Environmental Law

Peter S. Menell

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138721647
• eBook ISBN: 9781351760584
• Topic: Social Sciences
• Subtopic: Law Theory & Practice
• Index: Social Sciences

This title was first published in 2002. Since the importance of environmental governance was realised in the late 1960s and early 1970s, this vibrant area of law has witnessed much change. Assembling insightful essays from a number of key contributors, Environmental Law takes stock of developments to date and outlines the challenges for the future.

Part I
Market-based Instruments

[1]
Currencies and the Commodification of Environmental Law

James Salzman* and J.B. Ruhl**

The success of several environmental trading markets (ETMs) has led to proposals for broader use of ETMs in environmental and resource management policy. The successful ETMs all share a basic feature—they exchange units of trade that are fungible, such as tons ofsulfiir dioxide or kilos offish. This feature of trading promotes resource allocation efficiency while advancing environmental protection. But most commodities exchanged in current and proposed ETMs, such as wetlands and endangered species habitat, exhibit nonfungibilities across the dimensions of type, time, and space. Using ETMs to trade these commodities is no longer trading “environmental apples for apples,” and thus the rationale for using ETMs is called into question.

In this article, the authors develop a comprehensive analytical framework for evaluating ETMs from the perspective of commodity nonfungibility and explore the challenge presented by trading environmental apples for oranges.They argue that by focusing on nonfungible commodities and their currencies we can better explain the design of ETMs, their rules of exchange, and provisions for public participation.

INTRODUCTION

I. CURRENCY ADEQUACY: SELECTION OF THE CURRENCY INSTRUMENT

A. The Mechanics of Marketable Permits

B. Measures of Exchange

1. Nonfungibilities of space

2. Nonfungibilities of type

3. Nonfungibilities of time

C. Currency Design Strategies

1. Simple currency

2. Universal currency

3. Comprehensive currency

II. EXCHANGE ADEQUACY: CONSTRUCTING THE EXCHANGE MARKET

A. Market Refinements Across Space, Type, and Time

B. Market Fragmentation, Background Markets, and Other Design Pitfalls

1. Arbitrage

2. The inevitable tradeoff between fat and sloppy or thin and bland

III. CURRENCIES AND MARKET CONSTRAINTS IN THE REAL WORLD-WETLANDS MITIGATION BANKING

A. Establishing the Wetlands Trading Market

B. Currency Adequacy

C. Exchange Adequacy

1. Nonfungibility of type

2. Nonfungibility of space

3. Nonfungibility of time

D. Fat and Sloppy Versus Thin and Bland

IV. REVIEW ADEQUACY: DESIGNING APPROVAL AND INTERVENTION MECHANISMS

A. Approval Strategies

1. Wholesale review

2. Retail review

B. Interest Analysis

1. Trading parties

2. Agencies

3. Public interest

C. Procedural Analysis

1. Constrain agency discretion

2. Inform agency discretion

3. Increase political accountability

4. Strengthen judicial accountability

5. Provide for more meaningful public participation

D. Design Impasse?

V. CONCLUSION

INTRODUCTION

Two major, integrally related trends define U.S. environmental law at the millennium. The first trend is to bring presently unregulated risks under the control of the regulatory system. The second trend … is toward bigger bubbles—toward broader and broader trading among pollutants and even among various types of risk reduction ….¹

Picture a playground where children in business suits trade environmental protection like baseball cards. The front sides bear slick images of endangered species, drops of acid rain, and vanishing habitats. The flip-sides show all the statistics—population remaining, acreage consumed, who benefits from the wetlands, who is harmed by the pollution. And the kids sit huddled round in an excited circle, busily swapping cards. To snag Jamie’s prized cattail wetlands, Ben must part with his cherished saltwater marsh.

There are differences, of course, between this imaginary playground and a market in real environmental commodities. A “bad trade” in baseball cards is in the eyes of the beholder and, at worst, damages only a child’s ego. When parties trade environmental protection, though, what seems a good trade looking at the pictures may lose its appeal once we take a closer look at the statistics and the effects of the trade on the environment itself.

Over the last decade there has been a sea change in environmental law and policy, marked by growing interest in market-based instruments of environmental protection. In particular, approaches that explicitly commodify environmental impacts by creating markets for their sale are on the rise. These environmental trading markets (ETMs) now operate in a range of regulatory settings where parties exchange credits to emit air pollutants, extract natural resources, and develop habitat ² In fact, every major environmental policy review in the last five years has called for even greater use of ETMs.³ Markets for environmental commodities represent the new wave of environmental protection and, despite critiques both subtle and shrill, they are still building.

