk
level. Similarly, total damages are deﬁned as the area under the MD curve at the particular
risk level. As long as the MSB curve is above the MD curve so that the beneﬁt of additional
risk exceeds the damage, then society gains from additional risk. This occurs at lower levels
of risk. However, when the MD curve is above the MSB curve, then each additional unit of
risk imposes more damages for society than the beneﬁts it creates. For society to maximize
its welfare, the risk level should equal the point where the MSB and MD curves intersect, r*.
Moving away from this point in either direction would cause society’s welfare to decrease.

If society does not accept any risk then neither will it reap any of the beneﬁts of a shipping
industry.

In is important to emphasize that while society may recognize r* as its optimal level

of risk, r* is only a probability measure that describes the level of randomness. The actual

 

1Expected marginal damages equal the expected value of marginal damages of
invasion times the marginal risk of an invasion due to increased risk of an introduction.

16

environmental outcome may be much different than predicted by the amount of risk due to
stochastic natural forces. While this fact deserves consideration, society can neither control
nor predict the effect of the random natural forces, and so it does not know the exact state
of the world that will arise after the level of risk has been selected. Thus, the ex ante
societal optimum remains at r* since society can only make decisions based on its

expectation of outcomes under different potential states of the world.

Multiple Firms

The case in which multiple ﬁrms inﬂuence the probability of an invasion is
illustrated in ﬁgure 2.3. This ﬁgure focuses on the two ﬁrm case, although the results
extend readily to incorporate additional ﬁrms.

Firms receive different beneﬁts from producing a given level of risk. Optimally,
each ﬁrm should equate its marginal proﬁts from generating risk with the marginal damages
arising as a result of the risk. Figure 2.32 graphically illustrates this for the case of two ﬁrms
with different marginal proﬁt (Mir) curves. The shapes of Mn curves differ, and may
possibly intersect, indicating that the marginal proﬁt per unit of risk varies among ﬁrms.
Also, for a given level of risk, the ﬁrm with the greater Mn curve produces larger proﬁts
(the area under the M1: at a particular risk level). Thus the marginal social beneﬁt of risk
also differs among firms. The differences between the MD curves indicate that for any

given level of risk, ﬁrms with larger MD curves are expected to create more damage (e.g., an

 

2Figure 2.3 portrays a special case in which the marginal damage curve for one ﬁrm
is independent of the risk created by the other ﬁrm and the risk of invasion is independent
across ﬁrms. This is only for illustration purposes. In reality, the MD curve of one ﬁrm
depends on the actions of the other ﬁrm(s).

17

introduction by one ﬁrm is more likely to cause an invasion, due to the types of species it
may be carrying). The variation among M1: and MD curves indicates that the socially
optimal level of risk varies among ﬁrms. Figure 2.3 demonstrates this; Mm, the marginal
cost of ﬁrm 1, intersects the marginal damage (MD,) curve at r,*, whereas M1:2 intersects
MD2 at L}.

Recognizing that ﬁrms have different MD and M1: curves leads to a critical question:
What is the efﬁcient allocation of risk (i.e., Who should optimally do more to reduce risk)?
Table 2.1 categorizes ﬁrms by their marginal proﬁts as well as their marginal damages in
order to visually illustrate which ﬁrms should reduce their risk. As noted, a tradeoff exists
between social beneﬁts, which include proﬁts, and the expected damages of the risk of ANS
invasions. However, not all ﬁrms face exactly the same tradeoffs at the margin. For
instance, all else equal, it is beneﬁcial to allow ﬁrms with the highest marginal proﬁt levels to
reduce their risk less than ﬁrms with lower marginal proﬁts. This is because, for each unit
of additional risk, the ﬁrms with larger marginal proﬁts will generate larger economic
beneﬁts than ﬁrms with smaller marginal proﬁts. Similarly, society beneﬁts when ﬁrms with
greater marginal damages lower risk more than ﬁrms with smaller marginal damages. This is
because, for each unit of additional risk reduction, the ﬁrms with larger marginal damages
will reduce expected damages by more than ﬁrms having smaller marginal damages. Table
2.1 demonstrates that, when all else is held constant, the expected marginal damage and the
marginal proﬁt of a ﬁrm affect its optimal level of risk reduction. Figure 2.3 graphically
illustrates the different optimal levels of risk for two ﬁrms with differing marginal proﬁt and

marginal damage levels.

18

Market Failure

Properly functioning markets force ﬁrms to account for all the costs of productions.
However, occasionally externalities exist. Extemalities are damages caused by the
production process, such as pollution, borne by society rather than the ﬁrms responsible for
the pollution. ANS introductions are an example of an externality, since society bears the
cost of the economic damages from ANS instead of the ﬁrms responsible for the pollution.
Hence, a degree of economic inefﬁciency exists here, and trading lower risk for lower
proﬁts could improve the efficiency of the economy.

Figure 2.4 is a variation of ﬁgure 2.2, the difference being that the marginal proﬁt
(Mn) curve replaces the MSB curve. The Mn and MD curves in ﬁgure 2.4 segment the
graph into four triangles numbered I-IV. A proﬁt-maximizing ﬁrm will produce up to the
point where the marginal proﬁt from creating additional risk equals zero, to. At this point,
the ﬁrm’s proﬁts equal the sum of triangles I, II,»and III. However, at r0, the expected
damage from the risk of ANS introduction equals the sum of triangles II, III and IV,
meaning that the net social beneﬁt of the risk equals the difference between triangles I and
IV. This is not socially efﬁcient. Producing at the point r* would maximize net social
welfare, represented by triangle 1, while limiting proﬁts to triangles I and 11. While reducing
the probability of ANS introduction does increase social net beneﬁts, the reduction it causes
in ﬁrms’ proﬁts likely means that ﬁrms will not voluntarily undertake actions to curb the
amount of risk they create, thus implying the need for government intervention. In'the case
of ANS, the MD of the risk of new introductions does not equal the MSB. Figure 2.4
illustrates the similar relationship to that depicted in ﬁgure 2.2, but from the perspective of

the ﬁrm. In this case, the downward sloping curve represents the marginal proﬁt of the

19

ﬁrm and the upward sloping line represents the marginal damages to society. The vertical
and horizontal axes remain the same. The socially optimal level of risk is r*, the point
where marginal proﬁts equal marginal damages. However, proﬁt maximizing ﬁrms will
accept risk up to the point where additional risk yields no additional proﬁts, r0, if the market
does not force ﬁrms to absorb the marginal damages of the risk they accept. The social
costs of market failure equal the area between the MD and M7: to the right of r’“, which
means that the social costs of market failure equal the total damages of risk beyond the
optimal level, r*, minus the proﬁts from the risk beyond r*. To society's disadvantage, the
market does not hold ﬁrms responsible for the risks they pose, and thus ﬁrms create a level
of risk, to, higher than the social optimum, r*. This situation is indicative of a market failure
induced by an extemality of the production process: a well-recognized cause of market
failure (Arrow, 1969). Market failure means that operation of market forces has not yielded
the socially optimal outcome, thus imposing unnecessary costs on society. Figure 2.2
represents these social costs as the area between the MSC and MSB curves between H and
to. To obtain an outcome with a higher degree of social welfare will require government
intervention to induce ﬁrms to bear a level of risk closer to r*.

ANS invasions are low probability, non-incremental events that can have very large
damages. Policy makers who fear the potential down-side risk may not with to pursue an
economically efﬁcient solution. Rather, they may wish to pursue a ‘safety-ﬁrst’ outcome in
which invasion risk is reduced to some pre-speciﬁed level in a least-cost manner. Often the
speciﬁed level of risk would be small or even possibly zero. Such an outcome would not be
optimal ex ante as it may imply that large costs are incurred at the margin in return for small

reductions in expected damages. But if a least cost solution is to be obtained then econoic

20

tradeoffs are still important and the previous discussion essentially applies. The only
difference is that tradeoffs occur between the beneﬁts of ﬁrm-level risk and the risk of an
invasion, as opposed to the beneﬁts of ﬁrm-level risk and expected damages. The only case
in which tradeoffs are not relevant is when the risk of invasion is zero. Essentially such a
constraint would imply a situation in which no trade is allowed in the Great Lakes. It is
doubtful that such an outcome would ever be deemed desirable. Because economically
efﬁcient and safety-ﬁrst outcomes are each determined based on similar sorts of tradeoffs,

the focus is mainly on ex ante efﬁciency in what follows.

III. Level of Governance

The identiﬁcation of market failure and the recognition of the need for government
intervention lead to the difﬁcult task of crafting public policy. This task becomes more
difﬁcult when there is uncertainty surrounding who has the responsibility for drafting the
public policy. In the case of the ANS, three different levels of government have a stake in
the condition of the Great Lakes: the national (the US and Canada), provincial (Ontario),
and state (eight US states). Throughout this paper the word ‘government’ refers to the
governments listed above. Various governments on the different levels have already taken
steps to address the introduction of ANS. Government mandates have mostly come from
the two national governments involved, while the state governments have largely focused
on action plans. While state and provincial governments may have a positive role to play in
dealing with ANS, the ability of species to spread within the region may indicate the need

for the most serious efforts to come from the national and international levels.

21

Many studies of international environmental agreements use game theory to model
potential outcomes, oftentimes looking at cooperation within a group of nations. (see
Ecchia and Mariotti, 1998; Carraro and Siniscalco, 1998; Barrett, 1994). The potential for
c00peration seems larger when fewer potential free-riders exists, such as in the current
situation involving only two countries. However, the US. and Canada may have different
values for the costs and beneﬁts of ANS risk, and thus will not pursue the socially optimal
outcome, r*, unless they cooperate. If they do not cooperate, then an inefﬁciently low level
of pollution control will result. Interestingly, since social net beneﬁts are greater with
cooperation, both could be better off by cooperating. This does not mean that cooperation
will necessarily make each country better off. One country may gain more from risk
reduction than the other country and may have to compensate the other country or
compromise on the size of the risk reduction.

Endres and Finns (1999) identify three areas countries must agree on if they want to
enter into an environmental agreement: a free-riding deterrent, an abatement target, and a
rule for burden sharing. The US and Canadian governments have an incentive to work
together and effectively address this problem, thus lowering the potential for free-riding.
Cooperation between these two governments shares some similarities with a repeated

prisoner’s dilemma game". In this case, non-cooperation by either country could have

 

3In the Prisoner’s Dilemma game, two prisoners are questioned separately and each
given the option to either squeal on the other prisoner or say nothing. If neither prisoner
says anything, they both receive short jail times, thereby optimizing their joint utility. If one
prisoner does confess, he receives no jail time if the other prisoner does not confess. The
second prisoner then receives a very lengthy sentence. However, if both prisoners confess,
they both get long sentences. Depending on the potential sentences, prisoners in one
period games have the incentive to confess and maximize their utility, but in repeated games
where retribution is possible, then cooperation (i.e., silence by both prisoners) will be the
prisoners best strategy.

