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Surprise, Surprise

Who Should Bear Nature's Risk? Original Article

On October 4, 1995, Hurricane Opal made landfall along the Gulf coast near Pensacola, Florida. With 125-mph winds and 20-foot storm surges, the hurricane smashed boats and buildings, cutting a swathe northward through Alabama. As it crossed the border into North Carolina, the storm finally dissipated. Twenty-seven people lost their lives, and the hurricane was responsible for nearly $2 billion in damages.
Amid the human toll and property damage was a different sort of potential casualty. To the west of Pensacola, on the Fort Morgan peninsula in Alabama, the Aronov Realty Management Company owned fifty-two acres of beachfront. Bordering the Bon Secour National Wildlife Refuge, the property was a mixture of sand dunes and scrub vegetation. The refuge managers had put the property high on their priority list for future refuge acquisitions, but Aronov had other plans for the site. The company wanted to build a high-density, residential development, to be known as “Martinique on the Beach.” Before construction could start, the company had to acquire a slew of government permits — including one that Hurricane Opal threatened to block.

Sometimes called the “Mini-Yellowstone of Alabama,” the Bon Secour refuge is home to a rich brew of biodiversity, with endangered species such as the bald eagle, red-cockaded woodpecker, and, of interest to Aronov, the Alabama beach mouse (Peromyscus polionotus ammobates). P. p. ammobates is one of several subspecies of beach mouse that inhabit the sand dunes of the Alabama and Florida coast. Developments like the Martinique had cut deeply into their habitat, enough to convince the U.S. Fish and Wildlife Service to place P. p. ammobates and four other subspecies of Peromyscus polionotus on the official endangered species list in the 1980s.

The Bon Secour refuge and the surrounding area was important to the continued survival of the Alabama subspecies. The surrounding area, of course, included Aronov’s property — which brought the company into the bailiwick of the Fish and Wildlife Service, under the auspices of the Endangered Species Act. The ESA prohibited Aronov from “taking” the beach mouse, which included adversely disturbing its habitat, a difficult hurdle for any developer. Alternatively, the company could strike a deal with the service. Aronov would fashion a proposal, known as a habitat conservation plan, or HCP, for mitigating any damage to the mouse’s habitat caused by its development. In return, the service would grant the company an incidental take permit for harming the species, effectively allowing construction to go forward.

In the spring of 1995, Aronov applied for such a permit, offering a number of mitigation measures in its HCP: “establishment of a walkover structure across that scrub dune, a prohibition against housing or keeping pet cats, [Alabama beach mouse] competitor control and monitoring measures, scavenger-proof garbage containers, restoration of dune systems impacted by the construction, and the minimization and control of outdoor lighting.”(1) The service was considering Aronov’s application when Hurricane Opal struck.

The storm hit the Bon Secour refuge hard, washing away a good chunk of the mouse’s local habitat. Biologists immediately worried that the species’s was now at even greater risk. If so, swift action might be needed to counteract the hurricane’s effects.

But who should take that action? Should the service shelve Aronov’s plan, demanding a new one with more expansive protection or denying the permit altogether? Or should the service accept the plan and increase its own efforts to protect the mouse? Agreeing that a species such as P. p. ammobates deserves a strong protective effort does not automatically mean that a particular party should be the one to bear the costs (or enjoy the benefits) of providing that protection. A severe hurricane season, a sudden appearance of a disease, an unlucky reproductive season — should the effort to protect biodiversity place the burden for responding to these natural “disasters” on the shoulders of private and other non-federal landowners, or should the federal government be the one to respond? In short, who should bear nature’s risk?

As it turned out, the population of P. p. ammobates on the Fort Morgan peninsula was hit hard, but not hard enough to convince the service to reject the company’s plan.(2) The case illustrates a problem, however, that has come to the fore of our efforts to conserve biodiversity. The federal government recently adopted a policy — the “No Surprises” rule — that addresses the allocation of nature’s risk. Several environmental and scientific groups have attacked this policy, arguing that it flies in the face of ecological reality.

Addressing these concerns requires a deeper understanding of the role nature’s risk plays in both the ecological and economic world. Risk and uncertainty have only recently been embraced by ecology; and although the history of its treatment in economics goes back considerably further, few treatises consider how nature’s risk affects economic behavior. Rather than present a formal treatise of my own, I will endeavor to illustrate the issue of nature’s risk and the No Surprises rule using a few simple examples.

