WATER MARKETING ISSUES
The selling or
leasing of water rights within or between the states has been viewed as
offering opportunities for flexible and efficient water transfers, but
difficulties are envisioned. California was philosophically reluctant to adopt
the marketing approach. Even so, a July 11, 1997 Wall Street Journal article on the situation in California was
entitled, “Why Markets Seem Inevitable.” At that time, the Federal government
was supporting a market approach. In 1995, Arizona created a state water bank,
providing water storage for itself and California and Nevada.
ENVIRONMENTAL MARKETS
A recent book by
Anderson and Libecap (2014) discussed using market approaches, in depth, [Environmental Markets: A Property Rights
Approach, Terri L. Anderson and Gary D. Libecap, 2014, Cambridge University
Press.]:
“Environmental
economics often focuses on the failure of markets to allocate and manage
natural and environmental resources efficiently. Under the banner of
externalities, markets fail either because private costs are less than social
costs or because private benefits are less than social benefits.”
Either way, there
results an overuse of the environmental features or an underuse or an
under-investment.
Unless otherwise
noted, the quotations in this chapter are from this book.
Generally, remedies
are to use taxes, licensing, or quotas to reach the optimal amount of
environmental use. It is not clear that the costs of establishing taxation and
regulation regimes outweigh the benefits they provide. Taxes and regulations
are not expected to produce optimal outcomes, especially when political factors
weigh heavily. For example, “fishing season limits have been a common
regulatory response to overharvest, but they generally result in
twenty-four-hour fish derbies, excessive investment in capital and labor to win
the derby, and a glut of fish during the season.” The process of governing
affects the future costs of governing, making this recursive (and complex).
“Institutionalchoice processes are thus path-dependent.”
“…national parks
[are] overused and underfunded and national forest management paralyzed by
litigation and the demands of competing groups.”
“As with regulation
and taxes, property rights and market exchange are costly, and it may not
always be the case that it is socially optimal to solve the environmental or
resource problem.”
This book explores
how to use property rights and markets to allocate environmental resources, and
it compares this to the regulatory
and tax alternatives.
It was heavily influenced by the work of Nobelprize-winning economist Ronald
Coase and his article “The Problem of Social Costs.”
“We do not contend
that markets can solve all environmental problems or that political approaches
always fail. Rather we offer a lens through which we can tackle environmental
problems using property rights and markets and compare them to the regulatory
and tax alternatives.”
One of the book’s
goals is to show government leaders and policymakers how to reduce transaction
costs to enable the market-based solutions and private incentives to improve
environmental quality and productive use.
Government can help
shape the creation of markets for willing buyers and willing sellers in the
environmental area, such as rights to water usage.
“As environmental
economists, we cannot resist the efficiency gains that markets can provide, but
we also embrace the potential of markets to go hand-in-hand with financial
improvements.”
Environmental
conflicts naturally arise between those who have competing uses for
environmental resources, whether it’s enjoying clean air and clean water or
using air and water to some degree as part of the manufacturing of goods and
the rendering of services.
Another conflict is
between present and future users of environmental resources, such as the issue
of overfishing, a competition between those who want fish now and those who
want a sustainable yield in the future. We must consider benefits and costs and
different users and different potential distributions of the benefits and
costs.
Environmental
conflict is especially noticeable in the “tragedy of the commons,” where a lack
of ownership of the common resource means that no user has a strong incentive
to preserve it, nor an effective means to do so alone.
An example of a
common pool resource is groundwater. “Groundwater supplies more than 50% of the
drinking water in the United States and is a major source of irrigation.” The
users of this groundwater essentially engage in competition, by competitive
pumping. It’s like several people sharing a soda with their straws in the same
glass. While drinking rapidly has disadvantages, the slow drinker ends up with
much less of the soda.
Currently, preventing
the over-use of such resources is done by government intervention through
regulation and taxation. Just as there can be market failure, “there can be
gov’t failure as well when policies are molded by interest-group politics and
by political and regulatory changes that may do little for the environment or
the provision of public goods.”
In fact, neither
government nor market approaches are perfect.
Some consideration
should be given to the distribution of the costs and benefits among different
classes of people. “Although environmental justice can be portrayed as an
effort to provide improved conditions for poor and underserved populations,
environmental regulations themselves raise costs and are often regressive.”