22

signiﬁcant deleterious effects on both countries, thereby lowering the beneﬁt that either
country has from free-riding. The ANS extemality does not limit itself to any particular
political boundary. Unless both countries work to lower the probability of ANS
introductions, the lack of cooperation will limit the ability of any one country to lower the
probability of introduction. As for an abatement target, this may take a fair amount of
consideration on both sides about the acceptable trade-offs between abatement and cost,
particularly the cost to the national shipping industries and the industries dependent on
shipping. It would seem that both countries would seek fairly similar abatement targets
since they each have experienced the considerable costs of ANS introductions, indicating
that a low abatement target might appeal to neither. Of course, the political process of
selecting an abatement target may lead either or both countries away from their similar
efﬁcient levels of abatement. The conﬂict over the rules for burden sharing will likely vary
directly with the estimated administrative and monitoring costs. Presently, the
administrative and monitoring costs are not excessive, and the US and Canadian
governments have shown a willingness to police this problem together (Reeves, 1999).
While potential subjects of international environmental agreements deserve a careﬁil review
under Endres and Finus’ (1999) three conditions, a cursory review of the pollution problem
and the countries involved suggests that fertile ground exists here for a mutually beneﬁcial

agreement.

23

Chapter Three

Analysis of Economic Policy Options

1. Introduction

In Chapter 2, I discussed the potential role for government intervention when the
marginal costs of ANS introductions outweigh the marginal beneﬁts. In order to develop
economically efﬁcient or cost-effective policies to deal with the introduction of ANS, three
things need to be known (a) the available policy options, ([2) an understanding of the speciﬁc
design issues associated with the various options, and (c) a determination of the options that
can cost-effectively deal with the situation. Indeed, a number of policy options are available,
but the suitability of each option may vary. Even those options that may be suitable may
not be very cost-effective unless they are designed appropriately to best deal with the
problem. The economic literature on pollution control addresses these issues, largely by
answering the following three questions: who to target, how to deﬁne and measure
compliance, and lastly, how to induce changes in production and pollution control practices
to improve environmental quality(Shortle and Horan 2001). Each of these questions needs

to be answered in order to formulate cost-effective ANS pollution policies.

Who to target?

The question of who to target involves specifying the person or group towards
whom policies are directed. This involves identifying the potential targets, analyzing which
groups pose the most signiﬁcant threat, and determining if there is a cost-effective way to

target these groups. In the case of ANS the potential targets are all groups and individuals

24

that affect ANS introductions in the Great Lakes. The vectors of introduction include
ballast water, solid ballast, canals, ship fouling, deliberate releases, aquariums, bait ﬁsh
releases and accidental introductions. Rather than consider all vectors of introduction and
the many groups which affect them, we focus on ballast water, since this vector is
responsible for most of the recent introductions. As we indicate below, focusing on only
one group limits efﬁciency. But targeting groups with little impact on pollution generates
costs without producing substantial offsetting gains. Indeed, a focus on ballast water can
reduce program start-up and administrative costs and provide greater beneﬁts in the near
term, at least relative to a program that tried to do too much and spread its administrative
resources too thin. This focus is consistent with other pollution control programs that
began by mainly focusing on large point sources and ignored smaller point sources and also
non-point sources. Over time it may be beneﬁcial to include other potential sources of
ANS as well. The present list of potential targets then includes all ships loaded with ballast
entering the Great Lakes, ships without ballast water entering the region (N OBOB’s), ships
that sail exclusively on the Great Lakes, and ports. The threat posed by these potential
targets varies. For instance, ocean going ships that carry ballast differ in respect to such
factors as whether and how thoroughly they exchanged ballast on the open ocean, the
amount of sediment in the ballast tanks, the last port in which the ship loaded ballast, and

physical characteristics.

What is the basis for compliance?
Compliance is the basis on which the instruments are applied. Generally, policies

may be based on emissions, proxies of environmental performance, management practices,

25

input usage, or ambient pollution levels. For instance, in conventional pollution problems,
the government can subsidize abatement, reductions in the use of polluting inputs, or the
adoption of environmentally friendly technologies. Here, abatement, inputs, and
technologies represent different policy bases. The nature of the particular sort of pollution
problem will determine the cost-effectiveness of the policy basis. Identifying an effective
compliance measure for a particular problem narrows the ﬁeld of potential policy
instruments, focusing attention on the most promising policy instruments.

An appropriate basis is one which is easily measured, monitored, and correlated with
the environmental outcomes, in addition to being affected by ﬁrms’ choices. Moreover, a
ﬁrm must understand how its actions affect the compliance measure for the incentives to
induce improved environmental outcomes.

Emissions are often viewed as an ideal policy basis, due to their high correlation
with environmental damages. However, policies based on emissions require the ability to
accurately monitor the amount of pollution emitted from various sources. An inability to
obtain accurate emissions measurements limits the use of emissions as a policy basis. In the
case of ANS, emissions of nuisance species are not easily observed at reasonable cost.
Therefore, another basis for policy must be chosen.

Performance proxies are normally emissions estimates which are derived using
information on ﬁrms’ management practices and input use. In the ANS case, a
performance proxy might be an estimate of the likelihood or risk of an ANS invasion, based
on information such as whether a ship exchanged ballast water, the last port it entered,

along with the technologies and ballast management practices it utilizes.

26

Every ﬁrm uses inputs in its production process. Inputs may include physical
goods, technologies, and management practices, and certain inputs may contribute to the
production or abatement of pollution. For instance, the use of chemical biocides to treat
ballast water is an abatement input. Therefore, policies can be based on the use of inputs
affecting pollution. Existing ballast water regulation largely focuses on dealing with inputs.
For instance, the US. mandates that ships entering the Great Lakes perform an open-ocean
ballast exchange(management practice), Argentina requires ships calling in Buenos Aires to
chlorinate their ballast tanks(physical good), and Panama prohibits the dumping of ballast in
the Panama Canal (management practice) (Perakis 2001).

The ﬁnal policy basis is ambient pollution, or the overall level of pollution in the
environment. In the case of ANS, the number of new organisms in the region would be a
good indicator of the ambient pollution level. A regulatory agency would monitor the
region for the presence of a new species. Once the regulatory agency detects a new ANS,
the group of potential contributors would be identiﬁed based upon the estimated time of

introduction, and a penalty would then be imposed on these potential contributors.

HOW to induce changes?

The third question from the pollution management literature which relates to ANS
management is how to induce changes in production and pollution control practices to
improve environmental quality. At least four avenues can be used to induce the desired
changes: economic incentives, regulations (i.e. mandates or command-and-control policies),
marketable permits, and educational/ voluntary programs (Baumol and Oates, 1988). Which

of these methods will most effectively induce the desired changes in production and

27

pollution control practices depends on the design of the policy, the amount of desired
change, and the targeted ﬁrms, since policies can vary in effectiveness across ﬁrms.
Generally, the policies considered here are analyzed with respect to their ability to produce
an economically efﬁcient outcome, however, some policies can produce positive change,
but are incapable of effecting economically efﬁcient outcomes. This section contains a
broad overview of the policy options. More detailed discussions of some speciﬁc
instruments will follow.

Command-and-control measures are rules or mandates to which a ﬁrm must adhere
(or else face a high penalty). These measures can effectively promote the adoption of
practices and technologies that enhance environmental quality when enforcement and
penalties exist. Rules can be structured so that polluters have more or less freedom in
achieving policy goals. Rules can control either outcomes(performance-based rules) or
processes(design-based rules). Design-based rules impose inﬂexible restrictions on
polluters, such as a limit on certain inputs. As described above, this is the predominant
approach of existing policies. In contrast, performance-based rules mandate that the
polluter lower pollution by a given amount and allow the regulated party to ﬁnd the most
cost-effective way to meet the requirements.

Economic incentives most often come in the shape of taxes or subsidies, but they
can take many other forms. Economic incentives vary in their applicability to different
scenarios, as we describe below, but they all work under the same principle: to create an
opportunity cost of engaging in activities that pose environmental risks. As described in
Chapter 2, free markets do not create a price for using the Great Lakes as a waste receptacle

for biological pollution. Since environmental risks are an extemality of the shipping

28

industry and, in the case of ANS, these risks pose no cost for ﬁrms, ﬁrms will create too
many risks. Economic incentives make it costly for firms to create risks, and so they will
engage in fewer risky activities.

Economic incentives have been used around the world to induce better economic
outcomes. For instance, many countries in the European Union utilize such economic
incentives as fertilizer and pesticide taxes (Hanley, 2001). Environmental protection
programs in the US. have also used economic incentives to a degree. For instance, the
Conservation Reserve Program pays farms to keep land out of production (a subsidy) to decrease
soil erosion and increase water quality and the EnrimnmmtalQuaﬁy Incentive: ngmm shares
the cost (a subsidy) of approved measures that target environmental concerns (Ribaudo,
2001). Economic incentives have addressed such areas of pollution as industrial pollution,
brownﬁelds, municipal sewage plants, and agricultural pollution (Hanley, 2001; NCEE, 2001;
Ribaudo, 2001). Table 3.1 lists a number of different economic incentives and examples of
their use.

As noted above and in table 3.1, a number of pollution control initiatives use taxes
as the policy instrument. Baumol and Oates (1971) demonstrate the ability of tax on
emissions to produce an efﬁcient outcome. Generally, taxes increase the opportunity cost
of polluting by applying a charge to the polluter which can be based on emissions or a
proxy, inputs, management choices or ambient pollution levels. Subsidies work in a similar
manner to taxes, but rather than applying a charge, subsidies provide payments to those
ﬁrms who take steps to reduce their environmentally risky behavior. Both taxes and

subsidies have potential to cost-effectively lower the probability of ANS into the Great

29

Lakes. The following section more closely analyzes each of these policy instruments and
their applicability to the ANS situation.