The Nature of Nature’s Risk(3)

Conserving endangered species is often presented as an either-or situation: Either a species is endangered or it is not. The Endangered Species Act reflects this dichotomy, the law either affording a species the full protection of the law or not.(4) This view has its roots in what is sometimes called the “equilibrium” paradigm of ecology, reflected in the popular “balance of nature” metaphor. In this way of thinking, species have a natural, unendangered state; the influence of humans invariably knocks an ecological system out of balance, thereby endangering its non-human inhabitants. Remove the human influence, and nature has a chance to recover.

The equilibrium paradigm has held a powerful sway over biodiversity policy for decades. In the process of considering the Endangered Species Act of 1973, for example, Congress noted that

consideration of [the] need to protect endangered species goes beyond the
aesthetic. . . . [M]any of these animals perform vital biological services to
maintain a “balance of nature” within their realms.(5)

The metaphor has been routinely translated into dire warnings and admonitions:

All of us are passengers on a very large spacecraft — one on which we have
no choice but to fly. And, frighteningly, it is swarming with rivet poppers
…(6)

If the biota, in the course of aeons, has built something we like but do not
understand, then who but a fool would discard seemingly useless parts? To
keep every cog and wheel is the first precaution of intelligent tinkering.(7)

The importance of wild species goes far beyond their direct use by humans.
As more species become extinct, the living fabric of our planet is becoming
tattered, endangering whole natural systems and putting us all at risk.(8)

The message in these warnings is clear: Nature’s risk is a catastrophic one, stemming from the possibility of total collapse. Pop one too many rivets, toss out one too many cogs, or snip one too many strands in the web, and human civilization will come to an end.

While these warnings continue to surface in the popular media, ecologists have recognized severe limitations of the “balance-of-nature” view. They have moved away from the equilibrium paradigm, replacing it with one that focuses on ecological processes, not delicate states of the world. Rather than a fragile balance, according to this new paradigm, nature is in flux.(9)

An example is P. p. ammobates. The ecosystem it inhabits is made possible in part by the constant disturbance of waves and winds. As the primary dunes closest to the sea are washed away or built up, the mouse’s population ebbs and flows accordingly, sometimes taking refuge in the secondary dunes further inland. A hurricane can have a severe effect on local populations, even wiping them out entirely. But over the broader landscape, P. p. ammobates survives because not all of its local populations are in one dune area. If a disaster wipes out one local population, the mouse can recolonize the depopulated area from other, extant locations.

In this dynamic ecological world, the fortunes of populations and even species wax and wane — they are always at some risk of extinction (local or even global), although the natural risk may be (and usually is) vanishingly small. Human influence can raise the risk appreciably by lowering population numbers directly or by displacing the species from its habitat. In the case of the beach mouse, development has reduced the extent of the dune landscape, chopping it into disconnected fragment, thereby diminishing the species’s ability to recolonize empty areas. Once a major but not disastrous event, a hurricane like Opal now has the potential to deal a serious blow to the mouse’s chances of survival.

Protecting species under the ESA may therefore call for strong action, strong enough to lower the risk of extinction appreciably, but that action will never take the form of saving a species unequivocally. As Scott et al. (1995) note, the choice of a conservation goal — what risk of extinction over what period of time — “may be guided by science but [is] essentially rooted in society’s values.”(10) Acknowledging the nature of nature’s risk means accepting a discomforting fact: There is no bright line — save a species or don’t save a species — that makes our choices easy.

Responding to Nature’s Risk

Nature’s risk is something any farmer, hiker, or beachgoer learns to endure. Variability in weather, for example, can affect these people and their chosen activities, and so has given rise to weather forecasting, cloud seeding, and bustling markets in raincoats and umbrellas. In general, variation in nature encourages us to acquire better information, reduce that variation, and find ways to adapt to it. These activities are not costless, and the tradeoffs between the benefits and costs determine how much variation there will be and how the remaining risk will be borne.

One way to look at nature’s risk, then, is from an economic point of view. To keep matters simple, consider the case of a single person facing nature’s risk: Daniel Defoe’s Robinson Crusoe. By Defoe’s account, the risks Crusoe faced were not, at first glance, overwhelming:

I had no want of food, and of that which was very good too; especially these
three sorts, viz., goats, pidgeons, and turtle or tortoise; which, added to my
grapes, Leaden-hall Market could not have furnished a table better than I, in
proportion to the company. And tho’ my case was deplorable enough, yet I
had great cause for thankfulness, that I was not driven to any extremities for
food; but rather plenty, even to dainties.(11)

Crusoe appears to have been shipwrecked on the best of all possible islands, a primordial world devoid of rivet poppers, cog tossers, and strand snippers. With so little human influence, Crusoe’s island must have been a paradise.