Two types of analysis
are common: positive analysis, dealing with what is factual, and normative
analysis, dealing with what various parties prefer.
The tendency is to
over-use the virtually free environmental factors, so that the government is
then called upon to restrict this over-use, by setting quotas or fees or taxes,
and then perhaps trying to compensate some of those who have lost out due to
the government intervention. “If environmental markets are more cost-effective,
there are greater surpluses to compensate those who were harmed by the policy.”
For example,
development of oil and natural gas sources in the Arctic carries with it some
environmental risk, to be balanced against the value of increased energy
supplies. Pumping out reservoirs of oil and gas and water deplete these, giving
an incentive to those doing the pumping to remove these fluids as rapidly as
possible before someone else take them.
In situations where
the users of the environment are spread over a large area, they’re often
unaware of the impact that they and their distant neighbors are having on the
environmental resource. Those upstream in a river will have a different
perspective from those downstream. As the saying goes, “Where you stand often
depends on where you sit.” These parties may be in different governmental
jurisdictions, complicating matters further.
Those who enjoy a
clean air may have unrealistic requirements, and those who use it may be
ignorant or uncaring about the impact of dirtier air on others. The tragedy of
the commons is reciprocal.
Access without
limitations leads to over-use and under-protection. “… open-access problems
persist [because] it is costly to define and enforce rules via regulation or
environmental markets regarding who has access, who bears the cost and benefits
of decision-making, and who can capture the value of scarce environmental
resources.”
Approaches using
government for laws and regulations lead to continuing interaction in the
public body politic as various interest groups, including “the public,” try to
better their positions. Recognizing property rights to certain environmental
elements can also lead to continuing competition in the market and in the
courts by the parties involved.
Various cap-and-trade
schemes make emission limits into property values in themselves.
Making and changing
laws and regulations has an impact on the public, politicians, and businesses,
so that these becomes the subjects of legal, political, and economic
competition. “…regulation is controversial and may not always be the low-cost
solution.”
Although taxes can be
set to discourage over-use and to compensate those who suffer from the use by
others of the environmental resource, the optimal level of taxation is quite
difficult to determine. Currently, this taxation approach with compensation has
rarely been adopted.
In contrast,
well-defined, enforceable property rights give the owners incentives to use the
resources prudently, in the present and while considering the future. These
rights may be owned by individuals or organizations of one type or another.
Prudent use maximizes the benefits to the owner. Innovation is rewarded.
Markets often adjust more rapidly to change than can government entities.
Property rights
require the owner to be able to identify and legally protect ownership of the
asset and to transfer the asset through market exchange. If the costs of
ownership and transfer are too high, compared with the value of them, then the
definition of property becomes less attractive. Property rights are more
readily assignable for static and observable resources such as land than for
mobile resources such as river water or hidden resources such as groundwater.
Where excluding others from using the resource is
difficult or impossible, government can try to make the use of the resource a
right rather than the resource itself, the basis of “cap-and-trade”
emissions-limit markets, where more cost-efficient emitters can profit by
selling some of their unused rights to emit. The authors give some reasons why
cap-and-trade schemes have worked less well than quotas on fishery catches.
Property rights are
ownership of an asset that, with the owner paying the costs and obtaining the
benefits, avoid the problem of the “tragedy of the commons.”
“There is no simple
analysis, however, that can tell us whether markets are better than regulation
of vice versa. The answer depends on the relative costs and benefits of
alternative institutions.”
They (Anderson and
Libecap, 2014) address in detail the example of Mono Lake in California.
Mono Lake (Calif.) --- Riparian Rights
“…Mono Lake [is] an
alkaline and hypersaline body of water, 300 miles northeast of the city [LA].
“Between 1941 and
1981, the lake’s level fell about 46 feet and surface area receded from 90 to
60 square miles.”
Environmental groups
proceeded to sue to limit Los Angeles’s use of Mono Lake water. Ultimately, a
commission ruling held that water diversions were to be stopped until the
lake’s level could rebound to a target of 6377 feet. This level is not likely
to be met before the year 2021. Many alternatives would likely have been
economically preferable in comparison to a wholly stopping the diversions.
“Once property rights were rejected, the basis for bargaining was lost.”