Marketable permits have displayed potential as a method of solving speciﬁc
pollution problems (see Table 3.1). Hanley et a1, (1997) draw on the work of Montgomery
(1972) and Tietenberg (1984) to demonstrate the least-cost properties of marketable permit
systems. While marketable permits have performed well in certain cases, they are restricted
in the situations in which they can help. As with all other regulatory instruments,
marketable permits require the identiﬁcation and measurement of a good such as an
emission or input. A regulatory agency will then assign polluters the right to use or produce
a speciﬁed amount of the targeted good. The speciﬁed amount will depend on what level
of abatement policymakers hope to achieve. Individuals or ﬁrms may then sell all or part of
their right to produce or use the good. The scarcity of the permits along with the ability to
trade creates incentives for ﬁrms to reduce their emissions at least cost. An important
hurdle exists for the efﬁcient operation of this economic incentive; marketable permits
require goods to be targeted that can be relatively inexpensively traded and monitored.
Ballast water, possibly the most obvious option for marketable permits, would work well
were it not for certain characteristics of the problem: the number of organisms can vary
signiﬁcantly among equal quantities of ballast water, and the introduction of only a few
organisms may be a sufﬁcient base for a population. ANS prevention policies seek to
minimize the risk of new ANS introductions, and marketable permits need an appropriate
target to effectively minimize the risk of ANS introductions. Marketable permits, if
targeting a good that increases the probability of ANS introductions, could shift the usage

of the good to the ships with the highest marginal cost of abatement, thus cost effectively

3O

lowering usage of the good. Minimizing ANS introductions require that the targeted good
corresponds with the probability of ANS introductions.

Cross compliance pollution control measures have been enacted to deal with the
ANS situation in the Great Lakes, e.g., Public Act 114 (Sikkema, 2002). Cross compliance
measures work by tying the behavior of a ﬁrm to its eligibility to participate in a government
program. In the ANS context, shipping ﬁrms which pose a high risk of introducing ANS
would lose their eligibility to receive subsidies unrelated to ANS control. Cross compliance
measures basically operate as a binary instrument, either the ﬁrm retains eligibility for the
entire subsidy or it loses eligibility to receive the subsidy. As such, ﬁrms face slightly
different incentives, either abate to the smallest degree possible to retain eligibility for the
subsidy, or do not decrease emissions at all. Cross compliance measures do not affect the
marginal cost of polluting, which creates the aforementioned incentives that may not
produce socially optimal outcomes. Although cross compliance measures may not produce
socially optimal outcomes, they do have the potential to inexpensively lower the probability
of ANS introduction, which in effect means that this tool can target ﬁrms with low
abatement costs and those that might abate otherwise, i.e., the ‘low-hanging ﬁuit’.

Liability can create a ‘strong incentive’ for ﬁrms to curb the pollution damages they
cause (NCEE, 2001). Liability rules have been used successfully in the US. in the
Connbrebenriw Environmental Response, Conpenraﬁon, and Uabz'ﬁgy Art (CERCLA). Holding ﬁrms
liable for pollution implies that they have the responsibility to pay for the pollution damages
they create. Different forms of liability exist and we discuss them below. Segerson (1995)
identiﬁes three types of liability rules that may have the potential to address different

environmental problems: strict liability, liability under negligence, and a joint and several

31

liability standard. Strict liability holds the polluter responsible for all damages caused by the
pollution, while liability under negligence only holds a polluting ﬁrm responsible if it did not
exercise due care (Segerson 1995). That party would then bear full responsibility for all the
pollution with the right to pursue other contributors. An introduction of a new ANS is a
binary event. Either the species exists in the Great Lakes or it does not. Additionally, there
is no practical method for determining if a ship ever dumped a particular non-indigenous
species into the Great Lakes. Under a joint and several liability standard, the identity of only
one party who contributed to the pollution need be ascertained; this party can then be held
responsible for all the pollution damages, and has the right to then seek compensation from
the other contributors (Segerson 1995). Again, the impossibility of proving that a ﬁrm ever
dumped a particular species into the Great Lakes lessens the potential effectiveness of this
liability measure. For these reasons, liability rules do not seem to have the ability to provide
a signiﬁcant incentives for ﬁrms to abate. Because liability would only be applied when
ANS have been discovered in the Great Lakes, liability is similar to a tax on ambient
pollution levels. The ‘Ambient Pollution’ section below more thoroughly analyzes this
situation and the reasons neither ambient pollution nor liability can slow the introduction of
ANS.

The following economic incentives and other sorts of policy instruments have
limited potential to effectively address the ANS situation. Nonetheless, each of the
following policy instruments have effectively dealt with other environmental problems (see
Table 3.1) and, each will receive a brief analysis of its operation and the attributes which

would likely limit its effectiveness in the ANS situation.

32

Deposit-refund systems have worked well in many states with beverage containers.
This economic incentive is tied to a good, and attempts to promote recycling of that good.
Deposit-refund systems work by requiring the consumer to make a deposit on a product at
the time of purchase. That person can then return the product for recycling and receive the
deposit when he no longer has any use for it. A study by the National Center for
Environmental Economics (NCEE, 2001) notes that deposit-refund systems basically
amount to an initial product tax coupled with a recycling subsidy. This study also notes the
potential for high administrative costs with deposit refund systems. In the case of beverage
containers, the consumer will pay a deposit of ﬁve or ten cents for each bottle or can
purchased. Each beverage container can then be exchanged later for the refund. An
important question when considering a deposit-refund system is to what good will the
refund be tied? The ANS situation does not provide a good answer to this question. Due
to the lack of a suitable target, a deposit-refund system is not a promising economic
incentive for the ANS problem.

Reporting requirements mandate that ﬁrms report their emissions. Assumably, the
reporting requirements induce ﬁrms to abate more in order to avoid the negative publicity
of causing pollution. Konar and Cohen (1997) report that reporting requirements can in
fact give ﬁrms an incentive to reduce emissions. However, in the case of ANS, ﬁrms have
the ability to report the amount of ballast water they release, but not the number of new
ANS they have introduced. The correlation between the two varies, a fact which Would
limit the effectiveness of reporting requirements as a policy instrument for decreasing the
probability of ANS introductions. Reporting requirements have been used with ballast

exchange, a behavior believed to reduce the risk of ANS introduction. Ballast exchanges

33

did become more common, and were later made mandatory when possible by the US.
Generally, reporting requirements can act as inexpensive incentives to lower pollution
damages if the good being reported is correlated with pollution damages, which in this case
are ANS introductions. Additionally, while reporting requirements do increase the
opportunity cost of polluting, the opportunity cost they impose could be smaller than the
costs of additional abatement for some producers. This may be due to the high cost of
abatement technologies or the low opportunity cost of reporting.

Education and moral suasion, along with the potential for more stringent rules,
caused most ships to increase open ocean ballast exchange before it became a government
mandate. Additionally, the Lake Carrier’s Association, which represents U.S. ships
operating exclusively in the Great Lakes, has voluntarily adopted practices to slow the
spread of ANS in the Great Lakes (possibly to ward off additional rules). While these
efforts do reduce the likelihood of ANS transportation, they do not require substantial
investments. However, further reductions in the probability of ANS introduction may
require signiﬁcant invesnnents in technology. Ribaudo and Horan (1999) review the
effectiveness of education with regard to agricultural pollution and conclude that it does not
provide a signiﬁcant incentive to undertake measures that improve environmental quality
unless those measures also increase proﬁtability. Given that additional reductions in the risk
of ANS introductions could decrease proﬁtability, education alone is unlikely to effectively
lower the probability of ANS introductions. Ribaudo and Horan (1999) note that education
can increase the effectiveness of other policy instruments, particularly performance-based
instruments, by helping ﬁrms to understand the pollution they cause and how to lower the

relevant pollution measurements or proxies.

34

Voluntary programs, such as the Laker Carrier’s Association’s members’ voluntary
adoption of practices aimed at slowing the spread of ANS, have the potential to reduce
pollution damages. As their name indicates, voluntary programs do not mandate
participation. Voluntary programs share many similarities with education, and educational
programs are normally voluntary in nature. Additionally, voluntary programs and education
can easily be coupled together. It can be argued that voluntary programs are to a degree
economic incentives, since participation can result in good publicity for ﬁrms, thereby
increasing the marginal beneﬁts of abatement. As with education programs and reporting
requirements, voluntary programs may work well when the costs of abatement are small or
the probability of more costly regulations is very high, but real changes will involve
signiﬁcant costs that ﬁrms cannot be expected to incur voluntarily. In a competitive
economy, incurring the substantial abatement costs will imperil a ﬁrm’s proﬁtability and
competitiveness. For this reason, voluntary programs perform poorly in the presence of
high marginal costs of abatement. Voluntary programs are also susceptible to uncertain
levels of participation as table 3.1 notes. Overall, voluntary programs and education are
effective and inexpensive methods of lowering pollution damages in certain instances.
However, when participation lowers proﬁts, such as in the ANS case where expensive
technologies may be necessary to decrease the risk of pollution damages, then voluntary
programs have only limited usefulness.

While education and the various economic incentives mentioned above do have
merits as pollution control instruments, this chapter can more fruitfully narrow focus to
consider how government mandates, taxes, subsidies, cross compliance measures and

marketable permits operate with different policy bases to control pollution. The following

35

sections go into greater detail in examining these instruments and consider how they can be
combined with different policy bases in order to analyze how well the different instruments
address the ANS situation with regard to targeting, measuring compliance, and inducing

change.

II. Economic Incentives and Command-and-Control Measures

I begin this section by focusing on two classes of pollution control instruments
described above: command-and-control instruments and economic incentives. Economic
incentives receive a signiﬁcant amount of attention for their potential to harness the power
of the market to address environmental problems, however, they do not necessarily have a
distinct advantage over government mandates in achieving optimal environmental
outcomes. After providing general descriptions of particular policies in these two
instrument classes, this section then elaborates upon particular design issues with respect to

the different policy bases.

Command and Canon! Measures
Government Mandates: General Pmpertz'er

Government rules attempt to limit risk by mandating changes in behavior. The
mandated changes can be design-based or performance-based, although for now I focus on
performance-based measures for ease of exposition.

Figure 3.1 illustrates a government mandate that limits a ﬁrm’s risk proxy and the
associated economic impacts. The risk proxy, denoted by r, is most accurately understood

as similar to the probability of an ANS introduction (this is explained in further detail

36

below) A ﬁrm’s proﬁts indirectly depend on the value of r: if ris restricted then the ﬁrm
must alter its production choices, incurring costs (forgoing proﬁts) to meet this restriction.
In the absence of any environmental policies, a proﬁt-maximizing ﬁrm will choose the level
of r (through its production and pollution control decisions) such that the ﬁrm’s marginal
proﬁts from an increase in r, denoted Mn, equal zero. At this point, a further increase in 7‘
has no positive impact on proﬁt levels. The associated value of ris r0, and the ﬁrm’s proﬁts
are given by the area below the Mn curve from 0 to r0.

