Global Risk Regulation Alberto Alemanno HEC Paris Global Risk - - PowerPoint PPT Presentation

Global Risk Regulation

Alberto Alemanno

HEC Paris

Global Risk Regulation

Lecture 3

Alberto Alemanno

HEC Paris

What’s the fear of the week?

Update on BPA

n BPA in the US:

q Petition by National Resources Defense Council q Next slide

n BPA in the EU:

q Sweden q French bill q Hazard vs risk assessment q EU and WTO implications q http://www.forbes.com/sites/trevorbutterworth/

2012/04/03/mais-non-europe-gangs-up-to-foil- frances-bpa-ban/

n The FDA pointed out in its note to

consumers, “the scientific evidence at this time does not suggest that the very low levels

• f human exposure to BPA through the diet

are unsafe … FDA scientists have also recently determined that exposure to BPA through foods for infants is much less than had been previously believed and that the trace amounts of the chemical that enter the body, whether it’s an adult or a child, are rapidly metabolized and eliminated.”

http://www.law.upenn.edu/blogs/regblog/2012/04/fda-rejects-petition-to-ban- bpa.html

Structure of the course

n Introduction to Risk Regulation:

q Introduction to risk theories q Terminology q Case study: BPA

n Regulating risk under the WTO’s supervision

q EU Risk regulation q WTO as a risk regulator q Case study: GMOs

Structure of the course (2)

n Optimization tools of risk regulation

q Risk analysis/Economic analysis q Case studies: Volcanic ashes

n New Frontiers of global risk regulation:

q Lifestyle risks q Consumer choice q Case studies: plain packaging/nudges

n Final comments

Bisphenol A

The emerging EU framework of risk regulation

Comparing EU and US risk regulation

The optimization tools

• f the modern risk regulator

Once we know that we want to regulate the ‘risk of the month’, how do we do that?

The optimization tools

• f the modern risk regulator

q Risk Analysis q Economic Analysis

Volcanic ash cloud - Eyjafjallajokul

The optimization tools

• f the modern risk regulator

q What are they?

The optimization tools

• f the modern risk regulator

« Regulation that is based on solid economic analysis and sound science is more likely to provide greater benefits to society at less cost than regulation that is not » 2007 OMB

KYSAR – regulating from nowhere

n ‘Familiar script’ in which the excesses of our

early attempts to regulate risks came to be disciplines by the insights of:

q Sound science q Economic reasoning

warding off in the process alarmism,

inefficiency and government over-reaching

According to this ‘script’

n Any risk regulation must be preceded by an

empirical justification derived from:

q A scientific risk assessment, and q Be based on the ALOP that is acceptable in light

• f corresponding costs (CBA)

n If not:

q Costly compliance behaviour q Unwarranted health and safety concerns q Misallocation of ressources q Disguised economic protectionist

Colonization of the ‘script’

n Evidence-based approach exported outside

• f the US:

q E.g. evidence shows that behind the spread of

CBA in the EU there are tobacco companies, such as BAT

q OECD work on regulatory reform and Regulatory

impact assessment

n Risk assessment codified in the WTO

Agreements

According to this ‘script’

n Language of instrumentalism that animates our

talk of tradeoffs, efficiency and welfare maximization is so dominant that :

q Env’l/safety/health rights à optimal risk tradeoffs q Irreversible harm à risk aversion q Obligations towards future generationà discounting q Internal cooperation à competitiveness

The Genesis for Optimization Tools

n Statutes insensitive to costs:

q standard-based: CAA: national air ambient quality

standards; Delaney Clause: no risk-benefit for carcinogenic; CWA: high quality waters)

n Statutes sensitive to costs but:

q technology-based (best available) or q feasibility based (OSHA safety standards ‘feasable’)

Opposition to those approaches consider them naïve, not economically efficient…

Rationale for optimization

n A critique to ‘Command and control’ risk

regulations, which:

q mandate a single compliance technique, thus

precluding opportunities to achieve same ALOP through less costly means

q Encourages a culture of compliance among

regulated firms: no incentive to achieve higher level of protection [vs incentive-based]

q Unfair distribution of compliance costs (higher per-

unit price for drinking water in small town)

