учебный год 2023 / (Encyclopedia of Law and Economics 5) Boudewijn Bouckaert-Property Law and Economics -Edward Elgar Publishing (2010)

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been protected primarily (though not exclusively, and not at all in socialist economies) through the allocation of private property rights. Many other environmental goods, such as the upper atmosphere, have, for various reasons, never been allotted to private owners. At Roman law and common law, the property rights of landowners supposedly extended down to the center of the earth and up to the heavens. But, of course, that was purely theoretical with respect to the upper atmosphere before the advent of civil aviation, at which point the common law rule was summarily displaced. See United States v. Causby, 328 US 256 (1946). Today, the atmosphere (above the area immediately useful for landowners) is treated as a publicly owned resource, and the government regulates private uses, including civil aviation and pollution. Thus, societies have relied on both of Hardin’s proffered solutions – privatization and public ownership/ regulation – to avert the tragedy of open access.

Most property regimes governing environmental goods are admixtures of individual private ownership, private (non-state) common property management, state ownership and management (i.e., regulation). These actually-existing systems of property rights on environmental goods hardly resemble the idealized versions presented above in Section 3. Some law and economics scholars maintain, however, that a ‘private’ property regime of the ideal type would offer more effective and efficient environmental protection than any other ownership/management regime. Their arguments are reviewed in Sections 11 and 12. Sections 6 through 10 focus on the theory and practice of environmental regulation using property or quasi-property mechanisms. The balance of this section, meanwhile, merely identifies different types of environmental regulation.

The law and economics literature distinguishes between regulatory approaches in a number of different ways. Many scholars recognize two categories of regulation: command-and-control and ‘market-based’. See, e.g., Stavins and Whitehead (1992). The second category actually encompasses (at least) two distinct regulatory approaches: taxes and trading systems. See, e.g., Baumol and Oates (1988) and Opschoor and Vos (1989). Percival et al. (1996, pp. 154–158) derive a more expansive list of 12 distinct approaches, including (1) design standards or technology specifications,

(2) performance standards or emissions limits, (3) ambient or harm-based standards, (4) product bans or use limitations, (5) marketable allowances,

(6) challenge regulation or environmental contracting, (7) pollution taxes or emissions charges, (8) subsidies, (9) deposit-refund schemes, (10) liability rules and insurance requirements, (11) planning or analysis requirements, and (12) information disclosure (e.g., labeling) requirements. The regulatory approaches in this more expansive typology combine varying amounts of commands, controls, and economic incentives.

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From the perspective of regulated industries, these typologies are misleading because, at bottom, all regulatory approaches are economic; the only meaningful difference between one approach and another lies in their differential costs of compliance and administration. As a practical matter, then, the key to choosing between different regulatory approaches to achieve certain environmental protection goals is cost-effectiveness or regulatory efficiency: In any given situation, how much pollution control or resource conservation would alternative regulatory regimes buy for the buck? This is the question that law and economics scholars have been addressing in their theoretical modeling and empirical investigations of environmental protection regimes. See, e.g., Cole and Grossman (1999 and 2002).

6.The theory of property rights-based environmental regulation

All forms of environmental regulation constitute, in effect, property-based solutions to the ‘tragedy’ of open-access environmental goods. See Barnes (1982–3); Cole (2002). Whenever the state regulates air pollution, for example, it imposes a system of rights and obligations with respect to the atmosphere. Whether it employs technology-based standards or marketbased incentives, the state imposes on polluters a legally enforceable duty to comply with all restrictions on use of (what amounts to) the public’s atmosphere. Alternatively, the state may choose not to assert public rights on the environmental goods themselves, but on privately-generated information respecting those goods, e.g., through the use of public disclosure requirements. See, e.g., Hamilton (1995) and Konar and Cohen (1997). Such state regulations may be characterized as exercises in sovereignty (imperium) rather than ownership (dominium). See Denman (1978, pp. 25, 29–30). But this makes little practical difference. Whether the state is purporting to act as sovereign or owner, the rights it asserts are in the nature of property.