A limit on r generally prevents a ﬁrm from producing at r0. Suppose ris set at a
value of 7", which may or may not be the socially optimal level, 7* (i.e., the point at which
the marginal social beneﬁts from an increase in the proxy equal the marginal social damages;
more on this issue below). The ﬁrm will then make production and pollution control
choices so that r = 1*, and its proﬁts will equal the area under the M1: curve between zero
and r*. The limit forces ﬁrms to forego the proﬁts represented by the area under the Mn
curve between 1* and r0. This area also corresponds to the amount of abatement costs that
a limit causes a ﬁrm to incur. Depending on the magnitude of the required abatement, the
effects of the regulations could extend further. The limit essentially increases the cost of
production, which could lead to a decrease in the production of the good (shipping) and
possibly some ﬁrms exiting the industry. At the market level, the price of shipping would

increase.‘ The increased price would hurt consumers but would generally beneﬁt ﬁrms that

 

‘Reeves (1999) alludes to the idea that some in the shipping industry worry that a
small price increase will cause consumers to make a complete switch to other modes of
transportation. Some substitution will occur, but a complete switch will not occur. As
demand for other modes of transport is increased, suppliers of alternative transport will
generally face increased marginal costs of providing transport. Accordingly, the market
price for rail and other modes will rise. An equilibrium will therefore arise involving
shipping and other transport industries.

37

remain in the industry. Similarly, some industries and workers dependent on the shipping
industry may be adversely affected, although those remaining in the market could beneﬁt
from higher prices. Finally, limits might be a good idea when pursuing a safety-ﬁrst goal

because they would not give ﬁrms any ﬂexibility to create risk in excess of the desired levels.

Economic Incen u'ves

Economic incentives work by creating an opportunity cost of engaging in activities
that pose environmental risks. To be most effective, economic incentives should
differentiate between polluters by the risk they impose when creating an opportunity cost.
This means that for very risky activities the opportunity cost should be sufﬁciently high to
reduce the occurrence of that activity, and for activities with a lower risk the imposed
opportunity cost can be correspondingly lower. In the ANS case, the referred to risk
represents the probability of ANS introduction, and targeting activities highly correlated
with this risk is a serious challenge in policy design. Potential targets include volume ballast
water, time in the Great Lakes, ballast exchanges, presence of ﬁlters and origin of the ship.
All of the economic incentives mentioned require some sort of target, or policy basis, to
operate. In some cases, promising bases for certain policies have been identiﬁed, thus
raising the interest in these policies. Conversely, suitable bases have not been found for

otherwise promising policies, thereby dampening enthusiasm for their present use.

Taxes
Taxes raise the opportunity cost of creating risk by applying a charge to a ﬁrm based

on a certain policy basis. The terms “charges” and “taxes” are used separately in table 3.1,

38

but both imply a fee to be paid by the polluter. Taxes vary by magnitude of the charge they
impose on ﬁrms, the amount of monitoring they require as well as the different bases they
utilize (e.g., a risk proxy, input, or ambient pollution level). The size of the tax will directly
affect the level of abatement as well as the incentive for tax evasion (Biber, 1999). The
challenge for effectively utilizing a tax in the ANS situation will be to select a target highly
correlated with ANS damages.

Figure 3.2 graphically demonstrates the operation of a tax based on a risk proxy.
The tax rate is represented by the horizontal line t. In the ANS case, a tax will create an
opportunity cost for each additional unit of risk that a ﬁrm creates. A ﬁrm will produce up
to the point where its marginal pre-tax proﬁt equals the tax. Producing units beyond this
point results in negative marginal post-tax proﬁts. Optimally, the tax would be set at the
point where M7: = MD, at 1*. Other values of twill result in less efﬁcient outcomes.
Producing units beyond this point results in negative marginal post-tax proﬁts. As set in
ﬁgure 3.2, the tax rate t has the same efﬁciency properties as a limit set at 1*. That is, both
generate the same level of social net economic beneﬁts. The distributional effects of taxes
are slightly different than regulations. For instance ﬁrms realize smaller proﬁts under a tax,
which equal the area between the M7: curve and the tax line from 0 to 7*. An additional
effect of taxes is to increase government revenue, which equals the area under the tax line
between 0 and 1*. This transfer of rent from ﬁrms to the government has no effect on the
overall level of social welfare. As the size of the tax grows, so too will societal gains from
abatement and government revenues from tax collection while ﬁrms’ proﬁts decrease. As

ﬁrms’s proﬁts shrink, certain ﬁrms may exit the industry, driving the price higher.

39

Ultimately, the elasticity of demand for shipping and the elasticity of the supply of substitute
forms of transport will determine the amount of shipping ﬁrms supply.

Finally, taxes may be seen as less-than-desirable in the short run when pursuing a
safety-ﬁrst goal to limit risk at a pre-speciﬁed level because taxes give ﬁrms the option of
increasing their risk levels if it becomes proﬁtable for them to do so. If this is viewed as a
possibility, then the taxes might have to be set at higher rates to compensate for the
likelihood that such an event would arise.5 In the long run, however, taxes may provide
more incentives than standards to develop new technologies that would allow ﬁrms to

reduce their risk even more at low cost (Hanley et al., 1997).

Subsidies

Environmental subsidies work in much the same manner as taxes in that they raise
the opportunity cost of creating the risk of ANS introductions. However, rather than
penalizing ﬁrms that pollute, they reward ﬁrms for limiting their environmentally risky
activities and for engaging in environmentally friendly activities. Subsidies are generally
favored by ﬁrms and communities in which those ﬁrms operate (e.g., freshwater ports such
as Duluth which rely on the shipping industry). A subsidy to reduce the risk proxy is of the
form s(ro-r*). This subsidy has two parts: a lump sum payment (s’ro) and a tax (507),
although the lump sum payment more than offsets the tax so that the total payment is

positive. As with taxes, subsidies vary by the size of the payment they give ﬁrms, their

 

’The same issues arise when striving for an efﬁcient outcome. In that case, the
efﬁcient level of expected damages will not be achieved if ﬁrms take advantage of the
ﬂexibility offered by a tax. However, the implicit view behind the adoption of a safety-ﬁrst
objective is that it is important that the objective be satisﬁed and maintained.

40

monitoring requirements, and policy bases. Additionally, abatement is a function of the size
of the subsidy, and an effective subsidy should focus on the abatement a target with a
strong impact on ANS damages.

Figure 3.3 graphically demonstrates the operation of a subsidy. As ﬁgure 3.3 shows,
a ﬁrm will produce up to the point where its marginal proﬁt equals the subsidy. Producing
units beyond this point results in negative marginal post-subsidy proﬁts. Figure 3.3
represents the subsidy as a horizontal line(s); the intersection of this line with the marginal
cost curve shows the predicted level of production, r*. Setting the subsidy rate and tax rate
at equal levels will result in the same outcomes. Adjusting the subsidy level will affect the
level of production and risk. The distributional effects of subsidies differ in important ways
from both taxes and regulations. Subsidies allow ﬁrms to gain proﬁts equal to the area
under the Mn curve between 0 and 7* plus the area under the subsidy line from 7* to 75. The
ﬁrm earns the same pre-subsidy proﬁt from a subsidy as with a limit to the point where
estimated risk equals 1*. In addition, the subsidy provides a payment equal to the area under
the subsidy line from 7* to re. The subsidy has an additionalyadvantage over taxes for ﬁrms
because not only does a ﬁrm not get paid under a tax-based approach, it has to pay the tax
bill.

To encourage ﬁrms to abate, the government must set the subsidy at least as high as
the cost of abatement. Subsidies impose substantial costs on the government, because
achieving the desired level of abatement necessitates spending an amount equal to the area
under the subsidy line from 7* to r0. Subsidies can encourage excess entry into the

subsidized industry, in this case the shipping industry, which could increase the risk of

41

pollution (Hanley et al., 1997). Additional subsidies may then be required to reduce that
risk, potentially creating a cycle which adversely affects the government budget.

Policies that use subsidies reveal a particular implicit philosophy. Paying polluters to
stop polluting connotes a belief that polluters have the right to pollute, and the
infringement upon this right requires a payment to be made. Taxes and regulations come
from a different set of beliefs. Rather than conveying an implicit right to pollute, policies
that include taxes or regulations express the belief that society has the implicit right to a
clean environment, and polluters that infringe on that right will be subject to sanctions.
Recognizing the philosophical differences among the different types of policy instruments
may aid in the selection of the appropriate instrument.

As with taxes, subsidies may provide ﬁrms with too much ﬂexibility when a safety-
ﬁrst standard is applied, and so they might have to be offered at higher rates to compensate
and ensure that the desired level of risk is maintained. However, a cost-share (a subsidy tied
to a speciﬁc action) might be useful in combination with command-and-control approaches.
But even in that case a subsidy will reduce a ﬁrm’s average costs, which might encourage

excess entry that would further increase the risk of an introduction.

M arketable Permit:
Marketable permits are a hybrid of governmental rules and economic incentives and
have been useful in addressing certain environmental problems(see Table 3.1).

Conventionally, establishing marketable permit system begins with a regulatory agency

42

assigning permits that provide the right to emit a speciﬁed amount of pollution“ or use a
certain quantity of an input (a command—and-control measure or rule). The permits restrict
environmentally risky activities or outcomes, thereby creating scarcity. This permit can then
be bought and sold by different ﬁrms. Firms with high marginal abatement costs (MAC)
will beneﬁt since they can buy permits from ﬁrms with lower MAC. Firms with the lower
MAC will decrease their risk of emissions because they can sell their permits and increase
proﬁts. The scarcity of the permits along with the ability to trade creates incentives for
ﬁrms to reduce their risk of emissions at least cost (Hanley et at, 1997; Perman et at, 1999).
As will all policy instruments, marketable permits need a base, or more speciﬁcally a
tradeable good. In the case of ANS, this question has no good and obvious solution.
Trading the right to emit ballast water could raise safety issues, and the ships with the
highest MAC, who would buy the permits, would not necessarily be those who pose the
lowest risk. Worth noting is the fact that marketable permits cannot target capital
investments, since capital investments can not be traded. Thus, an effective policy basis for
use with marketable permits will necessarily involve variable inputs or variable measures
(e.g., a risk proxy or the amount of ballast water dumped). An ideal policy basis (the
tradeable good) will have a strong relationship with the risk of introduction. However,
marketable permits will allow the ﬁrms with the largest MAC to retain a high level of risk,
thus hindering the ability of the marketable permits to lower the probability of introduction.

In practice, the price of permits works as a sort of tax, where each ﬁrm must pay a certain

 

6Since ANS emissions are unobservable, emissions will not serve as a basis for a
permit system, although a proxy that estimates the risk of emissions might work.

43

amount for its risk, and risk levels will vary according to the marginal beneﬁts of risk to each
particular ﬁrm in accordance with economic efﬁciency.

Figure 3.4 graphically illustrates the operation of a marketable permit system. An
estimate of risk of emissions is on the horizontal axis, while dollars are on the vertical axis.
The two downward sloping lines represent the marginal proﬁt curves of two different ﬁrms.
It is assumed that the ﬁrms have already received permits to create risk. Given the
existence of supply and demand forces in a functioning market for the permits, an
equilibrium price, P, will emerge. Each ﬁrm will buy or sell the permits so that the amount
of permits they hold will allow them to create risk up to the point where its Mn curve
intersects P. However, the ﬁrms have different M1: curves. This means that the cost
beneﬁts of emitting, or operating at a high level of risk, are greater for certain ﬁrms than for
others. So, ﬁrm one will produce at the level where its risk of emissions equal 1‘1 and firm
two will produce up to r2. While permits do induce all ﬁrms lower their risk level, the level
of risk will still vary among ﬁrms.

