Wednesday, March 11, 2009

Reader Comment – 03-10-09 IST Incentives

We do seem to be getting a lot of comments on IST (which is what I am trying to achieve). The latest reader comment comes from Luke Von Cfats (we won’t confuse him with Anonymous) and was posted to the first blog in the series. Among other things he points out that the HR 5577 provisions on IST also included provisions for the Secretary to make funds available to “help defray the cost of implementing methods to reduce the consequences of a terrorist attack”.

While that money was primarily intended for water treatment and waste water treatment facilities It does serve to introduce a new topic; incentives for IST implementation.

 This is part of the continuing series of blogs on Inherently Safer Technology and how it could be made part of the re-authorization of the CFATS program. The previous blogs include:
Writing IST Legislation Reader Comment – 02-24-09
What Standard to Apply for IST - Limits
What Standard to Apply for IST – Cost Estimates
Reader Comments – 03-08-09 – IST Comments


As Luke Von Cfats noted in his comment, HR 5577 would have appropriated $100 M for IST grants in the first year that it was in effect (and an additional $75 M and $50 M in the second and third years), or almost 1/3rd of the total appropriations for supporting the chemical facility security regulations (§2116). This money would have certainly have allowed for significant changes in the calculations for financial feasibility.

But according to § 2110(e) it is clear that a large portion of that money was intended to go to public water treatment facilities that operate on a tighter budget than most chemical facilities. Luke Von Cfats does not believe that this would have been either cost effective or very effective at reducing the risk at these high-risk chemical facilities.

Now, if the IST provisions were targeted at just the facilities that were Tier 1 or 2 facilities because of release toxic COI, I believe that a case could be made for a positive cost-benefit ratio based on the potential reduction in casualties. Of course, if one does not accept the potential risk as being real, then there can be no benefit and the resulting ratio is negative for any expenditure.

 Would the $225 M be an adequate incentive to convert all of the facilities? There is currently no way of knowing. Until each facility is required to conduct a detailed cost analysis of the potential IST provisions for their facility, we cannot even get a semi-accurate guess as to how much money will be involved. Even with double that amount of money, however, I would not be surprised to find that there were a few facilities that could not be economically converted to an IST process.

Tax Incentives

A very common tool available to Congress to ‘encourage socially acceptable behavior’ is the provision of tax incentives. This is one of the reasons that the US Tax Code is so complex as to be unmanageable. In any case, a properly crafted tax incentive is as good as giving someone cash; more so because it is not taxable. There is one significant draw back, it would not apply to publicly owned treatment works.

There are at least two different approaches that could be taken with ‘incentivizing’ IST implementation with tax credits. The first way would be to provide a tax credit based on the amount of money spent on an approved IST project. The draw back to this method is that it would not provide any incentive for the degree of risk reduction.

The second method would be to tie the tax credit to the number of people removed from an at-risk status by the IST implementation. This would provide for risk reduction but would not be linked to the amount of money spent. A blending of the two programs could be to determine a tax credit ‘rate’ to be based on the number of people removed from risk. Then that rate could be applied to the amount of money spent on the IST implementation.

This way the tax credit could reflect both the amount of risk reduction and the money spent on that reduction. Unfortunately, this would be even more difficult to set up before the IST evaluations were completed. A blend of tax incentives and grants could address that situation. Facilities could use the tax credit in their calculation for financial feasibility. Then DHS could target the grants at facilities that still had to deal with economic infeasibility.

Internalize Risk 

There is another technique that I have not seen or proposed with regards to this issue. That would be to require that high-risk facilities assume a measure of fiscal responsibility for the risk to the surrounding community. The easiest way to do that would be to require all high-risk chemical facilities to buy terrorism insurance for their facility. The amount of coverage required would be determined by the number of people exposed to the risk of a potential successful attack on the facility.

The benefits from the policy would be paid directly to the affected population in the event of an attack. This would have two additional benefits. First it would increase the costs of not implementing an IST program and directly increase the number of financially feasible projects. Second, it would add the insurance industry as an inspector of high-risk facility security implementation. Properly implemented security measures would also serve to reduce the premiums for that insurance.

The one downside of this program would be that it is likely that there would be facilities that not only could still not afford to implement an IST program, but could not afford to remain in business at that location while paying the required insurance premiums. There are those that would argue that this would be a good thing as it would ultimately eliminate the risk at that location. On the other hand, especially in the current economic environment, politicians would have a hard time justifying anything that would close a facility and put more people on the unemployment roles.

Combination Plans

The most effective incentive program would probably combine elements of all three of these techniques. A properly crafted set of incentives would go a long way to getting industry buy-in for a mandatory IST provision in the CFATS re-authorization bill.

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