By viewing the state as ‘owner’ (in some meaningful sense) of the environmental goods it regulates, it becomes clear that the choice in regulating is not whether to adopt a property-based approach in environmental regulation, but which property-based approach to adopt. To what extent should the state assert public rights (as owner or sovereign), as opposed to vesting (limited) property rights in individual users or groups of users? The answer to this question requires the same comparative assessment of production, exclusion and administrative costs discussed at the end of the preceding section.

Since the advent of federal pollution-control regulation in the late 1960s and early 1970s, economists have advocated the allocation of transferable property (or quasi-property) rights in wastes, as less costly alternatives to

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command-and-control environmental regulations. See Dales (1968). The idea is simple enough in theory. The government sets a pollution control goal and determines the extent of emissions reduction necessary to attain it. Necessary reductions are then subtracted from current emissions levels to derive total allowable emissions. Next, the government unitizes and allocates those allowable emissions, in the form of transferable pollution rights or allowances among regulated firms. The total number of ‘rights’ in circulation should match the emissions level the government deemed appropriate to achieve its pollution-control goal. Assuming the government’s calculations were accurate, its pollution control goal should be achieved, regardless of whether the firms can trade ‘rights’ to pollute. The primary purpose of allowing trading, therefore, is not to reduce emissions (though, depending on market conditions, allowing trading may create incentives for emissions reductions beyond government-mandated levels) but to minimize the costs of reducing emissions. By making pollution ‘rights’ transferable, the government ‘automatically ensures that the required reduction in waste discharge will be achieved at the smallest possible total cost to society’ Dales (1968, p. 107). It does so by creating markets that efficiently allocate the costs of pollution control among regulated firms. Firms with low pollution-control costs may find it worthwhile to reduce their emissions below mandated levels, leaving them with excess ‘rights’ to sell to firms with higher pollution-control costs. In theory, exchanges of pollution ‘rights’ should occur at any price below the marginal pollution-reduction costs of some firms and above the marginal pollution-control costs of others.

The great advantage of this system over traditional command-and- control regulations is that it takes account of the different cost structures individual firms have for pollution control. Command-and-control regulations disregard differential compliance costs, forcing all regulated firms to reduce emissions by the same amount. The market-based system of transferable pollution ‘rights,’ by contrast, allocates the bulk of the pollution-control burden to those firms that can reduce emissions at lower cost. Firms that cannot reduce emissions so cheaply are allowed to pollute more, though they must pay for the privilege by purchasing pollution ‘rights’ on the open market.

In addition to lowering the total cost of achieving administratively determined environmental goals, there is evidence that property rightsbased trading systems encourage the development of new abatement technologies, leading to even greater emissions reductions. See Jung, Krutilla, and Boyd (1996); Burtraw (2000). Empirically, however, the relative merits of tradable permitting on technological innovation remain questionable (at least). See Taylor, Rubin, and Hounshell (2005). Some

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proponents of emissions trading, such as Ackerman and Stewart (1985), further contend that it is a more democratic approach to regulation than command-and-control because it focuses public attention on the fundamental question of how much pollution is acceptable, supposedly leading to more meaningful public participation in the political process and more reasoned deliberation over environmental policy by elected representatives. Heinzerling (1995) disputes such claims, however, pointing to actual legislative deliberations over pollution trading programs, in which the public and their elected representatives avoided entirely the fundamental questions of environmental policy.

