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Article Excerpt
Introduction
Why are natural resources used by a large number of users so often poorly managed? Notable examples include declining fisheries, clear-cutting of forests, polluted water and air, and the depleted ozone layer. One of the most influential responses to this question was provided by Garrett Hardin (1968) in his article, "The Tragedy of Commons." Hardin predicted that individual users will appropriate resources owned by many to the point where resources are degraded, if not destroyed. He attributed this "tragedy" to resource characteristics as well as to the nature of the resource users. These resources--commons or common-pool resources (CPRs)--have two characteristics that create conditions for resource deterioration: rivalry and nonexcludability. Rivalry in consumption, along with the inability to prevent others from using the resource (or, rather, high costs of excludability) create incentives for the users to appropriate the resource before others do. This is because even if they were to restrain their resource use, they have no assurance that others would do the same. Given the rivalrous nature of the CPR, the restrained users would face a sucker's payoff. Because Hardin predicted that resource users will not be able to judiciously use the resource, he recommended governmental regulation or privatization as ways to manage the common resource. (2)
Governments have intervened in CPR management in several ways. First, governments have appropriated the resource and managed it on behalf of all users (e.g. national parks, national forests, and state forests). Second, governments have regulated the use of CPRs by prescribing technologies CPR users must employ either to withdraw the resource from the pool (as in fishing) or to deposit pollution in commons (emission filters and scrubbers to clean-up exhausts). Third, governments have enacted policies requiring firms to provide information to consumers regarding the CPR impact of their products. The idea is that informed consumers will vote with their dollars to reward firms that minimize CPR use (Dietz, Ostrom, & Stern, 2003). Finally, governments have created market incentives, such as taxes, fees, and tradable quotas, with the objective to alter the benefits and costs of CPR use by individual actors. This approach has drawn much attention especially in the context of the on-going global climate change debate. This article assesses the trading-based approach to protect CPRs by defining private property rights over them to facilitate their exchange.
If ill-defined property rights were the cause of CPR deterioration, allocating property rights to CPR users and allowing a trade in such rights should lead to a sustainable CPR use (Dales, 1968; Gordon, 1954). Indeed, scholars suggest privatization as the universal solution to the CPR problems: "If it is feasible to establish a market to implement a policy, no policy-maker can afford to do without one. Unless I am very much mistaken, markets can be used to implement any antipollution policy that you or I can dream up" (Dales, 1968, p. 100, italics in original). However, empirical analyses of individual CPRs suggest that this broad endorsement of privatization was overtly optimistic. Tradable permit markets have been found to be thin and with high transaction costs (Gangadharan, 2000; Hahn & Hester, 1989b). Data problems have impeded monitoring and enforcement of trading rules (Coy, 2001; Wilkinson & Thompson, 2006). Scholars question whether tradable permit systems stimulate innovation (Driesen, 9003; Montero, 2005) and have the ability to respond to sudden and substantial changes in the market (Coy et al., 2001; U.S. Environmental Protection Agency [EPA], 2002). About 30 years after the implementation of the first tradable permit market in the United States, researchers are more careful in endorsing the tradable permit markets as a universal approach to solve the commons problem: "All of our analysis suggests one final observation: Experience with and lessons learned from the Acid Rain Program must be applied with care to other environmental objectives" (Ellerman et al., 2000, p. 321).
There is a broad recognition in the environmental literature that because CPRs differ in their resource characteristics, user characteristics, and resource-use patterns, we cannot identify any one policy approach appropriate for all CPRs (Ostrom & the National Research Council Committee on the Human Dimensions of Global Change, 2002). The challenge is to identify conditions under which specific policy approaches and instruments work. This paper responds to this challenge by developing an analytical framework to examine the performance of tradable permits. I employ this framework to compare extensive empirical literature on tradable permits, identify omissions in this work, and suggest directions for future research. I focus on six tradable permit regimes:
* The sulfur dioxide allowance trading (the Acid Rain Program) was enacted by the Title IV of the 1990 Clean Air Act Amendments (CAAA). The 1990 CAAA allocated to electric utilities the rights to use the atmosphere as a sink for sulfur dioxide pollution. These rights were allocated in two phases. Phase 1 included around 960 of the dirtiest utilities that were allocated the allowances for 1995 onwards. Phase 2 included about 1,400 additional units that were allocated allowances for 2000 onwards. The goal of the Acid Rain Program was to reduce emissions of sulfur dioxide from electricity generation from about 18 millions (the 1980 levels) to about 9 million levels by 2005. The 9 million tons of sulfur dioxide limit would then continue in perpetuity (Ellerman et al., 2000).
* The Lead Phasedown program sought to reduce the use of the atmosphere as a sink for lead pollution from the largest source: gasoline-burning by on-road vehicles. In 1973, the EPA began regulating lead content in gasoline. At that time, gasoline contained about 2-3 grams of lead per gallon (gpg). The standards were subsequently tightened in 1979 and 1982. In 1983, averaging of lead content was permitted across all refineries, leading to trading among refineries. In 1985, banking of unused rights was allowed. Banked rights were crucial for many refineries when the standard for lead was further tightened to 0.1 gpg in 1986 (Newel & Rogers, 2004). At the end of the 1987, when the Lead Phasedown program ended, all refineries were able to comply with the 0.1 gpg standard (Nussbaum, 1992). Emissions of lead from on-road vehicles declined from about 172,000 tons of lead in 1970 to about 62,000 tons in 1980 and to 17,000 tons in 1990 (U.S. EPA, 1995).