Because a permit system combines elements of limits and incentives, tradeable
permits may be desirable when the goal is to limit risk according to a safety-ﬁrst criterion.
The reason is that the permits, since they are a form of limit, place an upper bound on the
aggregate level of risk. Firms then use the market to reallocate this risk in a least cost

fashion.

Cross Compliance
The Michigan legislature recently passed a bill, PA 114, aimed at decreasing the

introductions of ANS by focusing on ballast water releases in Michigan waters. This bill

operates as a cross compliance measure’. It renders ﬁrms ineligible for Michigan
Department of Environmental Quality aid money if their ships did not dispose of or treat
the ballast water in an acceptable manner (Sikkema, 2002). Cross compliance pollution
control measures act as a binary instrument, either a ﬁrm totally loses eligibility for a
government aid program, or it retains full eligibility. This is similar to a lump sum
instrument, implying that ﬁrms do not have the incentive to abate at the margin. Cross
compliance measures deﬁnitely give ﬁrms an economic incentive to abate, but not cost-
effectively. Figure 3.5 graphically demonstrates the operation of a cross compliance
measure with two ﬁrms with different levels of risk. On the horizontal axis is the estimated
level of risk that a ﬁrm creates for the introduction of a new ANS. Dollars are on the
vertical axis. The two downward sloping lines represent the marginal proﬁt curves of two
ﬁrms. The cross compliance measure is assumed to be set at 7*, the socially optimal level of
risk of emissions. If a ﬁrm chooses to produce at a level of risk greater than 7*, then it loses
eligibility for government aid, which equals the area equal to the box entitled cross
compliance. If the area under the Mn curve from 7* to 7;, is smaller than the cross
compliance box for either ﬁrm, then that ﬁrm will choose lower its risk to just below 7*. As
ﬁgure 3.5 shows, ﬁrm one would choose not to abate, while ﬁrm two would choose to
abate. This means that the ﬁrm which originally posed the greatest risk for introductions
has not decreased its risk at all, while the ship that posed less risk has reduced its risk. The
size of the compliance measure box can be changed to induce more or less abatement, and
since the ﬁrms which pose the most risk lower their risk for a signiﬁcant drop in the

probability of introduction to occur, the value of the compliance measure will have to be

 

’Public Act 114 also contains a reporting requirement.

45

quite large. Alternatively, the acceptable level of risk could be increased, meaning 7* moves
to the right, an action which would get more of the ﬁrms with greater risk to reduce their
risk. As Figure 2.3 demonstrates, pollution control measures need to target the ﬁrms with
the greatest risk, otherwise the overall probability may not decrease greatly. So then, unless
cross compliance measures have a very large penalty attached to them, they will not induce a
signiﬁcant reduction in risk among the ﬁrms which already pose the greatest risk. However,

cross-compliance may be a good idea when used in conjunction with other policies.

Compliance Bases and Options

Policy instruments, such as incentives and standards, require policy bases. Options
for policy bases include emissions proxies, ambient pollution levels and management
choices (inputs) that inﬂuence the likelihood of emissions. Policy bases are the standards by
which compliance with a policy is measured. For instance, a policy that uses an input as its
basis would be judged on how well it affects input usage and thus pollution levels. Although
a number of options exist, the unique nature of the ANS quandary will likely limit the

effectiveness and efﬁciency of many of the policy bases, as discussed below.

Emissions and Proxies

Intuitively, emissions seem to be an obvious basis for policy”. However, for the
ANS problem, measuring actual emissions at a reasonable cost is not a feasible option. Risk
proxies offer a promising alternative to emissions. Risk proxies are normally estimates of
emissions or the likelihood of emissions, which are deﬁned as a newly introduced species in
this case. For a particular species, an introduction is a binary event, it will either occur or it
will not. Accordingly, the estimate for any single specie lies between one and zero, although
actual emission can lie outside this range. Since species introductions do not come in
fractions, the risk proxy is most accurately understood as similar to the probability of an
ANS invasion. The characteristics of a ﬁrm and its management decisions could be input
into a computer simulation model to derive such estimates. The quality of the estimate
depends on the comprehensiveness of the model as well as the degree of randomness in the
variables. Due to random factors, proxies can not perfectly model risk, but they are a useful
tool when relevant inputs can be measured. In the case of aquatic nuisance species, risk
proxies can be based on a host of inputs and behaviors. These inputs and behaviors may
include the origin of the ballast water, the cleanliness of the ballast tanks, whether or not a
ballast exchange occurred, the length of the voyage or the presence and use of ANS

prevention technologies. Proxies have been used in other contexts, such as in the control

 

’Grifﬁn and Bromley (1982) showed that policies based on emissions proxies can
produce an efﬁcient outcome if the proxy is assumed to perfectly estimate emissions, and
there are no stochastic variables. However, Shortle and Dunn (1986) indicated that proxies
cannot perfectly measure emissions when stochastic factors inﬂuence emissions. Thus, the
proxy only provides incentives to control mean emissions. But expected damages are
inﬂuenced by the variance of emissions as well as the mean, and so the outcome can not be
efﬁcient. While not efﬁcient, emissions proxies can still be usable. The usefulness will
depend on how well correlated the proxy is to actual emissions.

47

of nonpoint pollution. Marketable permit systems involving point and nonpoint sources
work by allowing point sources who wish to increase their own emissions to pay nonpoint
sources to make an offsetting reduction in their emissions. This is not a straightforward
task however, because nonpoint source emissions are unobservable. This difﬁculty is
overcome by using the estimate of these emissions as the basis for trades (Horan and
Shortle, 2001).

A policy based on a risk proxy policy basis is performance rather that design-based,
meaning that the policy focuses on the probable outcome as opposed to the process, ideally
providing individual polluters an incentive to seek to lower their proxies in the most cost-
effective way possible. Every policy basis has a certain set of conditions under which it
maximizes efficiency; risk proxies are no different. Utilizing a risk proxy as a policy basis
necessitates having the ability to measure the variables that affect the risk of ANS invasions.
In addition, a knowledge of how these variables contribute to emissions aids in constructing
a model with which to produce useful emissions estimates. Unfortunately, the list of
affecting variables can become lengthy. Thus, in order to lessen the burden of gathering
information, a subset of the most relevant variables must be chosen. This subset will
optimally contain the variables with the largest impact on ANS invasions. Both cost and
the reporting burden need to be considered, consequently tradeoffs may arise between
accuracy and cost, i.e., better specifying the risk proxy measure increases its cost and vice
versa.

Firms need to understand the model that estimates their risk proxy and the variables
over which they have control in order to respond rationally to mandates or incentives. The

government will presumably take responsibility for constructing a model which produces

48

the proxy. Polluting ﬁrms then need to be educated on the actions they can take to lower
their risk proxy. Polluters may be aware of their emissions, but that does not imply that
they know the steps they can take to limit those emissions. Firms and individuals
responsible for the pollution need to have some control over the offending inputs and
behaviors for risk proxies to be an efﬁcient policy basis. The effectiveness of risk proxies as
a policy basis relies on the polluters' comprehension of how to lower emissions and control
the inputs and management practices that cause them, otherwise polluters will not know
how to respond to the incentives.

Ideally, policies that utilize risk proxies (e.g., economic incentives or command-and-
control measures) would be ﬁrm-speciﬁc since ﬁrms may create different expected marginal
damages. Of course, ﬁrm-speciﬁc policies would increase administrative costs relative to
policies that target ﬁrms uniformly, although they would also increase efﬁciency. The
suitability of these two types of policy approaches, ﬁrm-speciﬁc and uniform, depends on
whether or not the expected marginal damages vary among ﬁrms. In the ANS case, it is not

reasonable to assume that all ﬁrms have identical marginal expected damages.

Ambient Pollution Levels

Ambient pollution is the overall level of pollution in an environment. In the
context of ANS in the Great Lakes, ambient pollution can be deﬁned as the number of
non—indigenous species in the Great Lakes region. A policy based on ambient pollution
levels works by monitoring ambient pollution measurements (number of ANS); if the

measurements decrease, then general abatement is assumed, and vice versa. In the ANS

49

case, introductions are binary events, either they have or have not occurred, thus the
corresponding ambient measurements would be one and zero for any given species.

Ambient pollution does offer certain advantages as a basis for pollution control.
Most importantly, it is often easier and less expensive to monitor than input use or
emissions. Rather than monitor many ﬁrms, the regulator would only have to monitor the
ambient level of pollution in the environment.

Along with the beneﬁts of an ambient pollution policy basis exists disadvantages and
a number of challenging design issues. An important disadvantage of ambient pollution as a
policy basis is its ineffectiveness in dealing with all forms of pollution’. Skillfully designing
policies based on ambient pollution may overcome these deﬁciencies to a degree, but
limitations do exist. For instance, ambient pollution measures are subject to time lags. In
the case of ANS, these lags can be years, and the ships responsible for the emissions may
never be known or receive the consequences. Time lags can produce a situation where
ﬁrms are held responsible for established ANS populations to which they did not
contribute. Additionally, stochastic factors affect the actual level of ambient pollution,
meaning that ﬁrms do not have assurance that their risk reductions will lower the ambient
pollution levels. Altogether, ambient pollution has deﬁnite weaknesses as a policy basis,
particularly in the ANS case.

Tax and subsidy schemes based on ambient pollution concentrations have been

proposed for efﬁciently reducing nonpoint and other pollution problems (Segerson, 1998).

 

’I‘he covariance between marginal damages and marginal ambient pollution needs to
equal zero for all ﬁrms and all inputs for an optimal tax rate based on ambient pollution to
exist (Horan et al., 1998).

50

This discussion on ambient-based instruments will focus entirely on economic incentives’0
(e.g. taxes, subsidies, and liability). As noted above, ambient pollution-based policies
monitor ambient pollution measurements (number of ANS), and if the measurements do
not increase, then general abatement is assumed and ﬁrms are either not taxed or receive a
subsidy. The presence of new ANS would indicate that ﬁrms have not abated (i.e. reduced
their risk of ANS introduction), and then ﬁrms are either subject to taxes or loss of a
potential subsidy. The advantages of an ambient-based policy include the low monitoring
costs, low administrative costs, and the incentive all ﬁrms have to abate when the
opportunity cost of not abating is sufﬁciently high (i.e. large taxes or subsidies). In the case
of ANS major disadvantages also exist such as the time lag between the introduction of a
new species and its identiﬁcation as well as large economic incentives necessary to deter
free-riding which raise equity issues. Additionally, policies based on ambient pollution have
a unique set of design issues, explored below, which limit the forms of policies available, and
the types of pollution that can be addressed with this policy basis.