“The more secure,
durable, and complete are property rights, the more effective they are for
limiting losses of the common pool….Ownership can be transferred, and others
can be excluded, preventing the losses due to open access.… When transaction
costs are positive, property rights are never whole, compensation to aggrieved
parties is unlikely to be fully sufficient, monitoring is incomplete, and rent
dissipation is never fully constrained. Transaction costs also hold for
government regulation.…” One can expect political opposition from those who
benefited from open access, for as long as the resource maintains some value.
Some of this opposition can be mitigated by compensation. Not only must it be
decided who is to be compensated but also for how long and for what amounts. In
regulating fisheries, for example, sometimes the surplus equipment has been
bought by the government to compensate the owners.
It often takes a
crisis of a diminished environmental resource to get the stakeholders to work
toward a solution, be it market-driven or government-run. As the value of the
resource diminishes, the losers have less to lose and the winners have perhaps
less to gain.
Allocating Property Rights
There are four “mechanisms for allocating property
rights”: “pure political distribution, uniform allocation, auction, and
grandfathering or first-possession.’”
Political distribution works best when the government can be
trusted and held accountable. Otherwise, rich resources can be dissipated in
supplying political favors to the well-connected.
Uniform allocation, equal sharing, sounds attractive, seemingly
providing “equal access” or equal chance of access to qualified claimants.
Lotteries work this way. A race to obtain Federal land in Oklahoma ended up
being quite costly and of questionable fairness. The Oklahoma “Sooners” are
said to be those who left the starting line sooner than prescribed in April
1889 or were on the land already, hiding out. Equal partition is easier to
measure than extent of prior use or time of first possession. Lotteries for
hunting licenses are examples. If such licenses can be resold, “uniform
allocation will ultimately place ownership rights in the hands of those people
who value them most highly.” Three issues arise: prior owners, minimal resource
values, lack of political advantage to allocating the licenses.
Auctions raise money for the original owners (government or
private) and place the resources in those who value them most, as reflected in
their bids. They are hard to organize and will be resisted by current private
owners.
Grandfathering, the right of first possession, is the “most common
allocation mechanism.” Usually the initial ownership was obtained by being
first to claim it. Some owners will have invested heavily in using the
resource, and having out-competed others, they may be the low-cost, high-value
users already. Respecting those rights suggests to others that theirs will be
respected also, favoring investment. Criticisms include: not fair to
late-comers, gives away “rents” that could go to the government, can produce
ownership concentration, and require arbitrary selection of the “starting time”
for grandfathering, the baseline period. (To an economist, “rent” is the money
that a resource earns above the cost of keeping it in use.)
The
authors (Anderson and Libecap, 2014) give four
sets of examples of the evolution of environmental property rights into
markets: “water rights, conservation credits, emission allowances, and tradable
fishery shares.”
The rights that are
studied are not quite simple property rights but rather usage rights that can
be traded as though they were property.
Such rights are not
as secure from political interference as simple land property rights are. These
use privileges are therefore riskier as investments than simple land property
ownership is. This weakens the environmental market to some degree. Property
rights must be protected from regulatory takings to allow markets to improve
environmental quality.
The Oregon Water Trust
The Oregon Water Trust started in 1993 as a nonprofit organization
designed to help maintain and restore stream quality using market forces. It
required some changes in law to go from the Western principle of “use it or
lose it.” Leaving stream water unused had to be redefined as a “beneficial
use.” The owners of water rights were allowed to assign them to others for
environmental purposes. Many of their rivers and streams were suffering from
excessively low flows due to diversions and appropriations.
The Trust worked to
develop relationships with all stakeholders. Its focus on the smaller of the
streams enabled it to make bigger changes in their conditions. The Trust
generally uses short-term leases. The leased water is not removed from the
stream, reverting to its original use at the end of the lease. Approximately
30% of the restricted use has been donated and 70% has been obtained through
the leasing options.
The authors identify seven conditions that have helped the
Oregon Trust be successful: first, the parties must share in the goal of
protecting the environmental resource; second, there needs to be differences in
the value of the resource between its use in production and its use to protect
environmental quality; third, environmental use has got to be recognized
legally; fourth, the parties involved must trust each other; fifth, historical
uses of the resource must not be placed at risk; sixth, bureaucratic
interference must be minimized; and seventh, there must be mechanisms for
buyers and sellers to get together, to bargain, and to have such agreements
enforced.