Cost-benefit analysis

Assesses the costs and benefits of various standards and selects the standard that – according to the agency’s calculation – presents benefits that outweight its costs à maximization of overall social welfare

How to compare costs & benefits?

n Costs are easy to quantify n What about benefits?

q The economic approach requires regulators to

place monetary values on human life, endangered species, old-growth forests, etc

Arsenic in drinking water

n Actual rule: 50 ppb à 50 deaths a year n Proposed rule: 10 ppb à 44 deaths a year, but

costs 200 million $ à 6 lives saved a year 1 life saved = 33 million $ PS: because of costs of stricter standard, risk of more use of – unsafe - private wells

What’s the value of life?

In our example, 33 million per life saved: Too little? Too much?

Some monetizations

n The value of a human life is $3.7 million

(Environmental Protection Agency, 2002)

n The value of an elderly person's life is $2.3 million

(EPA, 2002).

n A case of chronic bronchitis costs $260,000 (EPA,

1997).

n An IQ point is worth $8,346 (EPA, 2000). n Anything a decade from now will be worth 50

percent less than today (Office of Management and Budget, 2003).

n Anything a century from now will be worth 99.99

percent less than today (OMB, 2003).

The rationale for CBA

n Not placing monetary value on life but on risk

reduction

n Commensuration of risk reductions occurs

every time we don’t follow absolute protection: SLIDE

q Accept to buy a airbag/a helmet q Accept to do a riskier job

We do this as a result of CBA in which we trade health vs wealth (WTP-WTA)

(Our Daily) Cost-Benefit Analsyis ?

VSL should roughly correspond to the

value that people place on their lives in their private decisions:

• We drive less safe car than we would

like to buy (WTP)

• We take risk while driving (texting)

(WTA)

VSL

n Based on revealed preferences

q economists exploit the difference in pay between

two jobs and determine how much of that difference stems from the difference in the risk of injury or death.

n Based on stated preferences

q Contingent evaluation method

n Based on consumer market behaviour

q infers our implicit valuation of life from our product

choices rather than our labor-market choices

Revealed preferences

n If I make $40,000 and my twin brother makes

$42,000 at a job that is identical to mine in all respects except for a 1 percent greater chance of death, then an economist assumes that the $2,000 difference is a premium my twin brother requires to accept the riskier job. If he requires $2,000 for a 1 percent greater risk, then I can infer that he is placing a value

• n his life of $2,000 x (1/0.01), or $200,000.

Stated preferences

n "Would you accept $1,000 to move from a one in

10,000 chance of death to a five in 10,000 chance of death?" If yes, then the next question might be whether the person would accept $800 to assume the higher risk, and so on until the person says he would refuse the money for the risk.

n After surveying a few hundred people in this

manner, the researcher imputes the implicit value that each subject places on the value of a life, as is done in the revealed preference method (multiplying the final dollar figure by the inverse of the additional risk taken) and averages the valuations.

CBA in the EU

An illustration

CBA

Despite the general perception that it is not happening, the EU Commission increasingly relies on quantitative economic analysis to determine legislative action

case study

Batteries Directive (2006/66) Ban on batteries containing cadmium

« Should we we eliminate the exemption for NiCd batteries in cordless power tools from the ban on cadmium? »

Should we extend the ban on cadmium to NiCd batteries in cordless power tools?

Ni-Cd

EU Commission study

concluded that a ban of the application of NiCd batteries in cordless power tools:

n would be of substantial benefit for European health and

environment;

n would be technically feasible as Li-ion and NiMH batteries

are competitive alternatives;

n would not cause inacceptable economic and social

impacts;

n could support the economy to be more competitive and to

gain higher profit margins; In sum, the expected benefits from a ban of NiCd batteries for application in cordless power tools (CPTs) exceed its costs.