Polluters need to understand how their actions and choices affect ambient pollution
for ambient-based incentives to work. Unless they understand the impact of their choices
on ambient pollution, basing policies on ambient pollution can not work. This means that
ﬁrms which do not believe their choices have an impact, as well as those ﬁrms which do not

understand their impact may not respond to incentives, in which case incentives may need

 

loGovernmental mandates that limit pollution do not function well when the basis
for policy is ambient pollution. A disconnection exists between the mandate and the
required actions of polluters. Polluters may know that they are required to lower the
ambient pollution level, but not knowing the actions of other polluters, nor necessarily how
the ambient pollution requirement relates to a change in individual ﬁrm action, they do not
have enough information or a compelling reason to comply. Hence, regulations do not
generally produce cost-effective outcomes when compliance is based on ambient pollution.

51

an adjustment. Policies need to be constructed in such a way that ﬁrms beneﬁt from their
reductions in pollution, otherwise a freeriding situation can evolve. Conventionally, all
polluters contribute to the level of ambient pollution in an environment, and so ambient
pollution measures compliance by a group, not individually. However, in the ANS case, a
perfect correlation does not exist between the risk of ANS introduction and the expected
damage from ANS invasion due to the random natural forces shown in Figure 2.1. This can
create a tendency toward freeriding which may potentially pose an equity dilemma as ﬁrms
which reduce their risk will not necessarily change the actual environmental outcomes (i.e,
ANS invasions). However, effective deterrence of freeriding can result from large
opportunity costs of polluting. If the government sets an ambient tax high enough, no ﬁrm
will consider polluting to be proﬁt-maximizing, and thus all will reduce their level of risk.
Admittedly, the level of the tax or other penalty necessary to achieve this may be quite high.
The solution to freeriding of creating extremely large opportunity costs may cause some

ﬁrms to cease operations or decrease their level of risk beyond the socially optimal level.

Liabivy Rules and Ambient Pollution

Liability rules are a form of ambient-based incentive, since suits normally result from
the damages caused by the level of ambient pollution in the environment. In general,
liability rules do provide polluting ﬁrms with the incentive to abate. Liability rules have
been discussed as a potential policy for the Great Lakes before (Larsen 1995, Foster 2000).
In fact, laws already on the books may allow for liability suits in the ANS situation (Foster
2000). Policies that incorporate liability rules often use an emissions basis. In the case of

ANS, emissions cannot be measured, and introduced species cannot be traced back to

52

individual ships. This creates an incentive for ﬁrms to abate as little as possible, since no
one will likely trace their ANS introductions back to them. When a joint and several liability
standard is used, an ambient pollution basis might allow for the entire industry to be held
liable for the level of ambient pollution, which in this case is the number of introduced
species. A joint and several liability rule may have more potential with regard to the ANS
situation than either strict liability’1 or negligence under liability12 due to its focus on the
number of ﬁrms to have contributed to pollution damages.

“The term “joint an several liability” means that if the government can identify just one
party out of many that contributed wastes to a site, then that one party can be held
responsible, potentially, for all cleanup costs. In turn, any potentially responsible parties that
have been identiﬁed by the government may seek to involve other potentially responsible
parties (NCEE 2001).”

Under a joint and several liability standard, all ships that have introduced ANS are

potentially responsible for all the damages of the particular species they may have
introduced, even if they were not the ﬁrst. This characteristic conventionally gives joint and
several liability standards a better chance to recoup cleanup costs. However, this standard
of liability would still require the ability to trace the introduction of an ANS to a speciﬁc
ship, thus sharing the same limitation as the other types of liability. Unless this obvious
limitation of the different forms of liability in the ANS case can be overcome, liability rules

will not likely play a signiﬁcant role in preventing ANS introductions.

 

11A ﬁrm is held responsible for all the damages it creates under a strict liability
standard.

l2A ﬁrm is held responsible for its damages if it did not take due care to avoid
damages.

53

A relevant consideration with regard to the ANS problem is the importance of the
initial introduction. Once a species has entered the Great Lakes and established a
population, the introduction of a few additional members of that species does not have a
signiﬁcant impact. The problem can be compared to throwing a rock through the window
in that the ﬁrst rock does the damage. Additional rocks may exacerbate the problem, but
the value of the window fell the most with the ﬁrst rock. So then, a joint and several
liability standard holds all the rock throwers responsible for the ﬁrst introduction.

Particularly in the ANS situation, liability rules have distinct weaknesses. Liability
rules introduce an additional degree of randomness in enforcement which may cause
polluters to lower their expected liability from ANS introductions. A liability rule would
afford society with the right to bring suits against ﬁrms for the damage caused by ANS
introductions. Two features of liability rules that reduce effectiveness are the uncertainty
regarding whether or not a ﬁrm will actually face a lawsuit for the ANS introductions it is
responsible for and the possibility that not every lawsuit will result in a polluting ﬁrm having
to pay damages. For these reasons, while liability rules do have the potential to deter

polluters from emitting, they would not result in a ﬁrst—best outcome in the ANS situation.

I mats and Pmctices

Policies based on inputs attempt to alter the use of those inputs or practices that
affect the level of pollution; in other words, to change the biosecurity choices ﬁrms make.
For example, farmers can limit pesticide runoff by decreasing pesticide use, or ships can
decrease the probability of introducing an ANS by using biocides or ﬁlters. To decrease

input usage, marginal costs (normally the price) associated with using the input should be

54

raised. Increasing the usage of certain inputs may lower the probability of introduction,
indicating that the marginal costs should be lowered. So then, changing the price of an
input can change its usage and affect emissions levels, or risk levels in the ANS case. In the
long run this tendency is magniﬁed since technologies are developed to use expensive inputs
sparingly and expand usage of inexpensive inputs (Hayami and Ruttan, 1985). In the ANS
case, many of the inputs, such as water ﬁlters and usltrasound systems, are not used at all,
and the policy challenge is to introduce these new inputs into the production process.

Chapter two described how the economically efﬁcient level of production occurs at
the point where the marginal social beneﬁts of production equals the marginal damages.
The idea of economic efﬁciency can be applied to the analysis of the efﬁcient level of
inputs, assuming that responsibility for pollution and proﬁts can be divided among inputs.
A tradeoff between social beneﬁts (e.g., proﬁts, the produced good) and social damages
(e.g., pollution) exists with the use of inputs. Society maximizes its welfare when the
marginal beneﬁts and expected marginal damages of input usage equal. Policies that utilize
inputs as a policy basis attempt to lower the expected marginal damages caused by input
usage.

Policies based on input usage can be shown to be economically efﬁcient in some
cases. An efﬁcient policy that utilizes an input basis would target all relevant inputs in a
ﬁrm-speciﬁc manner equal to the expected marginal damage or beneﬁt created by each
input. In the case of input-based incentives, for example, each risk-increasing input would
have to be taxed and each risk-reducing input subsidized, and the tax/ subsidy rates would
vary by ﬁrm. For example, a policy based on input usage that utilizes economic incentives

might subsidize ﬁltration and ultrasound systems while taxing the deballasting of untreated

55

ballast water in coastal areas. Achieving economic efﬁciency requires changing input usage
individually for scores of inputs and ﬁrms in order to equalize the marginal beneﬁts and
marginal damages of each input for each polluter. Needless to say, any such policy will
create enormous monitoring and administrative costs, effectively negating the efﬁcient
nature of the policy.

Targeting all the pollution-contributing inputs can be an onerous and expensive task,
so it may be optimal to only focus on those inputs that are both easily observable and highly
correlated with risk. Eliminating certain inputs from consideration reduces the regulatory
burden that would otherwise be established for polluters and bureaucrats to navigate
through, thereby creating excessive costs. This leads to a familiar tradeoff; the larger the
targeted subset of inputs and practices, the greater the transaction costs imposed on all
parties. However, a smaller targeted set of inputs results in less control over environmental
outcomes. If a safety-ﬁrst criterion is adopted, then an input-based strategy that targets
only a subset of inputs might allow for excessive levels of risk to emerge, depending on
which inputs are not targeted. Alternatively, the regulator might have to compensate for
the non-targeted set by increasing the stringency of policies directed at the targeted set, such
as by encouraging or mandating the adoption of expensive technologies that are highly
effective at signiﬁcantly reducing risk and that leave little room for adverse impacts from
choices involving non-targeted inputs.

Inputs are deﬁned as both current and potential inputs and management practices.
Using this deﬁnition, all of the ANS prevention technologies mentioned in Chapter One fall
into the input category, along with the other physical inputs and management practices such

as ballast water and ballast exchange. For certain inputs, the quantity of an input can vary

56

greatly (i.e. biocides or ballast water), while for other inputs, such as ﬁltration systems, the
quantity employed will be either one or zero. An understanding of the feasible input
quantities is necessary when formulating policy goals in order to provide incentives that
promote feasible input use decisions.

Government mandates or rules are one potential instrument that can work with
policies based on input usage. Mandates could work in two ways, depending on whether
the policy is designed to increase or decrease input usage. Rules that seek to decrease the
use of an input, work by restricting the amount of the input each particular ship could
employ, or limiting the supply of that input for the industry overall. Increasing input usage
would require imposing lower limits on the amount of an input each polluter can use. Input
restrictions that attempt to lower input use would more heavily penalize the ﬁrms with a
greater reliance on the input. Mandates that seek to increase input use would reward ﬁrms
that heavily use the input at the present time, requiring that they make a relatively small
change in their production process.

Rules that mandate introduction of a new technology into the production process
require a binary change. Firms must switch from not having, to both possessing and
utilizing a certain technology; water ﬁlters for ballast tanks offer a perfect example of this.
Monitoring whether ﬁrms possess the mandated technologies does not pose a great
regulatory burden. However, the transaction cost of enforcement and monitoring whether
and to what degree ﬁrms use these technologies may be prohibitively high; biocides provide
a good example since the marginal cost of using biocides is constant and greater than zero.
So then, if the monitoring and enforcement of an input with signiﬁcant marginal costs of

use such as a water heater or biocide is overly expensive, mandating or encouraging the use

57

of a technology such as a ﬁltration could produce better environmental results than the use
of technologies with which regulated parties have an incentive to minimize usage.

