The Drama of the Commons (2002) / Chapter Skim
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6 The Tradable Permits Approach to Protecting the Commons: What Have We Learned?
6 The Tradable Permits Approach to Protecting the Commons: What Have We Learned?
Pages 197-232
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From page 197... ...
And that survey failed to include many current applications.i Tradable permits address the commons problem by rationing access to the resource and privatizing the resulting access rights. The first step involves setting a limit on user access to the resource.
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From page 198... ...
It suggests that because capitalist property rights are the major source of the problem, it is inconceivable that these same rights could be part of the solution.3 OVERVIEW In this essay I review the experience with three main applications of tradable permit systems: air pollution control, water supply, and fisheries management.4 The next section provides a brief summary of the theory behind these programs and both the economic and environmental consequences anticipated by this theory. Some brief points of comparison are made with other competing and/ or complementary formal public policy strategies such as environmental taxes and legal regulation.
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From page 199... ...
This contradicts a popular policy premise that suggests that citizens should face equal individual risks regardless of where they work or resided To respond to both the information and moral concerns with an efficiency approach, the tradable permit approach starts from a sustainability perspectives Whereas efficiency may or may not be consistent with a sustainable allocation,
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From page 200... ...
The potential significance of this corollary is huge. It implies that with tradable permits, the resource manager can use the initial allocation to solve other goals (such as political feasibility or ethical concerns)
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Furthermore, even in the presence of these imperfections, tradable permit programs can be designed to mitigate their adverse consequences. 14 Without effective enforcement, permit holders who don't get caught may gain more by cheating than by living within the constraints imposed by their allocated permits.
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From page 202... ...
This is presumed to increase compliance. Although tradable permit systems in principle allow a variety of governance systems, the current predominant form in all three applications seems to be a system of shared management, with users playing a smaller role than envisioned by most co-management proposals.
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From page 203... ...
Fishers within these zones play a considerable role in defining the rules that govern fishing activity within their zone. Though none of the zones currently involve the use of tradable permits, that option is being discussed.
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From page 204... ...
Air pollution control systems and water have examples of both types. Fisheries tradable permit programs are all of the cap-andtrade variety.
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From page 205... ...
Existing tradable permit systems have responded to this challenge in different ways depending on the type of resource being covered. In air pollution control, the need for adaptive management typically is less immediate and the allowance typically is defined in terms of tons of emissions.
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From page 206... ...
Defining the Aggregate Limits In all three applications, the limits are defined on the basis of some notion of sustainable use. In air pollution control, the limits are defined to assure that the resulting concentrations fall below the Ambient Air Quality Standards (AAQS)
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Initial Allocation Method The initial allocation of entitlements is perhaps the most controversial aspect of a tradable permits system. Four possible methods for allocating initial entitlements are:
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From page 208... ...
In air pollution control, this "new user" bias has retarded the introduction of new facilities and new technologies by reducing the cost advantage of building new facilities that embody the latest innovations (Maloney and Brady, 1988; Nelson et al., 1993~33
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Finally, some systems allow agents other than those included in the initial allocation to participate through an "opt-in" procedure. This is a prominent feature of the sulfur allowance program, but it can be plagued by adverse selection problems (Montero, 1999, 2000b)
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From page 210... ...
For example, in fisheries a transfer from one quota holder to another might well cause the fish to be landed in another community. In air pollution control, owners of a factory might shut down its operation in one community and rebuild in another community, taking their permits with them.
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From page 211... ...
The Temporal Dimension Standard theory suggests that a fully value-maximizing tradable permit system must have full temporal fungibility, implying that allowances can be both borrowed and banked (Kling and Rubin, 1997; Rubin, 1996~. Banking allows a
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From page 212... ...
Monitoring and Enforcement Regardless of how well any tradable permit system is designed, noncompliance can prevent the attainment of its economic, social, and environmental objectives. Noncompliance not only makes it more difficult to reach stated goals, but it sometimes makes it more difficult to know whether the goals are being met.40 Although it is true that any management regime raises monitoring and enforcement issues, tradable permit regimes raise some special issues.