Commission Report

n

While (a ban on the NiCd batteries) could possibly yield substantial environmental and health benefits, estimation of the benefits is highly uncertain.

n It cannot currently be demonstrated that

the benefits of withdrawing the exemption would clearly outweigh the costs.

n Only a comparative life-cycle assessment of the

three main alternatives can lay the foundation for a sound impact assessment on the exemption and dispel the current uncertainty.

Commission Report

n The Commission concludes that « at this

juncture it is not appropriate to bring forward proposals to withdraw the exemption for cordless power tools from the ban on cadmium in batteries and accumulators.

n Any proposal for legislation on this matter, based on an

impact assessment in line with Commission policy, would require comparable technical and scientific information on the costs and benefits of cadmium and its substitutes in portable batteries and accumulators for CPTs.

A similar story

RoHS Directive

(Restriction of Hazardous Substances in electronic equipments)

Outcome

n In the best case, this approach delays

regulatory action

n In the worst case, this approach leads to

NO ACTION

(provisional) conclusions

n EU impact assessment more quantitative

than often thought

n EU people already appear as numbers

stacked in a column, points of a graph, equations, dose-response curves

n Beyond moral concern, optimisation tools

may have an inherent « anti-regulatory bias », and lead to « deregulation » in EU risk regulation

What is RISK ANALYSIS?

Risk Analysis as the Grundnorm

n Originally conceived by US Nat’l Research Comm

(Red Book 1984) as analytical methodology guiding decision-makers when adopting decisions about hazards to human health, welfare and environment:

q RISK ASSESSMENT (I) q RISK MANAGEMENT (II) q RISK COMMUNICATION (III)

n Very sensitive to define what is each of this step,

what is not, and what is their relationships

n Fff

Which risk theory behind the red book?

The responsability of those who exercise power in democratic society is not to reflect inflamed public feeling but to help form its understanding

Felix Frankfurter

Former Supreme Court Justice (1982), carved in stone on the wall of

the Federal Court House, Boston

Trends in risk analysis decision making…….

USA 1983 USA 1996 From the RED BOOK to the ORANGE BOOK

The Silver Book

UK 1983 UK 1992 Trends in decision making…….

RA / RM

RISK ASSESSORS RISK MANAGERS RISK COMMUNICATION

RISK MANAGEMENT RISK ASSESSMENT

RA + RM

RA / RM

RISK ASSESSORS RISK MANAGERS RISK COMMUNICATION

RISK MANAGEMENT RISK ASSESSMENT

RA + RM

RA / RM

RISK ASSESSORS RISK MANAGERS RISK COMMUNICATION

PP

RISK MANAGEMENT RISK ASSESSMENT

RA + RM

PP

RISK ASSESSORS RISK MANAGERS RISK COMMUNICATION

PP PP

Risk Assessment (I)

n Risk assessment is the process of quantifying

the probability of a harmful effect to individuals or populations from certain human activities.

n a methodology aimed at ensuring scientic

rationality

n In secondary law: sectoral legislation

n US: AFL-CIO v. American Petroleum Institute

(448 US 607 (1980)) – benzene case

q Risk assessment mandatory for all US agencies

involved in health regulation

n EU: Pfizer judgment (2003)

q Risk assessment mandatory for all US agencies

involved in health regulation

RA: Who-When-How-By Whom

n Introduction of risk assessment duty at

primary level (CASE LAW and/or LEGISLATION but its execution left to secondary law: who-when-how-by whom (food safety, chemicals, water protection, etc)

n These risk regulations developed through

time and did not necessarily share same risk analysis model

n Sectoral approach, however

Who conducts RA?

n The scientists (not the decision-makers) n Lack of a common approach to RA n Lack of a common source of advice:

q US Agencies / EU Agencies q Scientific committees (Non-food committees still in

COMM’s walls)

q Outsourced

The 4 steps of RA

n Hazard identification (Qualitative) n Dose-Response assessment n Exposure assessment n Risk characterisation:

q Treshold, RfD, etc

The 4 steps of RA

n Hazard identification (Qualitative):

q Is the agent capable of eliciting an adverse reaction

(at some dose)?

