Rights to Pollute

In this paper, Nives Dolšak examines the property-based approach to air-pollution control known as “cap-and-trade” and analyzes aspects of its institutional design and implementation, particularly monitoring and enforcement issues that determine its success or failure as an environmental protection tool. The first part of the paper combines the institutional analysis and development (IAD) framework first developed by Elinor Ostrom (2011) with elements from the comparative transaction-cost literature. Dolšak derives a novel analytical framework consisting of three basic elements: (1) external factors, including biophysical characteristics of the resource, external regulatory environments, and characteristics of resource users; (2) rules regulating resource use and users; and (3) design features of the cap-and-trade market, including trading rules, permits, and transaction costs. External factors can easily affect the success of a cap-and-trade regime. For example, a large, highly dispersed resource may make it difficult (that is, costly) to monitor use and assess the effects of use on resource stock. Similarly, a cap-and-trade regime may be more easily monitored and enforced, when the number of resource users/permit holders is relatively small. Rules regulating resource use, in particular quota limits and the structure and security of permitting, can also affect the success of a cap-and-trade market. For example, if the allocation system is perceived as grossly unfair or permits are insecure, the market may not take off. Constraints on, or high costs of, transferability may also hamper emissions markets.

In the second part of the paper, Dolšak applies her framework to analyze several cap-and-trade programs (all from the United States), including the phasedown of lead in gasoline, early EPA emissions-trading programs, the Southern California Air Quality Management District’s Regional Clean Air Incentives Market (RECLAIM), and the phaseout of ozone-depleting substances. Somewhat surprisingly, she finds that neither the spatial extent of the resource nor nonuniform effects of resource flows on resource stocks have had a significant impact on market performance under those various regimes. Meanwhile, transaction costs tend to fall over time. Thus, Dolšak concludes (with some caveats) that cap-and-trade programs may be applicable to a larger number of environmental problems than some critics have argued.

This paper was presented at the Lincoln Institute’s conference entitled “Evolution of Property Rights Related to Land and Natural Resources” in 2010 and is Chapter 6 of the book Property in Land and Other Resources, edited by Daniel H. Cole and Elinor Ostrom.