* The early EPA air pollution trading was implemented in the 1970s. Several areas in South California failed to meet the National Ambient Air Quality Air Standards (NAAQS) established by the CAAA of 1970. South Coast Air Quality Management District was established to manage air quality in this area. EPA regulations severely restricted the number of new sources of air pollution that could locate in these nonattainment areas by prescribing emission rates and technologies to be used to reduce emissions. These requirements differed across emissions sources (lower for the existing sources, more stringent for major modifications, and the most stringent for new sources). To avoid more stringent requirements, many sources engaged in trading of emission reduction credits starting in the second half of the 1970s. The EPA early emission trading allowed for trades to occur among facilities within a firm (bubbles and netting) and between firms (offsets). Some of these trades required state approval while others required federal approval (Hahn & Hester, 1989a). The area continues to fail to meet the NAAQS (Liroff, 1986).
* The Regional Clean Air Incentives Market (RECLAIM), a new tradable permit system, was developed and implemented by the South Coast Air Quality Management District in 1993. While the EPA emission standards regulate new sources, RECLAIM addressed existing sources (SCAQMD, 1997). Facilities included in the program received RECLAIM NOx and SO,, trading credits akin to sulfur dioxide allowances. The credits can be traded across time periods but only used within the year for which they are issued. The number of credits is scheduled to decline at predictable levels until 2003 after which it would remain constant (Gangadharan, 2000).
* The CFC Production Quota trading sought to reduce production of ozone-depleting substances. This system was introduced along with taxes on ozone-depleting substances and a ban on some uses of CFCs. While these substances were also regulated internationally through the Montreal Protocol, only the United States developed a system of tradable production quotas. Quotas for production of various ozone-depleting substances were allocated to 28 producers. Quotas allowed interpollutant trading. Most of these substances were to be phased out by 1995 on an accelerated schedule, with methyl bromide to be phased-out by 2005 (U.S. EPA, n.d.).
* The Wetlands Mitigation Banking sought to mitigate losses of wetlands that resulted from their draining and tilling. While some banks were already in operation in the early 1990s, the EPA provided federal guidelines for wetlands mitigation in 1995 only. When a wetlands owner wants to convert wetlands, he/she has to obtain a permit from the U.S. Army Corps of Engineers. The permit may or may not require mitigation of wetlands loss by creating wetlands at a different location, although within the same watershed. Wetlands mitigation banking provides wetlands owners with an option to purchase such mitigation services. Wetlands mitigation banks receive wetlands mitigation credits through a long review process that differs across states. Currently, wetlands mitigation banking accounts for about one-third of all mitigation (Wilkinson & Thompson, 2006).
The data used in this analysis come from published empirical case studies on these markets and from regulators, such as the EPA, the California's South Coast Air Quality Management District, the U.S. Army Corps of Engineers, and the Department of Energy (DOE).
My main argument is that because the existing empirical analyses focus on single cases only, their findings are often not generalizable to other CPRs. Clearly, understanding the political, economic, legal, and ecological contexts of any CPR requires a major investment of time. It is difficult to acquire detailed knowledge on a number of tradable permit regimes, a challenge also identified for studying other institutional approaches to CPR governance (Agrawal, 2001). This issue can be addressed by proposing a broad analytical framework and inviting experts studying specific tradable permit regime to apply it--see, for example, edited volumes by Sorrell and Skea (1999) or Harrington, Morgenstern, and Sterner (2004b). However, while these case studies apply a common analytical framework and repeat it across different CPRs, (3) they do not examine how various explanatory variables influence the performance of tradable permits across cases, akin to a comparative cases-study approach conceptualized by Bradshaw and Wallace (1991). What is needed is a comparative study of tradable permits to test hypothesized relationships between an explanatory variable and the performance of tradable permits across a variety of CPRs when all relevant variables are controlled for. This paper employs a comparative case study approach akin to quantitative cross-sectional studies, albeit data limitations do not allow for a large-n study.
The remainder of the paper is organized as follows. In the second section, I briefly review the debates on the privatization of commons and of natural resources. In the third section, I outline an analytical framework to examine the performance of tradable permit markets. In the fourth section, I address the limitations of my framework in light of limited data availability. In the concluding section, I summarize the lessons from the extant CPR markets and identify areas for future inquiry on the privatization on commons.
Advantages and Perils of Tradable Permits for CPRs
If ill-defined property rights are an important cause for CPR overuse and negative externalities (Cornes & Sandler, 1996), then defining property rights may be one solution to the problem. Dales (1968, p. 76) suggested that "[i]t is high time that we began to devise some new forms of property rights, not to air and water, but to the use of air and water." As "[a] property right is enforceable authority to undertake particular actions related to a specific domain" (Commons, 1968, cited in...
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