Property rights-based approaches to environmental regulation place a premium on a government’s ability to calculate current waste levels and necessary waste reductions to achieve environmental goals. If the government fails to accurately measure current emissions or necessary reductions, its environmental goals may not be met. This is similar to the problem of getting the prices right in a tax-based pollution control regime. See, e.g., Baumol and Oates (1971). Of course, in a tax-based system the government can adjust the tax rate up or down until it achieves the desired incentive effects. Dales (1968) recommends something similar for transferrable pollution ‘rights’: The ‘rights’ may be limited in duration (one-year, five-year, etc.), so that the government can make occasional adjustments to ensure the attainment of existing or newly-adopted pollution-control goals. Although this makes good sense from a regulatory perspective, it may seem problematic from a property rights perspective, and has not been incorporated into any existing tradable permitting system.

Holders of ‘property rights’ typically cannot be defeased involuntarily. When a person holds property ‘rights’ in something, that means that everyone else has a corresponding duty not to interfere. See Hohfeld (1920). The government may ‘take’ the property pursuant to Eminent Domain, but only upon payment of just compensation. What, then, is the status under property law of ‘rights’ to pollute that can be confiscated by the government without compensation? Are they really property rights?

As noted earlier, whenever the government regulates for environmental protection, it is (if only implicitly) asserting public rights in environmental goods. And when the government creates a market in transferable pollution ‘rights,’ this can be viewed as a conveyance of some of the public’s property rights in the atmosphere to market participants. What the private firms receive is something akin to a usufruct, a leasehold, or a defeasible fee on the environmental goods. These are certainly valuable property ‘rights,’ though they amount to something less than fee simple ownership. To say they are not ‘property rights’ simply because they are neither

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absolute nor perpetual would be akin to saying that fee simple is the only legitimate estate in land.

From an economic point of view, the legal characterization of property rights is less important than their incentive effects for market participants. The less secure property rights are, the less likely potential buyers will be to invest in them (assuming alternative investment possibilities). See Posner (1992, p. 32). Leaseholds certainly are less valuable than freeholds precisely because of their more limited tenure and security. And there is every reason to suspect that defeasible pollution ‘rights’ would have lower market value than absolute pollution ‘rights.’ Of course, if the market value of the ‘rights’ falls too low, the market for them will simply disappear.

7.The development of property rights-based environmental regulations: netting, offsets, bubbles, and banking

The theory of property ‘rights’ to pollute has been implemented at various times, in various ways, in various environmental goods, and with varying degrees of success. This section and the two that follow focus on the American experience with tradeable pollution ‘rights’ because it has been the most extensive. See Opschoor and Vos (1989, p. 99). And most of the American experience with emissions trading has occurred under the Clean Air Act (42 U.S.C. §§ 7401 to 7671q).

The first generation of federal pollution control regulations, adopted in the early 1970s, took a predominantly command-and-control approach to regulation. Federal regulators not only set environmental goals (or pollution reduction targets), but imposed industry-wide, healthor technologybased performance standards that applied to all plants, regardless of their differential costs of compliance. The Clean Air Act of 1970 included nothing like the transferable pollution ‘rights’ system that Dales (1968) had envisioned.

In the early days of federal environmental regulation, the command- and-control approach made some sense. The Environmental Protection Agency (EPA), at its inception in 1970, may not have possessed the ‘technical capability’ or economic expertise needed to design and implement transferable pollution rights programs. See Tripp and Dudek (1989, p. 375). According to some analysts, such as Latin (1985), command-and- control air pollution regulations were easier and less costly for a new and inexperienced administrative agency like the EPA to design and implement. It was almost certainly cheaper and easier for the fledgling agency to require firms to install and operate specified air pollution-control devices, which would reduce emissions by known amounts, than to monitor and enforce individualized output levels at thousands of sources. See Maloney and McCormick (1982, p. 106); Cole and Grossman (1999, 920–22).

