argues for the use of market-based incentives rather than "command-and-control regulation); see also Dallas Burtraw, Cost Savings, Market Performance, and Economic Benefits of the U.S. Exchange adequacy deals with the construction of the stock market - in light of a currency, that fail to capture significant values, how can the market be structured to ensure that trades support environmental protection.
CURRENCY ADEQUACY: SELECTION OF THE CURRENCY INSTRUMENT
The Mechanics ofMarketable Permits
ETMs and the many differences between them, their basic structure is simple.17 The basis for trading environmental goods is a regulatory prohibition of behavior followed by regulatory permission of behavior under controlled conditions.18 In creating a market, the government first creates a new form of property rights—legal rights to emit pollutants, to catch fish, to develop habitat—and then imposes a set of rules governing their exchange.' 9 In the typical pollution "cap and trade program," policymakers set a socially desirable level of aggregate emissions for a given pollutant. See ELI-WETLAND, supra note 11, at Requirement for compensatory mitigation of [wetlands] exists only because it is a government-imposed condition of wetland development."); Royal C.
Measures of Exchange
Nonfungibilities of space
The location of a source of emissions is important because dispersal from different points will result in varying exposures to sensitive populations." Mendelsohn, supra note 10, at 301. Additionally, concentration of damages raises serious equity concerns, since a group (possibly lower income people or others with relatively little political power) will suffer the damage while others are free from them." Gloria E.
Nonfungibilities of type
Nonfungibilities of time
Currency Design Strategies
- Simple currency
- Universal currency
- Comprehensive currency
- EXCHANGE ADEQUACY: CONSTRUCTING THE EXCHANGE MARKET
Diane Schenke, the project's executive director, described the net result as paralysis by analysis. Since environmental trading markets are primarily a creature of regulatory constructs, further refinements of the market can be implemented directly through regulatory inflation.
Market Refinements Across Space, Type, and Time
Lake County, Illinois, for example, requires that all wetland mitigation be done within the county. In the same vein, the New York Legislature recently passed a law penalizing New York companies that sell pollution credits to coal-fired power plants in the Midwest and South. Thus, in the Acid Rain Trading Program, sulfur allowances can be traded nationally, but they can only be used in locations that meet the state's implementation program and national ambient air quality standards.
According to the EPA's Emissions Trading Policy Statement, published in the Federal Register in 1986 and reflected in several regulations, emissions trading must be environmentally equivalent. According to some utilities in the Midwest and New York, this option has reduced their propensity to deal with each other because of the threat that deals may be overturned in the future." Sohn & Cohen, supra note 12.
Market Fragmentation, Background Markets, and
Arbitrage
Yet the imposed habitat value exchange rate between type A and B habitats cannot override the real estate market's exchange rate between the two types. As depicted in Figure 5, there may be more than one real estate market in the trading area. Say developers in the trade area believe that Type A habitat is undervalued in the real estate market and actually offers a more profitable development profile than Type B habitat, so they want to develop Type A habitat and use Type B habitat to mitigate.
Type B habitat is worth the same in habitat value across the trading area, but is worth more in real estate value in Market II than in Market I. Indeed, as the economist would predict, as the over time the real estate market price of Type B habitat will increase if required to mitigate Type A development, and price disparities in Type B acres within the trading area will decrease as demand for vacant acres increases.
The inevitable tradeoff between fat and sloppy or thin and bland. 645
While the lessons we draw apply to other ETMs, the issues of non-fungibility are clearest and most difficult in relation to wetland mitigation banks and habitat conservation plans. For background on this development and the HCP program in general, see Eric Fisher, Habitat Conservation Planning Under the Endangered Species Act: No Surprises &. Shi-Ling Hsu, The Potential and Pitfalls of Habitat Conservation Planning Under the Endangered Species Act, 29 ENVTL.
See FISH AND WILDLIFE SERVICE & NATIONAL MARNE FISHERIES SERVICE, ENDANGERED SPECIES HABITAT CONSERVATION PLANNING MANUAL (1996) [hereinafter HCP MANUAL]; see also Hsu, supra note 102, describing various official statements in favor of HCP authorization). For criticism of the trend toward ETMs in the context of endangered species protection, see Nancy K.
Establishing the Wetlands Trading Market
Vicarious mitigation has thus taken some of the "sting" out of 404 permits and reduced the frequency of incidents where issuing 404 permits is shown to be unreasonably onerous.12 1. Vicarious mitigation based on augmentation or preservation of existing wetlands is likely to create a network of wetland loss. To maintain the integrity of the aquatic ecosystem, it may be more beneficial to combine compensatory mitigation into a single large parcel of adjacent parcels when dec.
Establishing a mitigation bank can bring together financial resources, planning and scientific expertise, which is not feasible for many project-specific offset mitigation proposals. The use of mitigation banks can reduce permit processing times and provide more cost-effective compensatory mitigation options for eligible projects;
Currency Adequacy
Nineteen of these banks use an acre-based index; fifteen use one of the functional methods and two use the "best professional judgment" approach. For example, Maryland has one of the most sophisticated regulatory programs in place to protect wetlands, but it also relies on simple currency. For a discussion of the Florida wetlands mitigation bank program into which this new assessment method will fit, see John J.