Not quite, as Defoe related, for nature’s risk was still of major concern to Crusoe. One of the first tasks he took up, for example, was to learn to predict the weather patterns that affected his island. Crusoe’s interest in this information stemmed from his desire to plant corn, but his effort was not without mishap:

The rainy season and the dry season began to appear regular to me, and I
learned to divide them, so as to provide for them accordingly. But I bought
all my experience before I had it; and this I am going to relate, was one of the
most discouraging experiments that I had made at all. I have mentioned that
I had saved the few ears of barley and rice, which I had so surprizingly found
spring up, as I thought, of themselves, and believe there was about thirty
stalks of rice, and about twenty of barley; and now I thought it a proper time
to sow it after the rains, the sun being in its southern position, going from me.

Accordingly I dug up a piece of ground as well as I could with my wooden spade, and dividing it into two parts, I sowed my grain; but as I was sowing, it casually occurred to my thoughts that I would not sow it all at first, because I did not know when was the proper time for it; so I sowed about two-thirds of the seed, leaving about a handful of each.(12)

Unfortunately, Crusoe planted his corn at the beginning of the dry season, and “not one grain of that I sowed this time came to any thing.” With the remaining grain, he sought out moister ground and periodically planted a small crop, in case the rainy season would come during the next short while. “By this experiment I was made master of my business, and knew exactly when the proper season was to sow; and that I might expect two seed times and two harvests every year.”(13)

Predicting the weather was still an inexact science, however, and so Crusoe learned to accommodate the more inclement times:

The rainy season sometimes held longer or shorter, as the winds happened to
blow . . . After I had found by experience the ill consequences of being
abroad in the rain, I took care to furnish myself with provisions before hand,
that I might not be obliged to go out; and I sat within doors as much as
possible during the wet months.(14)

Crusoe also sought to reduce another form of nature’s risk, the variation in time and space of some of the island’s wildlife. As his supply of gun powder ran low, he undertook the task of domesticating some goats:

I went to the three kids, and taking them one by one, tyed them with strings
together, and with some difficulty brought them all home.

It was a good while before they wou’d feed, but throwing them some sweet corn,
it tempted them, and they began to be tame; and now I found that if I expected
to supply myself with goat-flesh when I had no powder or shot left, breeding
some up tame was my only way, when perhaps I might have them about my house
like a flock of sheep.(15)

Recognizing that keeping all his flock in a single location might court disaster, Crusoe reduced this risk by spreading them out in a “metapopulation”:(16)

I had a great concern upon me for my little herd of goats; they were not only
a present supply to me upon every occasion, and began to be sufficient to me
without the expense of powder and shot, but also without the fatigue of
hunting after the wild ones, and I was loth to lose the advantage of them, and
to have them all to nurse up over again.

To this purpose, after long consideration, I could think of but two ways to preserve them; one was to find another convenient place to dig a cave under-ground, and to drive them into it every night; and the other was to enclose two or three little bits of land remote from one another and as much concealed as I could, where I might keep about half a dozen young goats in each place: so that if any disaster happened to the flock in general, I might be able to raise them again with little trouble and time: and this, tho’ it would require a great deal of time and labour, I thought was the most rational design.(17)

Crusoe’s ecological efforts illustrate the possibilities for responding to nature’s risk and, more importantly, the tradeoffs in doing so. Because he was alone during this part of his stay on the island, Crusoe bore all the benefits and costs of his actions.(18) As a result, he acted in ways that he, and he alone, believed were the “best.” Still, his responses fell short of “perfect.” He gathered weather information only to the point where he could predict a monthly pattern, not the high and low temperatures or the likelihood of rain for a particular day. He domesticated goats but not pigeons, which were both less valuable and more costly to tame: “I endeavored to breed them up tame, and did so; but when they grew older they flew all away . . .”(19) And when he divided his flock of goats, he placed them in two locations, not three or more.

In each case, the “most rational” course of action involved a balance between the benefits and costs of responding to nature’s risk, not a strict adherence to an ecological plan laid out by a team of conservation biologists. Inevitably, some risk remained because the costs of eliminating it altogether were prohibitively high; and just as inevitably, letting nature’s risk take its course was unpalatable because the human costs of doing so were too high relative to the benefits of altering nature in some way. Crusoe may have faced “no want of food,” but he did so largely by his own hand, and he still chose to get wet every once and awhile.

Hiding behind Nature’s Risk

Let us now travel to another island, whose inhabitants faced a similar set of risk-management decisions: the island inhabited by the castaways of the S.S. Minnow, otherwise known as Gilligan’s island. If they had desired solitude and independence, the castaways could have divided the island into seven separate domains, each living as a modern Robinson Crusoe. Choosing instead to live and work together created social and economic opportunities not available to Crusoe.