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Moreover, in the early days of federal environmental regulation improvements came cheap, so that even a relatively expensive system of command-and-control regulations provided substantial net social benefits. Indeed, the Clean Air Act may have provided its greatest net social benefits at the very time it was most heavily dominated by expensive command-and-control regulations. According to best estimates, the total social cost of Clean Air Act regulations between 1970 and 1981 amounted to $13.7 billion, while the easily quantifiable benefits from those regulations in 1978 amounted to $37.3 billion, yielding a net social profit of almost $24 billion (not including the more difficult to quantify health, aesthetic and ecosystem benefits of pollution control). See Portney (1990, p. 69). Still, many have argued that the net social benefits of air pollution control would have been far higher had the government adopted less costly approaches to regulation than command-and-control. According to various studies, federal air pollution regulations in the 1970s and early 1980s were between 7 and 400 percent more expensive than ‘least-cost’ solutions. See Ackerman and Stewart (1985, p. 1338), and Tietenberg (1985, pp. 39–56).

Even in its early years, however, the EPA was not oblivious to alternative approaches to regulation. It began experimenting with emissions trading programs as early as 1974. See Hahn and Hester (1989a, p. 109). By 1980 the agency had approved four different types of emissions trading schemes: netting, offsets, bubbles, and banking. See Liroff (1986).

Netting

First, in 1974 EPA adopted ‘netting,’ a policy that allows firms to avoid the application of expensive ‘New Source Performance Standards’ by netting increased emissions from modernized or expanded existing sources with emissions decreases from other existing sources at the same facility. See Hahn and Hester (1989a, pp. 132–3). So long as the net increase in plant-wide emissions does not equal the minimal requirement for a ‘major’ source, as defined in the Clean Air Act, the modernization or expansion will not be treated as a ‘new’ source for purposes of the Clean Air Act. Netting can occur in all areas of the country, whether or not they have attained the National Ambient Air Quality Standards. But netting obviously applies only to internal trades, i.e., trades between sources located at the same facility. See EPA (1986a). Nevertheless, according to Hahn and Hester (1989a, p. 133), it ‘is the most commonly used emissions trading activity by a wide margin.’ Between 1974 and 1984, as many as 12,000 sources used netting to avoid more onerous regulatory burdens under the Clean Air Act. The result has been estimated cost savings of between $525 million and $12 billion. Hahn and Hester (1989b, p. 374).

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Offsets

‘Offsets’ were the second form of emissions trading created by the EPA. By the mid-1970s, the agency had become concerned that many of the country’s Air Quality Control Regions would fail to attain the National Ambient Air Quality Standards by the 1977 deadline. The question arose whether the Clean Air Act would permit the construction of new air pollution sources in nonattainment areas. A construction ban obviously would have entailed great economic costs for nonattainment areas, as well as political fall-out for state and federal regulators. To avoid this prospect, the EPA in late 1976 promulgated ‘offset’ regulations that permitted the construction of new stationary sources in nonattainment areas, provided that their new emissions were offset by reductions at existing sources. Under this offset rule ‘[e]xisting sources are, in effect, given pollution rights equal to their existing emissions, which can then be sold to new sources or to existing sources that wish to increase their emissions.’ See Stewart and Krier (1978, p. 593).

Offsets are different from netting in several respects: they apply only in nonattainment regions (and in certain attainment regions where emissions contribute to nonattainment in other regions); they are mandatory; and they cannot result in a net increase in emissions. EPA’s original offset rule was codified in §178 of the 1977 Amendments to the Clean Air Act, which additionally required that all new emissions in nonattainment regions be more than offset by reductions from existing sources. The purpose was to ensure that new economic development in nonattainment regions would contribute to the attainment of the National Ambient Air Quality Standards. Subsequently, the 1990 Clean Air Act Amendments established precise offset ratios, ranging from 1.1:1 to 1.5:1, that apply depending on the region’s level of nonattainment. For example, in Los Angeles, which is the only ‘extreme’ nonattainment area in the country, 1.5 tons of Volatile Organic Compound (VOC) emissions must be retired from existing sources for every ton to be emitted from a new source. As of about 1988, some 2,000 offset transactions had taken place, though only about 10 percent of these were external, i.e., involving more than a single facility (Hahn and Hester, 1989b, p. 373). The economic effects of these transactions are difficult to estimate. Offsets are not designed to yield direct regulatory cost savings. However, the fact that offset transactions occur at all suggests that they must provide some economic benefits both for firms seeking to locate in nonattainment regions and for the nonattainment regions themselves. See Hahn and Hester (1989b, p. 375).