Economic incentives can cause changes in input usage. Economic. incentives
operate by changing the marginal costs of an input and thereby altering its usage. Taxes and
subsidies are the most familiar economic incentives. Both taxes and subsidies hold some
promise for use with policies based on input usage. Taxing an input should cause its use to
decrease, while a subsidy should do just the opposite. The size of the change in usage will
depend on the magnitude of the tax or subsidy, and the change in input usage will produce a
change in emissions”. As mentioned above, economic incentives could potentially be tied
to inputs, such as the subsidization of chemical treatments or ﬁltration systems or the
taxation of ships that deballast without having exchanged ballast on the open ocean or that
do not have approved ANS control technologies (e.g., ﬁlters, UV systems, biocides, etc.).

In the case of Aquatic Nuisance Species which enter the Great Lakes, an obvious
input to target is ballast water. Unfortunately, there exists no good substitute for ballast
water, so taxing or restricting the use of ballast water could have severely deleterious effects
on the shipping industry. However, many physical inputs and management practices do
have the ability to lower the probability of ballast water introducing ANS. Many of the

inputs and practices reviewed in Chapter One lie in the category of inputs which decrease

 

13It is worth noting that economic incentives have a unique relationship to binary
inputs. While they do try to change their usage, it is only from zero to one or vice versa.
This implies that taxes and subsidies operate as non-varying penalties and grants which
either take effect or do not, implying that unless they are large enough to change input
usage (from zero to one or vice versa), they have no effect at all. This being the case, the
operation of taxes and subsidies on binary inputs shares some similarities to cross
compliance measures.

58

the danger from ballast water. Utilizing inputs as a policy basis offers an effective way to

reduce emissions if policies target inputs that are highly correlated with emissions.

59

Chapter Four

Conclusion

Aquatic Nuisance Species invasions have caused signiﬁcant economic damages both
in the Great Lakes region and globally, primarily by altering ecosystems and disrupting
industries. ANS invasions are certainly a signiﬁcant pollution problem, and human activities
such as commercial shipping provide opportunities for ANS invasions. For instance, ships
may carry species in their ballast tanks and release them into a new environment when they
take on or exchange ballast water in the Great Lakes. Individual ship owners and operators
do not consider the potential external costs of their ballast management practices (in terms
of a potential ANS invasion), and thus they have no incentive to adjust their behavior to
reduce this threat. The result is a need for public policy to induce ship owners and
operators to make more socially efﬁcient biosecurity choices. However, the types of policy
approaches that are commonly used to address more conventional forms of pollution do
not apply here. Economists typically promote emissions-based policies because such
policies are closely related to external damages and because such ‘performance-based’
instruments give ﬁrms the ﬂexibility to reduce their emissions in the most cost-effective way
they can ﬁnd. But emissions of ANS are not directly or indirectly observable, and so
emissions-based policies are infeasible in the ANS context.

Many of the general types of instruments used in other pollution contexts, such as
taxes and standards, can work to help reduce the threat of ANS invasions. These
instruments will have to be applied to a compliance measure other than emissions (which

are unobservable). Good policies will be positively correlated with the likelihood of

60

invasion, and will also provide vessels with ﬂexibility to look for ways to further reduce
costs and/ or improve effectiveness.

In this paper, I have used a framework for policy evaluation that focuses on two
facets of good policy design: the basis, the measure to which the policy is applied, and the
instrument, which is the policy tool used. An effective policy will use an appropriate basis
and instrument. While a variety of policy bases and instruments exist, the design of the
policy and its suitability to the particular problem require special consideration. I have
analyzed a number of different bases and instruments. Some have desirable properties,
although none represents a panacea for the ANS dilemma. In the following paragraphs I
review the three bases considered in this paper to show how some potential policies may be
formed to lower the threat of ANS invasions. These three policy bases are biosecurity
choices, risk proxies, and ambient pollution levels.

The term ‘biosecurity choices’ refers to the choices regarding input usage and
management practices that a ﬁrm makes which affect the likelihood of ANS invasions. For
example, chemical treatment of ballast water would be considered here as a biosecurity
choice. Using speciﬁc biosecurity choices as a policy basis implies that the policy with target
the process by which risk is produced rather than the outcome. Taxes, subsidies,
government mandates, and cross-compliance measures are policy instruments that could
work with biosecurity choices as the policy basis. The magnitude of the tax, subsidy, or
cross—compliance measure will affect the degree to which ﬁrms change their biosecurity
choices. In principle, input-based policies can be efﬁcient. However, the design of such
instruments is so complex (e.g., targeting all potential biosecurity choices with vessel-speciﬁc

rates) as to make efﬁcient input-based policies infeasible. More practical approaches involve

61

targeting only certain choices with fairly uniform policy instruments across certain vessel
classes. The effectiveness of lowering ANS invasions will depend on how closely the input
or biosecurity choices are correlated with the likelihood of invasions as well as the
correlation between non-targeted inputs or biosecurity choices and the likelihood of
invasions.

Risk proxies are computer—generated estimates of the likelihood of ANS invasions
produced by a model that utilizes the available data. Hence, risk proxies are a measure of
performance. Firms that face policies bases on these measures will have incentives to
choose the most cost effective approach for reducing risk. The same list of policy
instruments as above, as well as possibly marketable permits, could be paired with risk
proxies to create an ANS prevention policy. The accuracy of the risk proxy is important to
provide ﬁrms with the incentive to take actions highly correlated with the likelihood of ANS
invasions, thereby lowering the threat of ANS invasions. Increasing the accuracy of the risk
proxy involves correctly specifying a model and gathering accurate data, the latter of which
can become expensive. Again, as with biosecurity choices, assuming the policy basis is
highly correlated with the likelihood of ANS invasions, the effectiveness of the policy will
depend on the size of the incentive provided by the policy instrument. It is worth noting
that, because risks will not be uniform across ﬁrms, every policy will ideally be ﬁrm-speciﬁc
and will provide the optimal level of incentive for each ﬁrm. However, ﬁnancial and time
restraints render this ideal quite impractical.

Finally, policies could be based on ambient pollution levels -- the overall levels of
pollution in an environment, which in the ANS context means the number of species which

have invaded the Great Lakes region. This basis does not measure the risk any one ﬁrm

62

poses, but rather the damage already caused. So if an invasion does occur, then all ﬁrms
that contributed to the risk of invasion would be held accountable. The hope is that
ambient-based instruments will provide ﬁrms with ex ante incentives to reduce the risk of
invasion. It is natural to consider a liability rule as a potential ambient-based policy
instrument, particularly since it is impossible to accurately assign responsibility for any
particular invasion to a ﬁrm. But for this same reason and also other reasons, ambient-
based policies may not provide the proper incentives when used alone. The problem is that
for these instruments to work, ﬁrms would have to understand how their choices combine
with the choices of other ﬁrms to affect the overall risk of invasion. This is too much
information for the typical ﬁrm to process. If a ﬁrm thinks its risk contribution is negligible
relative to others, then the ﬁrm may not have incentives to changes it actions. The only
way to encourage a risk-reduction response in this case is to drive up the penalties to a point
where some ﬁrms will go out of business. This implies that any policy using this basis will
be relatively ineffective in lowering the risk of ANS invasions without destroying the
responsible industry, shipping in this case.

From an economic standpoint, there is no perfect policy instrument to reduce the
risk of ANS invasions. But there are some approaches that make more economic sense
than others - that is, some approaches can result in risk-reduction goals being achieved at
low cost relative to other approaches. The next step is to gather more information about
the costs and effectiveness of various approaches and use this information to empirically

analyze speciﬁc types of policy tools that in theory hold promise.

63

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65

Michigan Department of Environmental Quality. 1995. Nonindigenous Aquatic Neisance

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Michigan Department of Environmental Quality. 1999. Aquatic Nuisance Speeies
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Oemcke, D. 1999. The Treatment of Ships' Ballast Water. EcoPorts Monograph Series
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Perman, R., Y. Ma, J. McGilvray and M. Common. 1999. Natural Resourees Se
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Nap've Species to the Great Lakes. Sarnia, ON, report prepared for the Canadian Coast
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66

Rainer, S. F. 1995. Potential for the Introduction and Translocation of Exotie Species by
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67

Table 1.1—Selected Non-indigenous Species with Origins, Date of Entry, and Introduction

Vectors

(Source: Mills et at, 1993)

 

 

Species

Eurasian Watermilfoil

G/ugea bemvigi
Zebra Mussel
Coho Salmon
Brown Trout
Ruffe

White Perch
Alewife

Sea Lamprey
Chinook Salmon
Common Carp
Aeromomzs salmonia'da
Purple Loosestrife

’ Origin

Eurasia
Eurasia
Eurasia
Paciﬁc
Eurasia
Eurasia
Atlantic
Atlantic
Atlantic
Paciﬁc
Asia
Unknown
Eurasia

Date 01 Entg
< 1952

1960
1988
1933
1883
1986
1950
1873
1830s
1873
1879
<1902
1869

Vecto s
R(AQ), S(F)
R00

503”")
R(D)

R(A)

303W)

C

c. Re)
C. so)
R(D)
R(D)

R(F)
c, S(SB)

 

68

 

Table 1.2—Effects of Selected Non-indigenous Species (Adapted from Mills et al., 1993, for
additional information refer to Leach et al., 1999)

 

Zebra Mussel-its biofouling and ﬁlter-feeding negatively effects the Great Lakes ecosystem.
Large concentrations(which is normal) of zebra mussels increase water clarity and hurt
native Anand clam populations. The species imposes millions of dollars of cleanup
costs on water treatment facilities.

Alewife—destroyed habitat of more favored ﬁsh and birds(Emery 1985). Supports a small
commercial ﬁshing industry and is a forage food for commercial ﬁsh.

 

Ruffe-carnivorous ﬁsh, presently relatively concentrated, with great potential for affecting the
Great Lakes ecosystem.

Sea Lamprey-induced the decline of the native lake trout populations, resulting in millions of
dollars of lost ﬁshing revenues. Also adversely affected burbot populations.

Pueple Loosestrife-competes with native plants, marsh animals, and waterfowl for habitat.

Glugea bertwig-this protozoan parasite reduced the rainbow smelt population in the 19605 and
19705, but such infestation has not occurred since.

Eurasian Watermilfoil-this plant can change water temperatures, poses difﬁculties for
recreational and industrial water uses, and competes with native plant species.

Coho and Chinook Salmon-popular in the sport ﬁshing industry and help control alewife
populations.

Aeromonas salmonicida-this gram-negative bacterium causes furunculosis, trout and gold ﬁsh ulcer
disease, common carp erythroderrnatitis, and other infections.

Common Cgp-destroyed habitat of more favored ﬁsh and birds(Emery 1985).

White perch-sport and commercial ﬁsh.