For example, rather than fish alone, the castaways of Gilligan’s island could undertake a joint, cooperative fishing effort: Fashion a large net, and then cast and retrieve it together. Similarly, they could gather coconuts cooperatively, say, by stabilizing a tall ladder through the efforts of two or more people while someone scales it to pick the fruit.

Human nature being what it is, the opportunities created through joint efforts include the possibility of shirking one’s duties, as the case of Gilligan amply demonstrates. In some cases, shirking can be detected easily. If Gilligan is assigned the task of gathering coconuts, for example, his presence on the beach, sunning himself on a beach towel, would be a strong indicator of shirking behavior. But if he is part of a group casting and retrieving a net, whether or not he is giving his fullest effort would be harder to detect. And if the Professor is assigned the task of inventing a better ladder or net, his presence on the beach could be an indicator that he is either hard at work, thinking, or merely emulating Gilligan.

Exacerbating this problem is nature’s risk, which introduces variation into the productivity of the castaway’s environmental enterprises. If the natural world is unvarying, a fish harvest that falls short is a clear signal that someone was shirking, even though the identity of the shirker may be difficult to ascertain. Natural variation in fish populations muddies this signal: If the harvest is low, was someone goofing off or was the fish population just naturally low this time? In an uncertain world, the castaways have additional opportunities for shirking by hiding behind nature’s risk.

One response to this problem is suggested by a supposed, not-so-old Chinese fable.(20) A visitor to China, the fable goes, came upon a group of large, hard-working men, pulling a barge through a canal from along the shore. Accompanying the laborers was an even larger man brandishing a whip, which he showed no hesitation in using. What an outrage, the visitor remarked to his guide, the man with the whip is so cruel. The guide was puzzled by this remark and replied, “But the men hired him to do that!”

The castaways, in other words, could appoint one of their own number to be a taskmaster. This person would monitor the tasks assigned to each castaway, and have the authority to discipline anyone caught shirking. Policing the individual efforts of a joint venture in this way, however, creates its own problem: Who will monitor and discipline the taskmaster? Keeping tabs on six other castaways is hard work, and so the taskmaster will inevitably be tempted to shirk. But having the other castaways directly monitor the taskmaster’s effort means double-checking everyone else’s efforts, defeating the purpose of creating such a role. How will the other castaways have any faith that the taskmaster is doing the job?

Among the many ways of answering this question is an appeal to what economists call the “residual claimant.”(21) A residual claimant is the party (or parties) that has the contractual right to whatever remains after the other parties in a joint effort have been paid. If a taskmaster accepts the role of residual claimant, this can help instill faith in the other parties that the taskmaster will earn his or her pay.

To show how this comes about, suppose the castaway who takes on the job of taskmaster agrees to pay each of the other castaways a certain amount of fish per week in exchange for their fishing effort.(22) Once the harvest is in and the other castaways have been paid, the taskmaster receives whatever fish are left over (the residual). If the taskmaster is lazy, any laborer who shirks is not likely to be caught but will still receive the agreed-upon wage (but with less exertion). The taskmaster, on the other hand, will end up with a relatively low residual, because shirking will reduce the fish harvest. Like Robinson Crusoe, being lazy therefore generates costs that redound to the taskmaster. By accepting responsibility for any shortfall, then, a taskmaster who desires a full stomach has an incentive to prevent shirking by others as well as by him or herself.

Nature’s risk complicates the work of a taskmaster, as noted above, because it makes the detection of shirking problematic. Nature may unexpectedly provide a bountiful harvest, masking any shirking by the laborers; or a shortfall in the harvest actually caused by shirking can be blamed on unlucky natural conditions. Distinguishing the effects of ecological nature from those of human nature is therefore a valuable skill when nature’s risk is a major source of variation.

The castaways of Gilligan’s island are fortunate to have someone in their midst who is available to help in this way: the Professor. By applying his expertise to the island’s ecosystems, the Professor is capable of producing a better understanding of the fishery. With this knowledge, the taskmaster could predict the likely size of the next harvest, find better ways to manage the fishery, or invest in reducing the fishery’s natural variability or increasing its future viability. These efforts could both increase the harvest available to all and make the taskmaster’s job more efficient by making it easier to detect shirking.

Reflecting the vagaries of nature, the scientific enterprise is an uncertain one, and the worth of the Professor’s advice may be difficult for others to judge. If the taskmaster hires the Professor to estimate the level of harvest that the island’s fishery can support indefinitely, the accuracy of his estimate may not be revealed for some time. And checking the Professor’s predictions through duplication will be very difficult (and wasteful) for the other castaways.