Bubbles

In 1979, EPA permitted regulated firms to use ‘bubbles’ to avoid more burdensome regulations. A single plant may contain many individual

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sources of pollution. The ‘bubble’ policy allows existing plants (or groups of plants) under common management to place all their individual smokestacks under a bubble, as it were, with a single opening at the top. By treating the entire plant or group of plants as a single source with a single emissions target (for each pollutant), plant managers are free to allocate necessary reductions to those smokestacks with the lowest control costs. Instead of having to reduce emissions by a certain amount at each and every smokestack, the plant (or plants) can reduce emissions more at some smokestacks and less (or not at all) at others. ‘In effect, emissions credits are created by some sources within the plant and used by others’ (Hahn and Hester, 1989b, p. 372). By the mid-1980s the EPA had approved 42 bubbles for firms and various states with EPA-delegated authority had approved another 89; but only two of them involved external trades. See Hahn and Hester (1989a, pp. 123–5, and 1989b, p. 373). The total cost savings from bubbling have been significant. Federally-approved and state-approved bubbles have saved an estimated $435 million in regulatory costs. While this total is lower than the total cost savings from netting, it reflects a higher average savings per transaction. See Hahn and Hester (1989b, p. 374).

Banking

Also in 1979, EPA began allowing regulated firms to bank emissions credits for future use, sale or lease. This banking system is not so much a separate emissions trading scheme as a mechanism to facilitate the use of other emissions trading schemes, notably bubbles and offsets. The EPA delegated authority to the states to administer their own emissions credit banks. But, according to Hahn and Hester (1989b, p. 373), banking has not been well-received by either state administrators or regulated firms. As of September 1986, firms had withdrawn credits from banks for sale, lease or use only 100 times. Thus, the cost savings realized through banking were ‘necessarily small’ (Hahn and Hester, 1989b, p. 374). One possible reason for the reluctance of firms to use the banking system for emissions reduction credits is the lack of secure property rights in the credits, which can be confiscated by state or federal regulators at any time in order to further environmental protection goals (Hahn and Hester, 1989a, p. 130).

Indeed, none of the four pollution trading programs discussed in this Section – netting, offsets, bubbles, and banking – provide secure property rights in emissions reduction credits (ERCs). According to the EPA (Oct. 1980, p. 2), ‘an ERC cannot be an absolute property right.’ Because of its continuing statutory obligation to attain National Ambient Air Quality Standards, the agency reserves the right to impose new emissions controls that could, in effect, confiscate saved or purchased emissions reduction credits. See Hahn and Hester (1989a, p. 117). As noted earlier, the lack

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of secure property rights on ERCs is not necessarily a fatal flaw in the system; the market will discount their economic value based on the risk of confiscation. But, according to Hahn and Hester (1989b, p. 379), the lack of secure property rights on ERCs has served ‘as a disincentive for engaging in trading in nonattainment areas, and especially for external trading in those areas.’ The lack of secure property rights raises similar issues with respect to the most ambitious emissions trading program to date: the sulfur dioxide allowance trading program under the 1990 Clean Air Act Amendments.

