Safe Minimum Standards in Dynamic Resource Problems: Conditions for Living on the Edge of Risk

Abstract

Safe Minimum Standards (SMSs) have been advocated as a policy rule for environmental problems where uncertainty about risks and consequences are thought to be profound. This paper explores the rationale for such a policy within a dynamic framework and derives conditions for when SMS can be summarily dismissed as a policy choice and for when SMS can be defended as an optimal policy based on standard economic criteria. We have determined that these conditions can be checked with quite limited information about damages and risks. In order to analyze the SMSs in a dynamic setting, we have developed a method for solving optimal control problems where the state space is divided into risky and non-risky subsets.

The Economy, The Biosphere and Planetary Boundaries: Towards Biosphere Economics

“…In contrast, regime shifts are more difficult to deal with and many decision problems involving the economic exploitation of systems with regime shifts have proved to be non-trivial (Carpenter et al, 1999;Mäler et al, 2003;Crépin, 2003;Crépin, 2007). In particular, multiple regimes can sometimes be optimal depending on what has happened in the past Brock and Starrett, 2003;Crépin, 2003;Crépin, 2007), and it is unlikely that conventional policy tools can be used in the same way as for situations with no regime shifts Crépin et al, 2011) and precaution may be an optimal policy (Margolis and Naevdal, 2008;Polasky et al, 2011b). Further, the reversibility or irreversibility of such regime shifts has implications for the level of uncertainty in the system, the degree of its predictability, and the time over which predictability extends (Polasky et al, 2011a).…”

“…Margolis and Naevdal (2008) picture situations when there are boundaries which divide the state space into sets with different stochastic structures (risk thresholds), for example, no risk of entering a dangerous zone/some risk of entering a dangerous zone. They show formally that safe minimum standards could be optimal if some risk threshold can be identified below which there is no risk of a regime shift and above which the risk is positive.…”

“…They give a simple condition for when to establish a safe minimum standard before learning more about the risk. While Rockström et al (2009b) argue that "determining a safe distance involves normative judgments of how societies choose to deal with risk and uncertainty", Margolis and Naevdal (2008) define risk thresholds as dividing the state space into risky and non-risky zones. Their calculation of the safe minimum standard hinges on using a utility function with underlying assumptions about risk preferences.…”

“…For example if at the threshold the change in risk is small, Margolis and Naevdal (2008) suggest that it can be optimal to accept some risk. However they argue that it could still be motivated to have a safe standard if the expected cost of the bad outcome is large enough.…”

Using Fast and Slow Processes to Manage Resources with Thresholds

“…In a rather similar context of global warming, Ulph and Ulph (1997) demonstrated in a two-period model that the irreversibility effect did hold if the irreversibility constraint 27 was binding when there was no opportunity to learn. Margolis and Naevdal (2004) showed, in the context of a linear dynamic model with an exogenous threshold, that a safe minimum standard policy could maximize welfare under certain conditions. 28 So there is evidence that a precautionary approach is sometimes a relevant policy if such an approach means accounting for possible option values and irreversibility effects in a problem.…”