n Dose-Response assessment & Exposure

assessment (Quantitative):

q How does the degree of exposure to substance X

affect the incidence of impact Y? SLIDE

q What is the expected magnitude or probability of the

adverse reaction at different doses?

q Dose response function: linear, treshold and hormesis Ø Epidemiology (past human exposure, but variability) Ø Toxicology (lab tests on animals, i.e. rats, mice), BUT

extrapolations

n Risk characterisation: Treshold, RfD, etc

Dose-Response function

n Dose-response assessment is the process of

characterizing the relation between the dose

• f an agent administered or received, and the

incidence of an adverse health effect in exposed populations, and estimating the incidence of the effect as a function of human exposure to the agent.

A dose response curve

A dose-response curve defines the relationship between dose and response based on the following assumptions: 1) response increases as dose increases 2) there is a threshold dose - a dose below which there is no effect.

Bottom line

All substances are poisons: there is none which

is not a poison. The right dose differentiates a poison and a remedy

Paracelsus (1493-1541)

Medieval physician, botanist, alchemist, astrologer, and general

• ccultist

A dose response curve

What if diverging scientific opinions?

The limits of risk assessment

n Regulations mandating RA assume that RA will lead

to a 100% answer, but:

n Incomplete information (i.e. we have not & cannot

test all substances and their possible interactions)

n Indirect information (lack of epidemiological studies

and reliance on animal studies through extrapolation)

q Quid when animals (mice and rats) react

differently?

q Extrapolation from data points at high doses to the

low levels relevant to the regulations of risk to humans

The limits of risk assessment

n Use of defaults and assumptions to

proceed in RA when uncertainty: Weigh-of-evidence; i.e. if animal exposure does not show adverse effects does this imply safety for humans? à Uncertainty is pervasive in RA

Conclusion:

n Evidence has no meaning except in relation to

a specific hypothesis >> hence, need to lay out reasoning & basis for inference in final RA

Risk Management (II)

n The process of trasforming the outcome of

RA into clearly defined appropriate control decisions, by weighing policy options

n In so doing, need to take into account:

q Degree of risk deemed acceptable for society q Outcome of RA q Other (non-scientific) factors ?

• Ref. Baruch Fischhoff, Risk Analysis (1995), 15(2), 137-145.

Definition of Acceptable Risk (ALOP)

A ¡ risk ¡ could ¡ be ¡ defined ¡ as ¡ ‘acceptable’ ¡ if ¡ it ¡ is ¡ defined ¡as ¡such ¡because: ¡ ¡

v it ¡falls ¡below ¡an ¡arbitrary ¡defined ¡probability; ¡ v it ¡falls ¡below ¡some ¡level ¡that ¡is ¡already ¡tolerated; ¡ v it ¡falls ¡below ¡an ¡arbitrary ¡defined ¡a=ributable ¡frac>on ¡of ¡ total ¡disease ¡burden ¡in ¡the ¡community; ¡ v the ¡cost ¡of ¡reducing ¡the ¡risk ¡would ¡far ¡exceed ¡the ¡costs ¡ saved; ¡ v independent ¡experts ¡say ¡it ¡is ¡acceptable; ¡ ¡ v the ¡ general ¡ public ¡ or ¡ poli>cians ¡ say ¡ it ¡ is ¡ acceptable ¡ (or ¡ more ¡likely, ¡do ¡not ¡say ¡it ¡is ¡not). ¡

¡

Other non-scientific factors (OLF)

n European approach:

q « scientific legitimacy is not a sufficient basis for the

exercise of public authority »

q the scientists have « neither democratic legitimacy nor

political responsability »

n Scientific knowledge is authoritative but not

esclusively so

n Codification of « Societal, economic, traditional,

ethical and environmental factors »

n This philosophy already underpinned the ban on the

use of hormones-growth back in the ’80s

The EU RM principles

n Once recognised the multidimensional nature

• f RM:

q Precautionary principle q Principe of Proportionality q Consistency precept

Gradually identified as guidance principles for the risk managers when facing risk regulatory issues

PP

n « in so far as there are uncertainties in the present

state of scientific research with regard to the harmfulness of food additives, it is for the Member States, in the absence of full harmonization, to decide what degree of protection of the health and life of humans they intend to assure, having regard for the requirements of the free movement of goods within the Community » Sandoz, Debus, etc. 1980s

What is scientific uncertainty?