This is due to the wide discretion given to authorities in selecting valuation methods and making compensation decisions. Some advocates of wetland mitigation banks overlook this problem and suggest that the currency problems in wetland ETMs are simply a matter of the Corps' inability to mandate a particular assessment method for all transactions.
Exchange Adequacy
Nonfungibility of type
Nonfungibility of space
Nonfungibility of time
Fat and Sloppy Versus Thin and Bland
REVIEW ADEQUACY: DESIGNING APPROVAL AND INTERVENTION
This need to take into account the public interest represents a fundamental and largely unrecognized challenge for ETM. The search for an environmental policy institution that best represents the public interest has been dominated by two conflicting views. Only those public interests that value tradable public goods have an incentive to demand a meaningful review mechanism.
So the question comes down to how to meet the public's demand for ex-post review without discontinuing ETMs. We also focus on the current practice of embedding ETMs into traditional licensing programs, revealing a potentially intractable conflict between the objectives of government, the regulated sector, and the public.
Approval Strategies
Wholesale review
Retail review
Put another way, if wholesale review resembles government oversight of a commodity market, then retail review requiring substantive government approval looks more like an exchange market. As trades increasingly look like apples to oranges, it becomes necessary for the government to say, in the phrase of Justice Potter Stewart, "I know an equivalent trade when I see one. The challenge lies in designing a program." If the government chooses not to approve it, the merger bears the burden of justifying in court why it would be contrary to public policy.
The government can act even more directly as a market participant by offering to trade federal for state or private land, buying habitat from landowners, obtaining commitments from polluters to reduce their emissions, or buying commitments from fishing boats not to fish over certain border. The private party itself determines whether the offered state benefit (money or land) is sufficient.
Interest Analysis
Trading parties
In exploring the pressures of public choice on institutional interests, let us start with the trading partners and revisit the assumption made at the beginning of Part IV. Throughout this article, we have described the exchange through the eyes of the public as one between preserved habitat B and destroyed habitat A. However, in the eyes of the trading parties, the real exchange that takes place is between the requirement to provide preserved habitat B and the permission to destroy habitat A.
The habitat preserved is the price of the permit, linked to the level of destruction. While the public and the environment experience a habitat exchange, the developer simply pays for a permit.197 For private parties seeking to maximize their profits, the purpose of the transaction is permission to develop at the lowest cost, not to protect of the environment.
Agencies
The agency can leverage the uncertainty of litigation or grant approval to force a transaction more to its liking. For example, FWS's authority to prohibit habitat development under the ESA is far from certain in most circumstances, but the agency has used that uncertainty to influence many developers to apply for HCP permits instead of setting boundaries. FWS power to be tested in court. See Dana, supra note 199, at 47 (arguing that a necessary feature of contractual approaches to environmental regulation, such as HCPs, is that the agency threatens December 2000].
As a result, and as a consequence of the Clinton administration's high-profile support for ETMs, the agency is invested in the programs and does not want them to fail. One would expect that the optimal accuracy of the coin, from the agency's point of view, would also be an imprecise coin.
Public interest
To the extent that the agency and the applicant have clear incentives to keep the market thick, this will necessarily result in several different sectors of the public being affected by the trade. When the provision of ecosystem services is involved, as will often be the case with habitats, these communities should have real and often diverse interests in the trade negotiation and its outcome.2 16 Each community will want to minimize the negative externalities it is forced to bear. and maximize the positive things it retains.217. From an advocacy perspective, affected sectors of the public will want to ensure the ability to meaningfully review trade results, which in turn requires the development of an objective, verifiable record that documents the agency's rationale for the trade.
Assuming that relevant interests are represented, their combined efforts to reduce externalities can push trade outcomes toward a public interest outcome. However, if all relevant interests are not represented, the self-interested efforts of those involved can cause trade outcomes to deviate from the larger public interest.
ProceduralAnalysis
- Constrain agency discretion
- Inform agency discretion
- Increase political accountability
- Strengthen judicial accountability
- Provide for more meaningful public participation
The adversarial model may appease those most interested in the rule of law, but it is questionable whether the transaction costs are worth it in terms of improved substantive performance of the ETM. Environmental permitting as just described has played a central role in the successes achieved in protecting public environmental values. The traditional permit model is hardly a market in the traditional sense of markets, but with the advent of commerce it is increasingly used as the market mechanism for trading public environmental values.
The traditional permitting system works well for the agency and applicant, even in the era of commerce; it is the public whose interests are difficult to ascertain. Although published or noted in the Federal Register, neither the EPA/Corps Federal Guidance nor the FWS HCP Handbook was promulgated as a notice and comment.
Design Impasse?
CONCLUSION
The Currency Adequacy, Exchange Adequacy, and Review Adequacy standards provide a comprehensive framework for analyzing and understanding the various trade-offs that are part of ETM design. This does not mean that such markets are necessarily inefficient or undesirable; however, when significant values are left unaccounted for in transactions, barter becomes a more appropriate model and the need for a more rigorous valuation process arises. Designing this process presents a serious and difficult challenge for environmental law, especially as the trend of diversification of ETM into broader contexts continues.