Colorado-Big Thompson Project
A second example is
the Colorado-Big Thompson Project that brings water across the Rocky Mountains
from the Colorado River Basin in the west to the South Platte River Basin in northeastern
Colorado. “The Colorado – Big Thompson has by far the most active water market
in the western United States in terms of numbers of trades and sales. For this
reason, we have more data and can illustrate the nature and timing of
exchanges.” The water is traded in uniform water units, each a share of the
annual amount of water available from the Project. This will fluctuate
annually. The shares are identical to each other. As time has gone on, the
urban uses have been more valuable than the agricultural uses, and the market
has reflected that. If they have bought more than they need, cities can choose
to lease back the units that they’ve purchased in times when agriculture has
the greater need. The most active trading is typically moving the water from
agricultural uses to urban uses. The values of the shares have turned out to be
quite similar, on the average, for the urban and the agricultural uses.
Essentially, a market price for water in the region has been developed.
In the future,
population growth and increased environmental and recreational demand along
with traditional uses is expected to make water scarcer and more valuable in
the western states. The impact of any warming trend remains to be determined.
The Development of Property Rights
Before significant
human settlement, the river had few users and no real competition, a situation
allowing free-access without drawbacks. As competition for the water developed,
the problem of “the tragedy of the commons” arose, as some users made others’ uses
less valuable. The authors describe the conditions as follows:
•
“Scarcity attracts competition to capture
resource value.
•
Competitors impose costs on one another
•
Property rights determine whether and by whom
costs are considered in production.
•
Clearly-defined property rights encourage
bargaining to resolve the problem of competing uses.”
The problems arise
when the resource becomes scarce. No one has adequate incentives to improve the
common good. Over-use, such as over-fishing and over-grazing result and the
resource is depleted, perhaps ruined. Establishing property rights, though
expensive sometimes, gives limited access and incentives to the owners to
maintain the resource. “Coase argued that property rights assign benefits and
costs and promote bargaining….” The parties involved can work out arrangements
for sharing the resource or for compensating one who loses some of the use of
it. Upstream activities can be modified to accommodate downstream users,
perhaps with compensation. Alternatively, downstream needs may make these users
compensate upstream users for restricting the upstream use. Often it is not
clear who has the “right” to how much and how to use the resource when others
have competing uses. The authors comment that agricultural irrigators compete
with downstream fishermen for water, and it is unclear who should be preferred.
“Property rights hold
competing uses accountable for the opportunity cost of resource use because the
owners must consider what others would be willing to pay for the resource.”
“Opportunity cost” is the value of the most valuable alternative that is
forsaken. If the transaction costs are low, bargaining could bring about a
near-optimal solution among competing uses.
Identifying property
rights in environmental factors allows bargaining, “Efficiency and resource
conservation are less likely to ensue when property rights and exchange are
constrained.”
Problems with Property Rights
In the West,
diversion of water flow is the way water is claimed as property, showing
“ownership” and beneficial use. “.…priority is given to those with the earliest
claims.” The Oregon Water Trust, now the Freshwater Trust has handled
negotiations between agricultural users and those with fishing interests
downstream. Allowing water to remain in the stream had to be defined by law as
a beneficial use.
Costs of defining, enforcing, and trading property rights can
outweigh the value of doing so. Political considerations may be limiting
factors, too.
Factors determining the value of creating property rights in a
resource:
•
Resource
value: more valuable items warrant more expense in defining them as
property. Historically, panning and mining for gold quickly led to
establishment of claims and rights to locations out West, followed by passage
of laws to enforce these.
•
Physical
characteristics of the asset/resource are important. Boundaries are needed.
•
Stationary,
observable resources are more easily defined than movable or hidden assets.
Fences may suffice. Global Positioning Satellites may enable easy unambiguous
determination of locations and extents and the whereabouts of potential
trespassers.
•
Mobile or
unobservable resources are harder to define and defend. “ownership of
deep-vein hard rock minerals is assigned to the surface property owner where
the vein breaks the surface…. Similarly, access to groundwater and oil and gas
deposits are granted to surface land owners who obtain ownership by pumping.
Further, surface water rights are defined by proximity to water under the riparian
doctrine, which gives land owners adjacent to a stream the right to an
undiminished quantity and quality of water, or by the measurable diversion of
water under the prior appropriation doctrine, which establishes rights to fixed
quantities of water on a first-in-time, first-in-right basis.” And
international law gives special rights to coastal
countries over ocean areas adjacent to their shores, as exclusive economic
zones (EEZs). Where resources are highly mobile and not highly valued, it is
less worthwhile to try to define property rights in them, which explains some
of the difficulties for handling air and water pollution this way.