For the castaways on Gilligan’s island, one solution to this problem is straightforward: Put the Professor in charge. By combining the roles of scientist and taskmaster, and adding the rights and responsibilities of residual claimant, the castaways reduce the problem of shirking and increase productivity for their joint, “scientific” efforts in the following way.

The cost of monitoring will be lowest when the person whose contribution is the hardest to evaluate monitors him- or herself.(23) As long as the other castaways perform simple, labor-intensive tasks, the Professor’s contribution — his scientific predictions and recommendations — will likely be the most difficult to evaluate. Thus, he has an advantage over the other castaways in monitoring the joint effort, because any other arrangement would involve checking up on the Professor.

Agreeing to be the residual claimant cements the arrangement, because it effectively creates incentives for the Professor to perform more efficiently both as scientist and taskmaster. As scientist/residual claimant, he has the incentive to balance the benefits and costs of responding to nature’s risk. Scientific accuracy acquires a premium, as do cost-efficient ways of enhancing the fishery’s viability. Another strong candidate for consideration is building a safety margin into the weekly harvest to guard against extinction, but again, the Professor-cum-residual-claimant has the incentive to find the “right” safety margin, balancing the long run viability of the fishery against the short run cost of going hungry. And as taskmaster/residual claimant, he has an incentive to police himself, for a sloppy job of monitoring the others’ efforts may produce an unlucky string of shortfalls.

Putting the Professor in charge is no panacea. Gilligan will still find opportunities to goof off, and the Professor’s predictions will sometimes lead the castaways’ efforts astray. But when nature’s risk is an important factor in a joint enterprise, the ability to forecast, manipulate, and propose adaptations to that risk is an important skill, but one that is hard to evaluate. By offering to accept responsibility for his monitoring and scientific errors, the Professor relieves the other castaways of the need to constantly check his diligence as well as his math. The savings may just be enough to tide them over until their rescuers arrive.

The “No Surprises” Policy and Nature’s Risk

The effort to conserve an endangered species is almost always a joint effort, like those on Gilligan’s island, rather than a solo one, like those on Crusoe’s island. Species are rarely endemic to one piece of property, instead being spread across several landowners. Although cooperation need not take place, it will undoubtedly enhance any conservation efforts directed at that species.

Using Gilligan’s island as our model, then, the Professor’s role as residual claimant illustrates the logic of the No Surprises rule. If the conditions supporting the fishery population on Gilligan’s island unexpectedly deteriorated, the Professor would still owe the other castaways their weekly wage. He did not have the right to declare any shortfall their responsibility, and lower their wages accordingly. Instead, being the residual claimant meant adherence to a No Surprises rule: the Professor agreed to bear nature’s risk. By doing so, he created incentives that helped ensure his own efforts, both as taskmaster and as scientist.

In February of 1998, the U.S. Fish and Wildlife Service and the National Marine Fisheries Service (NMFS) announced their intention to fill a role similar to the Professor’s: the residual claimant for this nation’s endangered species. Can the No Surprises rule play a role similar to the one it played on Gilligan’s island? Or does it reject ecological reality, as some groups have charged? And are the two services, both federal government agencies, good fits for the role of residual claimant?

The essence of the No Surprises rule is straightforward:

Once an HCP permit has been issued and its terms and conditions are being
fully complied with, the permittee may remain secure regarding the agreed
upon cost of conservation and mitigation. If the status of a species addressed
under an HCP unexpectedly worsens because of unforeseen circumstances,
the primary obligation for implementing additional conservation measures
would be the responsibility of the Federal government, other government
agencies, or other non-Federal landowners who have not yet developed an
HCP.(24)

The rule’s finer details allow the services to modify existing HCPs should circumstances change, but those modifications cannot “impose new restrictions [on the permittee’s activities] or require additional financial compensation . . ..”(25) For example,

if an HCP’s operating conservation program originally included a mixture of
predator depredation control and captive breeding, but subsequent research
or information demonstrated that one of these was considerably more
effective than the other, the Services would be able to request an adjustment
in the proportionate use of these tools, provided that such an adjustment did
not increase the overall costs to the HCP permittee.(26)

Finally, should circumstances change and the risk faced by a listed species increase, the government (or any other party) can act to reduce that risk:

Nothing in this rule will be construed to limit or constrain the Services, any
Federal, State, local, or Tribal government agency, or a private entity, from
taking additional actions at its own expense to protect or conserve a species
included in a conservation plan.(27)

The No Surprises rule has generated vigorous opposition from environmental and scientific groups. The latter’s opposition is often stated in terms of the unscientific nature of the rule:

In a nutshell, [the No Surprises rule] does not reflect ecological reality and
rejects the best scientific knowledge and judgment of our era. It proposes a
world of certainty that does not, has not, and will never exist. . . . Because we
will always be surprised by ecological systems, the proposed “No Surprises”
amendment flies in the face of scientifically based ecological knowledge, and
in fact rejects that knowledge.(28)

A no surprises policy is troubling to scientists because it runs counter to the
natural world, which is full of surprises. Nature frequently produces surprises,
such as new diseases, droughts, storms, floods, and fire. The inherent
dynamic complexity of natural biological systems precludes accurate, specific
predictions in most situations; and human activities greatly add to and
compound this complexity. Surprises will occur in the future; it is only the
nature and timing of surprises that are unpredictable.(29)

These comments have helped fuel considerable opposition to this policy.

