The Tradable Permits Approach to Protecting the Commons: What Have We Learned?

"One of the new institutional forms of coping with the problem of rationing access to the commons involves the use of tradable permits. Applications of this approach have spread to many different types of resources and many different countries. The most common applications involve the control of air pollution, fisheries, and water, although tradable permits are also used occasionally in a number of other areas such as wetlands protection, land use control, nonpoint source water pollution, etc. "While these approaches do not privatize the resources, as conventional wisdom might suggest, they do privatize to a limited degree access to those resources. And because the access rights can be very valuable when the resource is managed efficiently, a substantial amount of wealth may be acquired by the owners of these rights. While the ability to reclaim that wealth for the purpose of motivating sustainable behavior is an important strength of the system, the ethical issues raised by its distribution among completing claimants are a significant and continuing source of controversy. "This essay opens with a brief summary of the theory behind these programs and both the economic and environmental consequences anticipated by this theory. Some brief points of comparison are made with other competing and/or complementary formal public policy strategies such as environmental taxes and legal regulation. "The essay proceeds with a description of the common elements these programs share and the design questions posed by the approach. These include governance structures, the setting of the access cap, the initial allocation of rights, transferability rules (both among participants and across time) as well as procedures for monitoring and enforcement. It continues by examining how these design questions have been answered by the air pollution, fishery and water supply applications and how the answers have evolved over time. This evolution has been influenced by changing technology, increased familiarity with the system and a desire to respond to some of the controversies surrounding the use of these approaches. Since the design questions have occasionally been answered rather differently in the three contexts, these differences provide an interesting basis for an analysis of both the sources and consequences of these variations. In particular it has become quite clear that the type of resource being protected makes quite a difference in the design of existing tradable permit systems. "The penultimate section examines the hard evidence on the economic and environmental consequences of adopting these approaches. This evidence is juxtaposed with the expectations created by the theory. "The final section draws together some tentative lessons that can be drawn from this comparison of the implementation experience we now have from applying these approaches in a variety of different contexts."