The costs of trading: defining, enforcing, negotiating,
communicating, inspecting, measuring, verifying, writing of contracts…all these
activities add to the cost of trading property and property rights. Easements
represent an uncomplicated way for an outsider to have some say in how a
property is used and many land trusts use these.
Government as a transaction cost reducer: Laws and regulations can
simplify the adjudication of disputes.
Defining and enforcing property rights: “By enforcing property
rights, government can encourage investment, encourage exchanges, and align
incentives to move resources to higher-valued uses.” For example, in 1974, the
newly ratified Montana State Constitution set up specific water courts to
adjudicate water disputes.
Setting uniform standards of measurement is another way government
can facilitate property use. For example, standardizing land property
descriptions.
Where defining
property is awkward, defining limits on its use may be less so. “…use rights
can limit who has access to a resource and thus prevent rent dissipation.” Use
rights can be tradable, establishing a market.
Courts can also
handle disputes due to third-party claims of being harmed.
Assigning property
rights helps restrict access, promote investment and exchange, and prevent
wasteful competitive activities. In some cases, assigning such rights may be
better than government regulation or tax policies.
Often, establishing
such rights comes late in the life cycle of a resource use. Individual Transfer
Quotas (ITQs) were adopted twenty years after they were proposed, to manage
fishing practices in Iceland and New Zealand. Tradable emission permits to
reduce air pollution took thirty years to be established in the U.S. The ITQs
and quota are not fully property and lack some of the advantages thereof.
Property rights need
government endorsement and protection and support, including enforcement.
To
prevent losses due to open access requires limiting some use, opening the issue
to politics and law. Equity (fairness) issues can clash with the possible
benefits from creating rights to resources and their use.
As time goes on, some
waterways have become more important as recreational resources than
agricultural, for example. Fishing requires more flow rather than less, in
competition with agriculture. In Montana, waterways are common resources,
available to all. A series of court battles were waged between the riparian
(shoreline) users rather than recreational users (visiting fisherman). Owners
of the Mitchell Slough returned it to agricultural use by cutting off its flow
periodically, lessening its value and availability for fishing. The Slough had
no “rights” allocated to “owners,” thus preventing any bartering and bargaining
to share the water between farmers and fishers.
“The more secure, durable, and complete are property rights, the more
effective they are for eliminating the losses of the common pool.” To get
public acceptance it is good if the proposal is consistent with historical use,
seems fair, and/or compensation is paid by the winners to these who suffer
loss. Sometimes, the compensations can greatly offset the added value of the
new arrangements. Transaction costs may prove substantial. New conditions can
put existing participants at a disadvantage, especially if investments have
been made that will be made less valuable. Politics may become paramount.
Listing a species on the Endangered Species Act may rule out certain uses of a
landowner’s property.
The government’s
buying property or equipment from the owners endangered by the changes may
mitigate their political opposition. As an example, the Nature Conservancy
developed a complex set of rules for fishing along a section of the California
coast, which eventually led to creating permits for fishing, permits that could
be sold or kept off the market, to control somewhat the harvesting of fish in
the area. The permits also limited the methods and equipment that could be used
during the fishing season.
The Mechanisms for Allocating Property
Rights:
•
Political
•
Uniform
•
Auction
•
Grandfathering
Political assignment of claims, such as shares in fisheries or
rights to emit specified amounts and types of effluents is common in countries
where the rule of law is respected. In such countries, there can be a “resource
curse,” as so many special interests claim a share of the potential profits
(“rent-seeking”) that the resources are ill-used, and the money dissipated,
such as in some oil-rich nations.
A uniform allocation seems fairer, giving
equal access, such as through lotteries or homestead distributions in the U.S.
West in the 19th
century. Not based on past allocations, the uniform awards do not have to
investigate claims of priority and extent. A hunting license is a good example.
Uniform allocation with the right to sell or buy them, can lead to the rights
getting to those who prize them most highly, by means of their being marketed
after the allocation. There are three reasons this method is not used more
often: the presence of some stakeholders before the lottery, a relative
abundance that makes the lottery not valuable, and that true uniformity makes
such allocations have little advantage for political patronage.