Crucial to define it as it trigger the use of PP

n Conflicting scientific result? Or Situations of ignorance? n The former is genuine uncertainty: there exist studies but

unable to determine direct casual link btw substance & adverse effect

n « where there is uncertainty as to the existence or extent

• f risks to human health »

n Because « of the insufficiency, inconclusiveness or

imprecision of the results of studies conducted »

n Not on « hypothetical considerations » n ECJ: sufficiently reliable scientific data, cogent

information, and solid and convincing evidence about negative effect à THE PP PARADOX

PP vs CBA

n No attention to costs n Bias against new risk vs actual risk n Bias against salient vs non salient risks n No guidance to decision-maker: how to weigh the

alternative courses of action?

n No help in risk vs risk trade offs (absestos) n Stricter regulation may breach PP as it leads to new

(unknown) risks (BPA?)

n Paralyzing principle favouring a zero-risk society

The principle of proportionality

n Not conceived as RM tool, rather control

mechanism over MS measures’ legality

n Suitable to the decalred purpose n The least onerous method n Disadvantages caused not disproportionated

to the aims pursued CFI « cost-benefit analysis is a particular expression of proportionality in RM »

Volcanic ash cloud - Eyjafjallajokul

The Volcanic Ash Crisis What happened and lessons learned

Alberto Alemanno | HEC Paris

Structure of the presentation

n What happened:

q Basic facts q Hazard identification q Regulatory action q Questions raised

n Lessons learned n What’s next

Volcanic ash cloud - Eyjafjallajokul

What happened?

April 14, 2010: start of explosive phase of the eruption of Eyjafjallajökull

April 15: explosive eruption continues, ash cloud reaches mainland Europe à closure of airspace over UK, Scandinavia and Nth EU.

April 16: a pulsating eruptive column reached above 8 kilometres: 11,659/28,597 flights

April 17: 5,335 actual flights vs 22,653

Sunday 18 April, Spanish Presidency and Eurocontrol propose a co-ordinated European approach

April 20:

PHASE OUT OF THE

April 21: back to normal

Some numbers

n Airspace of 23 countries involved n 300 airports (75% of EU air traffic) n 100 000 flights cancelled n 10 million passengers affected n Significant economic losses

Questions (end of April)

n Who took the risk management decisions, i.e.

fly bans?

n Who assessed the hazard, i.e.volcanic ash to

jet airliners?

n Who established safety level, i.e. zero ash?

à Some answers ASIL – Insights

Appropriate risk management

• r
• vereaction?

Perceived risks

• r

actual risk?

Is the volcanic ash crisis an instance of EMERGENCY REGULATION?

The Science

Volcanic Ash is well-known hazard (since 1982)

n “The risk to aviation from airborne volcanic

ash is known and includes degraded engine performance (including flameout), loss of visibility, failure of critical navigational and

• perational instruments, and, in the worse

case, loss of life”. US Government Department of Commerce National Volcanic Ash Operations Plan for Aviation FCM-P35-2007

Hazard to jet engines, but not only

‘State of the Art’ of Volcanic Ash Science (1 month before the Eyjafjallajökull)

There continues to remain no definition of a “safe concentration” of ash for different aircraft, engine types or power settings. In

• rder to give a reliable and justifiable “all

clear” once a plume has dispersed enough to be undetectable, clear limits of ash content are required from both the manufacturers and aviation licensing authorities 5th Int’l Workshop on Volcanic Ash, 3/2010 Chile

In other words

n We know that it is a hazard, BUT

How much volcanic ash is too much for jet engines?