8.The Clean Air Act’s sulfur dioxide allowance trading program

Program design

When the federal government took over primary responsibility from the states for air pollution control in 1970, one of its main justifications was the problem of interstate air pollution. See Revesz (1996, p. 2341). Since then, ironically, interstate air pollution problems have been among the ‘thorniest’ problems for federal regulators (Squillace, 1992, p. 301). Acid rain is a prime example. It is created when sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions, primarily from midwestern power plants, combine with constituent elements in the atmosphere to produce sulfuric and nitric acids that precipitate back to earth, acidifying lakes, burning forests, and corroding structures. The biggest regulatory problem with acid rain is that most of it falls far from its midwestern emissions sources in the northeastern United States and in Canada. In 1990, after more than a decade of political wrangling, Congress enacted an innovative new program to control acid rain. The ‘acid deposition control’ program established in Title IV of the 1990 Clean Air Act Amendments (42 U.S.C. § 7651) sought to cut SO2 emissions by 10 million tons and NOx emissions by two million tons by the year 2000. To reduce NOx emissions, Congress relied primarily on traditional technology-based standards, i.e., command-and-control: regulated utilities were required to retrofit controls on existing boilers. The SO2 reduction effort, by contrast, relied on a new, two-phase (quasi-) property-based approach utilizing transferrable emissions allowances.

The different regulatory approaches may reflect the fact that NOx controls are significantly cheaper than SO2 controls. See, e.g., State Utility Forecasting Group (1991, p. 45) (estimating the capital cost for NOx control retrofits at less than $100 million, compared to $0.9 billion for SO2 control retrofits). Consequently, the marginal benefits of an emissions trading program for NOx would be lower, perhaps so low as to be outweighed by the higher administrative costs of such a program.

In Phase I of the SO2 program, Congress issued emissions

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‘allowances’ – with each allowance equalling one ton of SO2 emissions – for the 240 dirtiest generators at 110 power plants in 21 states. Sixty-three percent of regulated generators were located in just six states: Illinois (17), Indiana (37), Kentucky (17), Ohio (41), Pennsylvania (21), and Tennessee (19). The total number of allowances issued equalled approximately onehalf of the total emissions of all 240 generators, in order to achieve a 3.5 million ton reduction in aggregate SO2 emissions before the second phase of emissions reductions begins in the year 2000. The allowances were allocated to individual generating units based on their average quantity of fossil fuel consumed during the three-year period 1985–1987, assuming 2.5 lbs SO2 per each million BTUs of fuel input. In Phase II, the goal is to reduce SO2 emissions from all but the smallest generating units by an additional 6.5 million tons, based on a formula of 1.2 pounds per million BTUs of fossil fuel input during the 1985–1987 period.

Congress’ pollution reduction targets really are not as stringent as they appear because the Act provides extra allowances for plants in ‘high growth’ states, including the six states that produce the lion’s share of the country’s SO2 emissions. The Act also provides that deadlines may be extended for plants that take early steps to reduce emissions beyond the Act’s requirements. However, the Act sets a fast 8.7 million pound cap on utility SO2 emissions after 2000. Moreover, the Act does not hold in reserve any emissions allowances for new sources entering the market; new sources must obtain allowances from existing ones.

All the pollution reduction realized under the Clean Air Act’s acid rain program will result from these administratively set quotas. They are ‘commands,’ but they have been issued without attendant ‘controls.’ The Act does not specify how sources are to meet emissions reduction requirements. In fact, the law does not even require sources to reduce emissions to the levels set by Congress but only to possess allowances equal to their actual emissions. Congress designed the Act to utilize market forces by expressly authorizing the nationwide buying and selling of emissions ‘allowances.’ Sources that can economically reduce their emissions below required levels can sell their excess allowances. Sources with higher costs of controlling emissions can purchase extra allowances, i.e., increase their quota, rather than reduce emissions to Phase I or Phase II levels. Congress even provided for the creation of a futures market in emissions allowances, authorizing generating units to buy and sell allowances for future years. See Mazurek (1994).

The goal of this trading system is primarily to minimize the total costs of achieving the legislatively commanded reductions in SO2 emissions. According to some estimates, it could reduce the total cost of achieving a 10 million ton reduction in SO2 emissions by 20 percent, from $5 to $4 billion or less. Menell and Stewart (1994, p. 410).