Auctions are popular with economists because they get the resources
into the control of those who want them the most, and they generate revenues
for the government entity doing the auction. Why are they not used more? They
are hard to organize, and the distribution of the money they raise produces a
new set of political conflicts. Incumbents often feel they should not have to
pay again for something they already are using.
Grandfathering refers to allowing the current use to continue,
while putting limits on new uses and users. It is the most common allocation
method. Here, first-possession trumps other claims, and it recognizes the sunk
costs of prior investments in capital and personnel. Early adopters are likely
to have developed efficient techniques that help them to be among the
lower-cost users. Granting these rights encourages further investment, at least
assures that such investment will not be wiped away by a mandated transfer of
ownership. Critics dislike disfavoring new entrants and giving away some of the
profit (rent) that could be kept for the public by selling the resource to the
highest bidder. Ownership concentration is feared, too.
Each of these methods
has advantages and disadvantages. Technology improvements make determining
boundaries on land and on water less expensive. Carrying out political
activities to get public support is not without cost. Rights given by
government can be taken away or modified more readily than traditional property
rights, especially in cases where major profits emerge.
From Property Rights to Markets
One set of examples
comes from water rights practice, where the rights are not “fee simple” rights
but privileges of use, somewhat weaker than outright ownership, more
susceptible to being modified by governmental or judicial action, thus less
secure. The more secure, the more they partake of the advantages of being
“property.”
Oregon’s Freshwater Trust successfully entered into various
agreements with farmers who had water rights; the farmers agreed to use less
water in the late summer in order to maintain stream flows and temperatures at
desired levels to protect the fish. The Trust is a private organization,
dealing with local citizens who can observe the adherence to the agreements and
the improvements produced by the agreements.
Furthermore, Oregon
gives government protection for the instream flows to be protected from capture
by those not in the Trust. Instream flow became defined as a “beneficial use,”
so that the “use it or lose it” principle meant that it is being used, and it
is not in the public domain for others to capture. The Trust built a web of
relationships with a variety of stakeholders in order to get the legislation
passed. During this period, Oregon was experiencing some shortages of water
that made the political environment more propitious. Focusing on the smaller
streams made the impacts of the Trusts activities more visible.
The Trust uses leases
more than permanent purchases of flow rights and has had to do much work to
help determine the appropriate prices. A lease means that the owner foregoes
usage of the water during the lease period. As confidence in the system has
increased, the tendency for longer-term leases has also, and long-term rights
are now 30% donated and 70% leased or bought.
These
factors are associated with the success
of Oregon’s Freshwater Trust:
•
The parties agree on the value of preserving the
resource.
•
The different uses have different marginal
values, leading to the likelihood of beneficial exchange.
•
The environmental use is recognized as a
“beneficial use” and thus protected.
•
The parties have mutual trust.
•
The agreements do not put into jeopardy other
valued uses.
•
Government and management are local, familiar
with each other and with the conditions
•
“There are mechanisms for buyers and sellers to
find one another, bargain, and enforce agreements,”
Water Trading in the Colorado-Big Thompson (CBT)
Project of Colorado
CBT is a government
project (Bureau of Reclamation, BOR) that brings water from the west side of
the Rocky Mountains to the east side; that is. from the Colorado River Basin to
the South Platte River Basin in northeastern Colorado. It is the most active
water market in the West, supplying agricultural, urban, and industrial users.
Its water is allocated in tradable, identical shares, each a certain percentage
of the estimated annual CBT flow, which varies yearly. The administration is
local rather than Federal. The most active trading has been from agricultural
uses to urban uses, often as insurance against shortages.
Water Colorado, a
firm offering to broker the buying, selling, and leasing of water rights on the
river has a site at watercolorado.com/ sell-water.
Individual Fishery Quotas
“Transboundary
fisheries are an example of a resource that can benefit from a market
solution.” (Anderson and Libecap, 2014) Examples are given for halibut, tuna,
and whale market-based limitations. Research shows that fisheries that cross
national boundaries are typically overfished, leading to depletion, unless
rules are set up. The more countries, the more problems, and the
slower-growing, higher-value stocks are most at risk.