Does “ecological reality” have any bearing on the wisdom of the No Surprises rule? The ubiquitous presence of nature’s risk strongly suggests that parties to an HCP would be wise to cover a range of possibilities, and the No Surprises rule encourages this. The rule goes to great lengths to describe the sections of an HCP that should cover circumstances that might change, or that were unforeseen when the plan was approved. As the future is realized, the plan might turn out to be inadequate, and so HCPs frequently contain adaptive management provisions that dictate certain actions for certain contingencies.

An HCP that contains provisions such as these will have greater potential value to the parties because wrangling over matters left out of the agreement will then be avoided. The No Surprises rule adds a similar type of value. It ties up loose ends, by assigning the responsibility for nature’s risk — natural events that fall outside the scope of the HCP — to the federal government.

“Ecological reality” is compatible with these provisions because an HCP that contains them acknowledges the uncertainty of the natural world. The question of who should act through adaptive management or who should bear nature’s risk, however, is decided by the parties to the HCP, not by any scientific deductions or inferences from ecology or conservation biology.(30) Ecologists and conservation biologists may have their own preferences about these provisions, but there is no obvious reason to give their preferences ascendancy over the arrangements chosen by the HCP parties themselves.

If any group of scientists should be bothered by the No Surprises rule, it is economists. Whenever a public entity assumes a role commonly filled by a private party, economists worry that the incentives to perform that role efficiently will be muted, if not absent altogether. Does this mean that the No Surprises rule assigns nature’s risk to the wrong party? Swallowing hard, I believe the answer to this question is a (heavily) qualified “No.”

Suppose the No Surprises rule did not exist, and the parties seeking an incidental take permit were required to bear nature’s risk. At first glance, this situation would give those parties incentives to learn more about that risk, adapt to it, and reduce it, none of which is substantially different from the incentives of a normal residual claimant. The absence of a No Surprises rule, however, would not shift the risk altogether. As long as the government retained the right to any ecological windfalls, the risk would be split between the two parties. This appears to be the case: If a species’s situation changes for the better (short of being delisted), nothing in the ESA gives non-federal parties the right to scale back their conservation efforts unilaterally.

Thus, without a No Surprises rule, HCP parties gain nothing from an ecological windfall, but must bear any shortfall. This asymmetry creates a set of perverse incentives, as Heyne (1997) notes:

Only short-range projects will be undertaken. Fewer resources will be
invested in research. Innovative projects will be explored less often.
Problems that could have been avoided through better foresight will be
encountered more frequently. Coordination failures will occur more often as
individuals try to reduce their private risks.(31)

Moreover, there is one way to reduce the risk to near zero: Avoid or even remove the conditions that make an HCP necessary.(32) If an endangered species is not present on a piece of property, or can be persuaded to depart, no permit is required and nature’s risk is the government’s tough luck.

Given that splitting the risk is unwise, why not give it all to the non-federal party? The reason stems from the frequent mismatch between ecological and legal boundaries. Consider the case in which a single property contains the entire habitat — past, present, and potential — of a species. The owner of that property has complete control over the species, and, like Crusoe, bears the benefits and costs of actions that affect the species’s risk of extinction.(33) Given the commandments of the ESA, the property owner, again like Crusoe, is well-suited to bear nature’s risk. In this case, a No Surprises rule would likely be misplaced.

Now consider the more prevalent case, in which a species’ habitat is spread across many landowners. In this case, a joint effort to conserve the species is likely to be more productive than separate, individual efforts. To give a simple illustration of this, suppose a population of a species exists on each of several properties. As it was for the S.S. Minnow castaways, each landowner could manage the species in isolation from the other landowners. Managing the populations together as a true metapopulation, however, would increase the overall viability of the species. Thus, there are definite potential gains from some form of joint conservation.

One way to achieve those gains is to create a market for species exchange among the landowners.(34) If one population falls to a dangerously low level, that landowner could purchase individuals from other populations; similarly, occasional purchases could take place to enhance genetic diversity.