The ‘response’ of the Science

Given the absence of « safe levels » of volcanic ash, no technical basis for any « fly through the ash » policy

The Law

The Law

n Adoption of ad hoc volcanic ash advisory system at

ICAO:

q International Airways Volcano Watch (IAVW),

responsible for a coordinated monitoring, detection, tracking and alerting service for aviation.

q Based on 9 Volcanic Ash Advisory Centres (VAAC)

n ICAO Guidelines:

q Annex 3 Chicago Convention q ICAO (EUR) Volcanic Ash Contingency Plan

ICAO 2007 Manual

n 3.4.8 Unfortunately, at present there are no agreed

values of ash concentration which constitute a hazard to jet aircraft engines. This matter is discussed in detail in Chapter 4, but it is worth noting at this stage that the exposure time of the engines to the ash and the thrust settings at the time

• f the encounter both have a direct bearing on the

threshold value of ash concentration that constitutes a hazard. In view of this, the recommended procedure in the case of volcanic ash is exactly the same as with low-level wind shear, regardless of ash concentration — AVOID AVOID AVOID.

That’s the procedure followed in the EU

(at least until April 18 when MS departed from ICAO Manual)

Why no longer a viable

• ption today?

Why not a viable option? (I)

n Some answers available in the position

papers presented by ICAO members to 2010 Assembly

q EU/EUROCONTROL Volcanic Ash Crisis q US Perspective on Volcanic Ash Practices and

Possible Ways to Improve Services

q IATA Reccomendations for Operations in the

Presence of Volcanic Ash

Why not a viable option? II

ALL SEEM TO AGREE: « not commensurate with the technical advances and operations of modern jet engines and with more precise ash predictions based on actual ash values » See: EU position to 2010 ICAO Assembly US = IATA =

And, airlines know best

"The analysis we have done so far, alongside that from other airlines' trial flights, provides fresh evidence that the current blanket restrictions on airspace are unnecessary," BA chief executive Willie Walsh.

Airlines know best II

“Europe was using a theoretical mathematical approach and this is not what you need. We needed some test flights to go into the atmosphere and assess the level of ashes and take decisions." Giovanni Bisignani, director general of the International Air Transport Association (IATA).

Ready for a

shift f

from zero- zero- tolerance tolerance t to acceptable l level o

• f

exposu exposure re

But original questions remain open

1.

What about measurement/prediction of ash concentration?

2.

What the safe level of ash concentration?

3.

What the effects on aircraft of a combination

• f ash concentration and exposure time?

Towards a legal definition

n Definition of a treshold ash concentration

(still differ across the world (e.g. EU Council of Transport Ministers 2mg/m3, provided that frequent maintenance inspection à this is 100 times more dust than usual at ground level; but also 4 mg/m3: revised ICAO contingency plan)

n Accompanied by shift responsability to

• perator on go/not go decisions, but within

a strictly regulated environment where RA/ RM subject to scrutiny and approved by authorities

Lessons learned

Lessons learned: the Science

n Incomplete understanding of the risk to

aircraft of volcanic ash, even though 25 years

• f volcanic ash science

n Exposure to such a risk likely to happen

again (and at greater scale)

n Yet, existing knowledge could have reduced

disruption

Lessons learned: the Law

n Both the previous and the actual regulatory

approaches need to be justified

n EU: air frontiers still exist

q Need to speed-up SES II q European Aviation Crisis Coordination Cell

n International level

q Int’l Volcanic Ash Task Force (IVATF) n

To advance science of aviation safety in contaminated airspace by volcanic ash

n

To establish a global safety risk management framework by May, 2011

q Revision of existing guidelines

Research questions

n Emergency regulation ?

q What’s that? q Features:

n Triggered by (threat of) unpredictable event n Scientific ignorance/Uncertainty n Strict-time frame n It questions status quo, even though apt to its task n Shaped by prevalent interests n Shaped by prevalent narrative ?

Research questions

n Emergency regulation ?

q Competitive notions:

n Emerging risk regulation n Catastrophe Law n Disaster Law

Catastrophe Law

Disaster Law

Emergency Risk Regulation