 

 

 

69

Table 1.3—Selected Ballast Water Treatment Technologies and Behavioral Methods
(Source: Oemcke, 1999)

 

Physical
Filtration
Cyclonic Separation
Ultraviolet Irradiation
Heat
Ultrasound
Magnetic Fields
Electric Fields

Chemical
Chlorine
Other Halogens(Bromine and Iodine)
Chloramine
Chlorine Dioxide
Ozone
Hydrogen Peroxide
Organic Compounds
Copper Ions
Copper + Silver Ions
Ionizing Radiation
Photochemistry
Oxygen Deprivation
pH Adjustment
Salinity Adjustment
Tank Coatings

Behavioral
Ballast Exchange
Ballast Retention
Ballast Water Micromanagement

 

 

 

70

Table 1.4—Descriptions of Selected Ballast Water Treatment Technologies
(Sources: Buchholz et at, 1998; Mackey et al., 2000; Oemcke, 1999; Pollutech, 1992)

 

Filtration and gclonic separation. Filtration has received a great deal of attention for its
potential as a primary ballast water treatment and as a stand alone ballast-water
treatment (Pollutech, 1992). A number of different ﬁltration methods exist, including
rapid sand ﬁltration, screening, cloth screens/ ﬁlters, precoat ﬁltration and membrane
ﬁlters (Oemcke, 1999). “The Great Lakes Ballast Technology Demonstration Project
concluded that ﬁltration with automatic back-ﬂush screen ﬁlters was feasible with
existing technology down to about 50 microns (Mackey et al., 2000).” Filtration was
also shown to be 95-99% effective against zooplankton and 60-80% effective against
smaller planktonic organisms (Mackey et at, 2000).

Ultrasound. Ultrasound works in ballast water by producing small vibrations that cause
“microscopic gas bubbles to quickly form, expand, and implode (Buchholz et al.,
1998).” This process can “rupture cell membranes, free particulates from solid
surfaces, and destroy particles and organisms through particulate collisions or by
forcing them apart (Buchholz et al., 1998).” Ultrasound is often mentioned as a
secondary technology whose effectiveness increases with pre-treatrnent. While this is
true, ultrasound can still effectively treat ballast water. Ultrasound can kill or inactivate
100% or larger organisms and achieve a 99.9999-99.99999% reduction in bacterium
and viruses. Using this technology does require signiﬁcant costs, one 600-gpm unit
costs $250,000 to purchase and requires electricity in the range of 40 kW/hr(1,000
gpm) to 294 kW/ hr (7,350 gpm) (Buchholz et al., 1998). Additionally, ultrasound
systems require very little maintenance, approximately once every 12,000 hours.

Ultraviolet Radiation. Ultraviolet radiation is considered a very promising secondary
treatment option. UV radiation causes a “photochemical reaction of cellular nucleic
acids” (Buchholz et at, 1998) which either kills organisms or renders them unable to
reproduce. The effectiveness of this treatment increases as water clarity, exposure
period, and radiation energy increase (Buchholz et at, 1998). Primary treatment
options such as ﬁltration increase the effectiveness of UV radiation by removing larger
organisms from the ballast water which may block the UV rays. Estimates of the
costs for an Ultraviolet radiation unit vary along with the volume of water they can
handle, from $10,000 -$545,000. Additionally, UV units impose operating costs of
around $2,200-$4,000 a year and require regular maintenance (Buchholz et at, 1998).

Heating ballast tanks. Using heat to treat ballast water has received renewed attention largely
because of the possibility of using waste heat from the ships engines. While this
measure would likely lower the operating costs, it would also impose high costs for
reﬁtting the plumbing. Heat treatment of ballast water works by “denaturing cellular
proteins and/ or increasing metabolism beyond sustainable levels (Buchholz et al.,
1998).” Heat treatment affects different organisms at different temperatures, for
example, less complex organisms generally do not succumb to heat as quickly as more
complex organisms. The cost of a boiler to heat water varies with the volume it can
handle, from $60,000 for a 1,200 gpm unit to a 12,000 gpm unit for $600,000. As the
size of the boiler varies, so does its oil consumption. Additionally, heat treatment
systems can impose a safety hazard for crew members with the hot water it produces.

 

 

 

71

Table 1.5—Selected International ANS Prevention Policies (Source: INTERTAN KO, 2002)

 

Count_ry Date Enacted Poliey
Australia 1992 Voluntary ballast water exchanges and mandatory
reporting.
Argentina- 1990 Mandatory chlorination of ballast water for ships
Buenos Aires arriving from areas with cholera.
Israel 1994 Mandatory ballast exchanges in open ocean for all
ships destined for Israeli ports.
New Zealand 1998 Mandatory mid-ocean ballast water exchange.
United Kingdom- <1998 Mandatory ballast discharge to onshore water
Orkngr Islands treatment plant.

 

 

 

72

Table 1.6—Selected Policies, Legislation, and Actions Relating to ANS Invasions in the Great
Lakes (Source: Reeves, 1999)

 

August 1998—Great Lakes Fishery Commission and the International Joint Commission request
ballast water regulations for ships entering Great Lakes.

Mg 7 989—Canadian Coast Guard sets forth Voluntary Guidelines for the Control of Ballast
Water Discharges from Ships, advocating ballast exchange.

November 1990—Nonindegenous Aquatic Nuisance Prevention and Control Act of
1990(NANPCA 1990) passed, directing US. Coast Guard to issue voluntary and
mandatory guidelines, six months and two years respectively after the act.

Apn'l 1993—U.S. Coast Guard issues regulations, as directed by NANPCA 1990, that require
ballast exchange or alternative measures on all ships entering the Great Lakes.

November 1993—Guidelines for Preventing the Introduction of Unwanted Aquatic Organisms
and Pathogens from Ships’ Ballast Water and Sediment Discharges, which urges ballast
exchange, is adopted by the International Maritime Organization General Assembly.

October 1996—United States passes the National Invasive Species Act of 1996 (NISA 1996),
directing the US. Coast Guard to set forth national voluntary guidelines one year after
act and mandatory policies three years later, if the voluntary guideline prove ineffectual.

October 7998—With the passing of the Shipping Act, Canada authorizes the government to issue
mandatory regulations for ballast water management in Canada.

Mgr 1999—US. Coast Guard issues an interim rule including national ballast water exchange
guidelines and mandatory reporting requirements.

August 2001—Michigan enacts Public Act 114 which requires ships to report their ballast water
management and ties eligibility for state grants, loans and awards to satisfactory ballast
water treatment.

 

 

 

73

Table 2.1—Quadrants of Risk, Proﬁt, and Recommended Action

 

 

Marginal Proﬁt Level
Expected Margrp' a1

Dmage
High Low

High Intermediate reduction Large reduction
of risk of risk

Low Small reduction Intermediate reduction
of risk of risk

 

 

 

74

Table 3.1—Uses of Economic Incentives (Source: NCEE 2001)

 

 

 

 

 

 

 

 

 

 

 

 

Incentives Examples Pros 8r Cons
Pollution Charges 8: Emission charges Pros: stimulates new technology, useful when damage
Taxes Efﬂuent charges per unit of pollution varies little with the quantity of
Solid waste charges pollution
Sewage charges
Cons: potentially large distributional effects; uncertain
environmental effects; generally requires monitoring data
Input or Output Leaded gasoline tax Pros: administratively simple; does not require
Taxes 8: Charges Carbon tax monitoring data; raises revenue; effective when sources
Fertilizer tax are numerous and damage per unit of pollution varies
Pesticide tax little with the quantity of pollution
Virgin material tax
Water user charges Cons: often weak link to pollution; uncertain
CFC taxes environmental effects
Subsidies Municipal sewage plants Pros: politically popular, targets speciﬁc activities
Land use by farmers Cons: often weak link to pollution; uncertain
Industrial pollution environmental effects
Deposit- Lead-acid batteries Pros: deters littering stimulates recycling
Refund Systems Beverage Containers Cons: Potentially high transaction coss; product must be
Automobile bodies reusable or recyclable
Reporting Proposition 65 Pros: ﬂexible, low cost
Requirements SARA Title III
Cons: impacts may be hard to predict; applicable only
when damage per unit of pollution does not depend on
the quantity of pollution
Voluntary Programs Project XL Pros: low cost; ﬂexible; many possible applications; way
33/50 to test new approaches
Energy Star Cons: uncertain participation
liability Natural resource damage Pros: provides strong incentive
assessment
Nuisance, trespass Cons: assessment and litigation costs can be high; burden
of proof large; few applications
Marketable Permits Emissions Pros: provides limits to pollution; effective when damage
Efﬂuents per unit of pollution varies with the amount of pollution;
Fisheries access provides stimulus to technological change
Cons: potentially high transaction costs; requires
variation in marginal control costs

 

75

 

Figure 1.1—ANS Taxonomic Groups in the Great Lakes (Source: Mills et a1, 1993)

 

 

 

 

 

 

 

 

 

 

 

 

Number of Species

 

 

 

 

 

 

 

76

 

 

Figure 1.2—ANS Introduction Vectors Over Time (Source: Mills et al., 1993)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1810-1839 1840-1869 1870-1899 1900-1929 1930-1959 1960-1991

 

Railroal or Highway I Canals Cl Deliberate Release
El Ships I Unintentional Release

 

 

 

 

 

 

77

Figure 1.3—Diagram of Ballast Water Management Options (Source: Oemcke, 1999)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ballast Water Management
Port-Based Shipboard l
Onboard Ballast Water
Treat After Ballast With l
T trn t Ex h
Deballasting Treated Water I rea en c ange
PRIMARY
Filtration SECONDARY
Cyclonic Physical or Chemical

 

 

 

78

 

Figure 2.1—The ANS Invasion Process

 

Firms’ {
Actions

Environmental
Outcomes

Economic
Outcomes

 

 

 

Firms’ Production and Biosecurity Choices

 

 

 

Random Factors

 

 

 

 

 

Emissions / Introductions

 

 

 

 

Random Factors

 

 

 

 

 

Invasions

(Establishments)

 

 

 

 

 

Private
Economic
Beneﬁts

 

Economic
Damages

 

 

 

 

 

 

79

 

Figure 2.2—Social Welfare

 

3

MD

 

SB risk

 

 

 

80

Figure 2.3—Different Marginal Demand and Proﬁt Curves

 

 

MD,

 

MD,

 

 

Mir,

* *
"1 r2 for ’"o,2

risk

 

 

 

81

Figure 2.4—The Incentives the Firm Faces

 

MD

 

II III

 

risk

 

 

 

82

Figure 3.1—Government Mandated Limit

 

MD
Limit

 

 

7* r0 risk

 

 

 

83

Figure 3.2—Tax

 

MD

 

 

risk

 

 

 

84

Figure 3.3—Subsidy

 

MD

 

 

7* 7'0 nSk

 

 

 

85

Figure 3.4—Marketable Permit

 

 

 

   

risk

 

3a
0

 

 

 

86

 

Figure 3.5—Cross Compliance Measure

 

  

Cgoss Compliance Limit

 

 

 

 

 

 

87

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