Unfortunately, the market approach presumes a degree of control over natural populations that rarely exists. For a market to be viable, an individual landowner must be able to prevent other landowners from “consuming” the species without paying for it. If the landscapes and therefore the populations are linked naturally, this control will be difficult to assert. Indeed, the natural connectedness of the landscape is a valuable, ecological asset, owned jointly by the landowners. Taking the market approach would require extensive monitoring efforts at the least, or the destruction of that asset at the extreme (for example, through domestication). Moreover, to set prices rationally, landowners must understand how changes in population numbers and genetic diversity affect the viability of the species. If each landowner invests resources to make this determination individually, the efforts will be duplicative.

An alternative that preserves the landscape’s ecological capital and reduces the duplication of scientific effort is to undertake a joint effort to conserve biodiversity. This approach encounters the same problems found on Gilligan’s island, however. Evaluating scientific information generic to the species will be wasteful if the evaluation involves duplicating the research,(35) and a particular landowner may have opportunities to shirk on whatever share of the joint effort that landowner has been assigned. Other landowners may notice that their populations are faring less well, but they may not be able to distinguish the effects of their neighbor’s shirking from a bad “natural” year.

Again assuming that a mandate to protect the species exists, such a group of landowners could solve their joint problem by emulating the seven castaways: Hire a “biodiversity taskmaster.” This party would take on two sets of tasks: conduct research or collect information (of a generic sort) on the species, and monitor the performance of the individual landowners in their effort to protect the species. The advantages of a biodiversity taskmaster are manifold: duplicative research would not take place; the taskmaster would have an incentive to conduct accurate science and the right amount of science; and it would be in a position to create and coordinate conservation plans across all landowners, with an eye toward cumulative effects and other factors that affect the overall viability of the species. The taskmaster’s performance could be ensured, in part, by making that party the residual claimant.

In short, if the FWS or NMFS did not exist, private landowners operating under a mandate to preserve endangered species might choose to hire such an agency! And a No Surprises rule, a likely part of the agreement covering the duties of the residual claimant, would help ensure (but not guarantee, of course) that the agency performed its tasks efficiently.

Note the important difference between the actual government agencies and our hypothetical agency, however: No one hired them to enforce the ESA. The Fish and Wildlife Service and the National Marine Fisheries Service have been directed to administer the ESA by Congress, not by the many landowners with an endangered species on their properties. More importantly, the two agencies are beset by the usual host of distorted incentives that plague all government agencies. Hence, the economists’ distress.

However imperfect the incentives facing the federal government may be, removing its agencies from the management of endangered species conservation is unlikely to occur anytime soon. The ESA is here to stay, at least for the foreseeable future. The choice is therefore between an Endangered Species Act with or without a No Surprises rule. The latter creates a set of perverse incentives because only half of nature’s risk is shifted. As strange as it seems, giving the federal government the role of residual claimant through a No Surprises rule is likely to be the more efficient alternative.(36)

Conclusion

Despite the problems introduced by a government agency acting as residual claimant, the idea of a No Surprises rule hardly “runs counter to the natural world,” as some in the scientific community have charged. At the very least, the rule potentially increases the efficiency of our conservation efforts. By doing so, the rule can create more opportunities for saving endangered species within the existing framework of the ESA. Whether we take advantage of these opportunities, and thereby improve the chances of survival for listed species, remains to be seen. In any case, the objections of environmental and scientific groups have little force: Ecological, economic, or any other type of reality gladly embraces a No Surprises rule.

Notes

1. 60 Federal Register 32161 (20 June 1995), at 32162.

2. In April 1997, a coalition of environmental groups challenged this decision, along with another HCP covering the Alabama beach mouse, in federal court. In Fort Morgan Civic Association v. Babbitt (97-CV-773, D.D.C.; case transferred to Alabama, 97-691, S.D. Ala.), the groups charged the FWS with not considering the cumulative impacts of coastal development on P. p. ammobates. The lawsuit, decided in favor of the plaintiffs in August 1998, did not address the effects of Hurricane Opal.

3. Throughout this essay, I use the term “risk” a bit loosely. In the economic world, risk is usually distinguished from uncertainty, following Frank Knight (Risk, Uncertainty, and Profit, 1921). The former refers to future variability that is quantifiable, and therefore potentially subject to contracting, while the latter refers to variability that is not quantifiable. Here, the term “nature’s risk” refers to future variability introduced by environmental forces. In some cases, nature’s risk can be quantified, while in other cases it cannot.

4. Technically, the law has two categories of protection: endangered and threatened. The latter category does not automatically receive the law’s full protection, but since early in the act’s history, threatened species have routinely been granted the same level of protection as endangered species.