The Pacific Northwest halibut fishery area is a fine example, where
the U.S. and Canada share the resource. Canada set up a quota system, by vessel
(IVQ) in 1990 and the U.S. adopted an individual fishery quota (IFQ) in 1995,
with the outcomes of having fewer vessels fishing for a longer season, making
fresh fish available for more of the year. The prices for these fish became
virtually identical, indicative of an active market. These are “cap-and-trade”
systems where a limit is put on the total amount of halibut allowed to be
caught, and the rights to catch a certain amount, a quota, are up for sale.
Each country’s vessels are restricted to fishing in their home country.
Atlantic bluefin tuna, “the world’s most valuable fish by weight”
(one tuna sold for over $1 million) show the problems with preserving a
large-area migratory species, with many countries involved in fishing.
“Stocks…have steadily declined from historic levels, and current harvests
appear unsustainable.” Even though non-governmental organizations have
attempted to regulate and apportion allowable, sustainable catch limits, the
requirement to allow new entrant countries has meant effectively no limits on
the catch. “…the number of ICCAT members grew from nine in 1970 to forty-eight
in 2008 with most new members being developing countries.” New rules encouraged
new entrants, and the “rights” of the earlier members have become worth much
less. Rules exist to prevent the purchase of the rights to harvest tuna on the
high seas are accorded to developing countries.
The voluntary International Whaling Commission (IWC)
protects the stocks of these mammals for future generations. “Since 1986, there
has been a ban on commercial whaling under the IWC’s moratorium. This has sunk
the U.S. whaling industry. The Japanese have found some ways to get around the
rules, and Russia and Canada and Norway and Iceland have resisted the rules,
and an “aboriginal” exclusion exists, as well. About 2000 whales, perhaps even
more, are harvested each year. Much international political action revolves
around whaling, and in the U.S., the Pelly Amendment allows the U.S. to
retaliate economically on countries violating the controlled-whaling
conventions.
Determining the
optimal levels of the plethora of oceanic whale species has become a heated
international political issue. “A tradable quota system with a more
collaboratively determined cap for each species offers a potentially viable and
attractive alternative.” By agreement, harvest quotas would be set for those
species that warrant them, and these quotas would be assigned to countries, who
would then assign them to their own citizens, and subsequently the individual
quotas would become tradable rights to catch a certain number of whales, rights
that could be bought and sold. Anti-whaling groups would be expected to
purchase some of these, to further limit the catch, and for the benefit of
those from whom the rights are purchased, a win/win.
Conclusions
“Broad,
cross-jurisdiction, open-access problems are very difficult to address through
the assignment of property rights and use of environmental markets because of
the high transaction costs involved.” The barriers include: measurement and
bounding, distributing rights and enforcing them and regulating market
exchanges. Politicians have short-term goals. Constituencies are at odds.
Bureaucrats have their priorities and prerogatives.
Initial allocation of
such rights is contentious. Some parties must be excluded. Wealth is to be
redistributed. Politicians and bureaucrats do not want to lose their influence.
The more heterogeneous the stakeholders, the more difficult the solutions.
Still, regulation has many of the same challenges, without the benefit of using
the market mechanism to protect and allocate resources economically. A bigger
pie, because of more efficient use of the resources, could result in all
getting bigger shares, even though the shares are unequal; compensation could
reduce the inequality, as well.
WHY ENVIRONMENTAL MARKETS NOW?
Greater tension
exists between use of resources and preservation of the environment than ever
before. Regulation worked well when benefits were relatively large compared
with costs. As diminishing returns occur with regard to command-and-control,
market approaches which take costs more explicitly into consideration seem
advantageous. Regulation offers many opportunities to political manipulation.
Regulation does not tend to encourage innovation nor the rational minimization
of control costs for the same degree of environmental benefit.
Setting up market
conditions is not free, but once implemented, this has the possibility of
rationalizing the costs of control and the impact on various participants. Cap
and trade and use quota rights are examples. Property rights facilitate
purchase and barter to find optimal allocations.
Clearly, the analysis
presented by these authors (Anderson and Libecap, 2014) has advanced the
discussion of management of common resources.
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or at DWC's amazon.com author's book title list https://www.amazon.com/s?k=douglas+winslow+cooper&i=digital-text&ref=nb_sb_noss
or at DWC's amazon.com author's book title list https://www.amazon.com/s?k=douglas+winslow+cooper&i=digital-text&ref=nb_sb_noss
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