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From page 213... ...
and on the degree to which existing enforcement resources are used more or less efficiently. Higher enforcement costs are not, by themselves, particularly troubling because they can be financed from the enhanced profitability promoted by the tradable permit system.42 Monitoring In addition to the obvious potential for quota busting that all tradable permit approaches face, fisheries also can face problems with poaching (harvests by ineligible fishermen)
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From page 214... ...
Monitoring compliance with a tradable permit program requires data on the identity of permit holders, amount of permits owned by each holder, permit, and permit transfers. Where programs have additional restrictions on permit use (such as type of equipment)
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Other sanctions are possible. In the sulfur allowance program, for example, those found in noncompliance must not only pay a substantial financial penalty for noncompliance; they must also forfeit a sufficient number of future allowances to compensate for the overage.
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From page 216... ...
On the other hand, it does appear that the introduction of new tradable permit programs becomes easier with familiarity. Following the very successful lead phaseout program, in the United States, new supporters appeared and made it possible to pass the sulfur allowance program.44 It also seems quite clear that, to date at least, using a grandfathering approach to the initial allocation has been a necessary ingredient in building the political support necessary to implement the approach.45 Existing users frequently have
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From page 217... ...
Traditional regulation was incapable of providing the degree of reduction required by the Clean Air Act. Environmental Effects One common belief about tradable permit programs is that their environmental effects are determined purely by the imposition of the aggregate limit, an act that is considered to lie outside the system.
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(Davidse, 1999~. Meeting the Limit In theory the flexibility offered by tradable permit programs makes it easier to reach the limit, suggesting the possibility that the limit may be met more often under tradable permits systems than under the systems that preceded them.
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Both the acid rain and RECLAIM programs involve substantial reductions in emissions over time (Tietenberg, 1999~. In the fisheries what have been the effects on biomass?
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From page 220... ...
In the presence of adequate enforcement, tradable permits do appear to increase the value of the commons to which the permits apply. In air pollution control, this takes the effect of considerable savings in meeting the pollution control targets (Hahn and Hester, 1989; Tietenberg, 1990~.
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From page 221... ...
that the introduction of ITQs will mean the demise of the smaller fishers as they are bought out by larger operations. The evidence does not seem support this concern.50 LESSONS What can be gleaned from this necessarily brief survey of the theory and implementation experience with tradable permits?
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From page 222... ...
Although tradable permit systems in principle allow a variety of governance systems, only in fisheries and water is there any evidence of an evolution in this direction. The current predominant form in both air pollution control and fisheries seems to be a system of shared management, with users playing a smaller role than envisioned by most co-management proposals.
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From page 223... ...
Second, in both fisheries and air pollution control, the evidence suggests that both the magnitude of the implemented limit and its evolution over time may be related to the policy. The flexibility and lower cost of meeting the limit offered by tradable permits systems can, and has, resulted in the acceptance of more stringent limits.
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From page 224... ...
13 Inadequate monitoring and enforcement, of course, plagues all policy instruments, not just tradable permit systems. 14 In the case of market power in fisheries, the maximum number of permits that can be held by any individual or defined group routinely is limited by regulation.(National Research Council, 1999)
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. 29 An interesting third possibility emerges from an examination of the air pollution control experience in Chile (Montero, 2000a)
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Not only are these investments inefficient, but rewarding them undermines the ethical basis for an initial allocation based on historic use. 33 The "new source bias" is, of course, not unique to tradable permit systems.
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1991 A note on market power in ITQ fisheries. Journal of Environmental Economics and Management 21(2)
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1987 Environmental policy for spatial and persistent pollutants. Journal of Environmental Economics and Management 14(1)
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Howe, C.W., and D.R. Lee 1983 Priority pollution rights: Adapting pollution control to a variable environment, Land Economics 59(2)
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1972 Markets in licenses and efficient pollution control programs. Journal of Economic Theory 5(3)
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1999 Implementing Domestic Tradable Permits for Environmental Protection. Paris: Organization for Economic Co-operation and Development.
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Pp. 147-165 in Implementing Domestic Tradable Permits for Environmental Protection.
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