5. Endangered Species Act of 1973, U.S. Congress, Senate Report 93-307, 1 July 1973, at 2.

6. Anne Ehrlich and Paul Ehrlich, Extinction (New York: Ballantine Books, 1981), at xii.

7. Aldo Leopold, Round River (Oxford: Oxford University Press, 1993), at 146-147.

8. G. Jon Roush, “The Disintegrating Web,” The Nature Conservancy Magazine, November/December 1989, at 3.

9. See, e.g., S. T. A. Pickett, V. T. Parker, and P. L. Fiedler, “The New Paradigm in Ecology: Implications for Conservation above the Species Level,” in Conservation Biology, P. L. Fiedler and S. K. Jain, eds. (New York: Chapman and Hall, 1992), pp. 65-88.

10. J. M. Scott, T. H. Tear, and L. S. Mills, “Socioeconomics and the Recovery of Endangered Species: Biological Assessment in a Political World,” Conservation Biology, 9 (February 1995): 214-216, at 215.

11. D. Defoe, The Life and Adventures of Robinson Crusoe (London: Penguin Books, 1965), at 122.

12. Id., at 117-118.

13. Id., at 118.

14. Id., at 120.

15. Id., at 155.

16. A metapopulation is a set of subpopulations that may be subject to local extinctions but in general are connected so that risk of extinction for the entire population is low. Conservation Biology, P. L. Fiedler and S. K. Jain, eds. (New York: Chapman and Hall, 1992), definition at 490. Crusoe’s separate flocks would be a true metapopulation only if he allowed (occasional) interbreeding among them.

17. Id., at 169-170.

18. Strictly speaking, this might not be quite accurate. Suppose a species of grape turned out to be endemic (found only on that island). If other humans acquired knowledge of that species and valued it for its existence, Crusoe’s decisions affecting that species would have consequences borne by others.

19. Id., at 93.

20. Or at least one of my graduate school professors, Steven N.S. Cheung, claimed it was a fable.

21. See P. Heyne, The Economic Way of Thinking, 8th edition (Upper Saddle River, New Jersey: Prentice Hall, 1997), at 265-270, and Y. Barzel, “The Entrepreneur’s Reward for Self-Policing,” Economic Inquiry, 25 (January 1987): 103- 116, for two good introductions to this concept.

22. The determination of the wage rate on Gilligan’s island is problematic, as is the competitive return for taskmasters, because the normal forces of competition are absent. I shall take the usual approach of economists and assume these minor difficulties away.

23. “[T]he person whose contribution to common effort is the most difficult to measure will assume the position of entrepreneur, employing and supervising the other persons. By becoming the residual claimant who bears most of the risk of variable outcome, his incentive to gain at the expense of his partners is curtailed.” (Barzel (1987), at 103.) When scientific expertise is combined with simple labor, the former is arguably the hardest contribution to measure.

24. Id., at 8867.

25. Id., at 8868.

26. Id., at 8868-8869.

27. Id., at 8869.

28. Gary K. Meffe et al., “Revisions of the Endangered Species Act: A Letter to Senator John Chaffee and Congressman James Saxton,” 23 July 1996.

29. “A Statement on Proposed Private Lands Initiatives and Reauthorization of the Endangered Species Act from the Meeting of Scientists at Stanford University,” 31 March 1997, reproduced in R. F. Noss, M. A. O’Connell, and D. D. Murphy, eds., The Science of Conservation Planning (Washington, D.C.: Island Press, 1997), pp. 214-219, at 215.

30. In fairness to the authors of the statements quoted in the text, they acknowledge this point. This makes their objections seem somewhat disingenuous, however, because the scientific credentials they frequently trumpet are in fact irrelevant to that question.

31. Heyne (1997), at 274.

32. This incentive exists even with a No Surprises rule, but the absence of a No Surprises rule exacerbates it.

33. Again, if existence values are present, this will not be the case unless the property owner can somehow capture those values, which seems unlikely.

34. Another way would be to consolidate the species’s populations by having one landowner buy out all the others. If the values generated by the species are the only ones under consideration, this option is probably the most efficient, but for that reason it is also the most likely to emerge out of private contracting. If other values dominate, consolidation may not be a viable option.

35. Gathering information on a particular piece of property will still have value to an individual landowner, but not to that landowner’s neighbors. Generic information about the species can be used by all landowners, and it is therefore inefficient for more than one party to produce this type of information.

36. An interesting reform to the ESA would be to allow multiple-landowner HCPs, in which the parties agree to be bound and monitored by a private biodiversity taskmaster. Certain HCPs in California have elements of this proposal, but the central agency is invariably a local or county agency, with permitting authority over private land use decisions.