ETMs have provided an enormously fertile area for scholarship. Articles have explored the mechanics of trading programs,⁴ debated the advantages of trading over command-and-control regulation,⁵ and, most recently, assessed the application of ETMs in the international sphere.⁶ Within this wealth of literature, however, a basic aspect of trading has largely escaped attention. Perhaps because it is so obvious, there has been scant consideration of the simple question—what is actually being traded?

If one compares trading programs, they all seem to share a basic feature. The CFC, fisheries, and proposed greenhouse gas ETMs, for example, all exchange commodities that appear to be fungible. One molecule of CFC, kilo of halibut, or ton of carbon dioxide seems much the same as another, both in terms of identity and impact. It is trading apples for apples (or pork bellies for pork bellies). Thus ETMs are considered a type of commodity market, where environmental credits go to the highest bidder. And for good reason, since the Chicago Board of Trade now sells rights to emit sulfur dioxide alongside pork bellies, orange juice, and grain futures.⁷

Indeed ETMs must assume fungibility—that the things exchanged are sufficiently similar in ways important to the goals of environmental protection—otherwise there would be no assurance that trading ensured environmental protection. While the precondition of fungibility may seem self-evident, this core assumption turns out to be more problematic than it first appears.

As an example of why fungibility matters, consider wetlands mitigation banking. This policy permits developers, once they have taken steps to avoid and minimize wetland loss, to compensate for wetlands that will be destroyed through development by ensuring the restoration of wetlands in another location.⁸ The regulations mandate trades that ensure equivalent value and function between destroyed and restored wetlands. In practice, however, most trades are valued in units of acreage. Within very loose guidelines, trades between productive (though soon to be destroyed) wetlands and restored wetlands are approved on an acre-for-acre basis. More sophisticated banks require ratios, trading development on one acre of productive wetlands for, say, restoring four or five acres of wetlands somewhere else. Counting acres may make for easy accounting, but it is poor policy.

Why? The social value of the habitat is absent from the transaction. The ecosystem services provided by the wetlands----positive externalities such as water purification, groundwater recharge, and flood control—are largely ignored. Opinions may differ over the value of a wetland’s scenic vista, but they are in universal accord over the contributions of clean water and flood control to social welfare.⁹ Trading acres for acres provides an inadequate measure to capture what is really being traded of significance. To be sure, such a simple metric allows trades, but other important, unaccounted trade-offs are occurring. The program can suffer from a lack of accountability (or, more accurately, a lack of countability).

In fact, upon close inspection, it turns out that most ETMs involve commodities and trades that exhibit a range of fungibilities. Legal trades can range from relatively straightforward kilos of surf clams to trades involving the exchange of different types of habitat (that may provide very different social benefits). To achieve the optimal outcome from ETMs, we need to understand and account much better for the qualities being traded. To do so requires careful consideration of the measure of exchange—the currency—since in the final analysis the currency forms the very basis of the transaction. The trading currency superficially makes the commodities fungible, determining what is being traded and, therefore, protected.

Many of the currencies employed by ETMs present trades of an acre of wetland here for an acre of wetland there, or a ton of emissions here for a ton there, as a basic exchange of apples for apples. In reality, though, this is a misleading description. More times than one might think, we are trading Macintoshes for Granny Smiths, apples for oranges, and, in some cases, apples for Buicks. Put simply, we can end up trading the wrong things.

Within the vast literature on ETMs, important and insightful work has explored the related issues of hot spots and the nature of tradable rights,¹⁰ but none has focused explicitly on the central role that currency selection plays in the structure and effectiveness of ETMs.¹¹ In this article, we reconceptualize the debate whether ETMs promote environmental protection and social welfare. By exploring efforts to promote nonfungible trading—trading environmental apples for oranges—we undertake a rigorous examination of environmental commodities and the currencies we use to trade them. We argue that nonfungibilities and currencies drive the structure of ETMs, directly influencing their construction, rules of exchange, and provision for public participation. In short, we contend that a more complete understanding of the root issues of commodity and currency provides a previously unlaid and strong foundation to understand better the potential and design of ETMs.

By breaking down the problem of ensuring environmental protection in the face of nonfungibilities, we create an analytical framework that can inform the assessment of any ETM. The structure flows from three distinct stages of an ETM’s operation. Currency adequacy involves selection of the currency unit—ca...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• Series Preface
• Introduction
• Part I Market-Based Instruments
• Part II Free Market Environmentalism
• Part III Contractual Approaches
• Part IV Liability Approaches
• Part V Information Disclosure
• Part VI Industry- and Community-Based Governance Institutions
• Part VII Analysis of Institutional and Instrument Choice
• Name Index