Inland Navigation System Planning: The Upper Mississippi River-Illinois Waterway (2001)

The job of smoothing arrivals at locks should be given to towboat operators, as they best understand the costs of delay and the technical limitations inherent in the operation of their equipment. The most direct way to achieve the smoothing of arrivals is to give towboat operators clear property rights to lockage times at different locks. This would be done by investigating the historical pattern of lock usage and, before the beginning of the navigation season, allocating to each operator the same percentage of 5-minute blocks throughout each day as they used in the historical period. It is important that the 5-minute blocks be allocated evenly over the year, with each operator being given the same number of minutes in each day in August as in April or October. The 5-minute slots throughout each day would be allocated at random to each operator. The remainder of the lock minutes throughout each day would be retained by the U.S. Army Corps of Engineers. Before the beginning of the navigation season, any operator could swap an assigned 5-minute slot for one held by the Corps.

The key to demand smoothing is to encourage the swapping of slots among operators to assemble a clear sailing path through each lock. Thus, for example, an operator planning an upbound sailing would swap with others to gain clear title to a lockage time at Lock 25 that is 6 hours, sailing time from the lockage time owned at Lock 26. The Corps would sell the minutes that it retains at the beginning of the navigation season to the highest bidder. Bidding would continue p to the point when the lockage time slot expired. This would allow operators a fallback position in case they failed to reach a lock in time to use the time slot that they owned. The Corps should develop rules for reserving slots for noncommercial lockages as well.

If an operator stayed in a lock for longer than the time that had been reserved, an arbiter would determine the penalty. In principle, an operator should be liable for all delays imposed on other users. Thus, if contiguous lockage times were delayed by an operator's failure to clear the lock on time, the operator should be liable for delays imposed on all those holding slots behind him or her as well as for delays that the others might encounter at the upstream or downstream sequence of lockages that they were scheduled to traverse. However, although the length of time a boat spends in a lock is determined primarily by the towboat operator, it is partially under the control of Corps employees. Weather also might cause a lockage to take longer than anticipated.

Under these circumstances, an arbiter would be permitted to forgive some of the fees that would normally be imposed on an operator who took longer in a lock than the time reserved.

New operators would buy lockage slots from either existing operators or from the Corps. To encourage entry, however, at the end of the navigation season, the Corps should be directed to rebate back to the new entrant an amount equal to the value of time per sailing given to existing operators.

Allowing operators clear title to specific 5-minute blocks of time throughout each day of the navigation season and then allowing them to trade slots to schedule their own lockage sequences is the simplest, cheapest, and most direct way to speed the flow of traffic on the UMR– IWW system. It has the added advantage of increasing the speed of lockages and thus increasing the system's economic capacity.

A tradable permit approach holds promise for inducing more efficient use of navigation infrastructure by the barging industry on the Upper Mississippi River–Illinois Waterway system. Tradable time-specific permits to use locks may reduce congestion delays and other user costs and may encourage technological innovation. In considering this approach, it is worthwhile to note that implementing tradable permit policies is often highly politicized because of the complex array of stakeholders with an interest in a tradable permit program. There are those who make a direct livelihood from the navigational use of the waterways—barge captains and tow operators; and those linked to them through capital investments, input supply, and output processing—from grain elevators and port authorities, and from communities concerned with jobs and economic vitality. There are competing advocates for differing priorities in waterway management: recreational boaters, national and local environmental advocates, and farm organizations. There are multiple arms of government—the Corps of Engineers, federal and state wildlife agencies, Congress, and the courts.

These disparate interests are faced with multiple tasks. Prior to establishing tradable lockage permits, policymakers must determine the desirable and feasible number of commercial navigation lockages per unit of time at specific locks or series of locks, and they must consider exceptions to the permitted lockage times for unusual conditions (e.g., severe weather). The nature of the permits must be specified. The permits could be in the form of a right to make an advance reservation that would avoid time in queue at specific locks. Or lockage arrival times and time allotted within the lock could be pre-assigned based on historic dates of use and use levels, with trading to adjust to current needs. To whom would the “permits” be allocated? Should a permit be mandatory to use a lock, or required only to move to the front of the queue upon arrival? What penalties apply for failure to use an assigned lockage time or for use of excess time in the lock? Should the program be revenue-neutral—that is, fees collected would be returned to the permittees in a manner that does not distort their lockage use incentives.

Some organization (which could be a public agency or a voluntary association formed by navigation interests) must assign initial lockage permit allocations, set the rules for trading, and monitor and enforce the activities that ensue. A central coordinating system for reservations

and/or trading might involve round-the-clock dispatchers, communicating via radio or the Internet. Fees collected could be dedicated to such administrative and coordinating costs. Finally, when all the details are worked out and the system begins to operate, policymakers must account to stakeholders, the public, and (frequently) the courts for the resulting stream of impacts on various constituencies.

Economists' advocacy of tradable permits has been an invaluable policy contribution, and tradable permit programs provide genuine advantages over command-and-control allocation. The development of markets in SO₂ allowances, western U.S. water rights, and fishery individual transferable quotas (ITQs) provide instructive insights for development of a tradable lockage permit program. ¹ Development of tradable permits for these three resources is briefly described in the appendix to this section.

Establishing tradable permits entails a series of policy design challenges when permits are defined and allocated and rules for trading are developed. This section outlines those challenges, based on experience with other tradable permit programs such as the three described in the appendix, and their implications for tradable lockage permits for navigation waterways.

The political complexity entailed in crafting a trading program often causes delays from the time tradable permits first are publicly debated to the date that trading rules are promulgated and permits are allocated. In the interim, all those with even a minor interest in the resource seeks to shore up their claim. Fish catch, pumping levels, and emissions soar in anticipation of rights being granted based on a history of use, anticipating the windfall gains that will go to those granted tradable rights. Alaskan fisheries amply demonstrated a rush on the resource in the face of pending quota policies.

The issue of how to incorporate new navigational interests into an established system of lockage permits will need to be addressed. New entrants (and increased use by an existing permittee) could be accommodated by allocating them lockage permits at zero cost. This approach would lessen incentives for trading, as compared to requiring new users to buy a permit. However, if permits issued after the program is established are for the less heavily used (and less desirable) dates of the navigation season, then trading likely would occur between those with permits for more desirable dates and those with less desirable dates.

The "rights" being traded in fishery, air emissions, and water markets (see appendix) had begun to evolve before tradable permits were proposed. Resource users had customary patterns of use, implicitly sanctioned by public policy. When pressures on water supply, fish stocks, and air quality became sufficiently urgent, there was momentum to quantify rights and develop trading mechanisms.

At this point in time, there does not appear to be a mandate to cap navigation use at any specific level. Presumably, lockage permits would be allocated to all current navigation users of the waterways. The question arises regarding what quantity each applicant would be awarded and who would be eligible for an allocation. One can envision a situation similar to the Alaska fisheries in which permits are awarded far in excess of use levels in recent years, in order to minimize political controversy. If tradable lockage permits are awarded in excess of actual use levels, incentives to trade will be weakened, though trading would still occur to obtain more desirable lockage time slots and to accommodate unforeseen delays that prevent the use of an advanced reservation.

As the UMR–IWW system is currently managed, navigation users have the “right” to arrive at locks without any reservation, permit, or coordinating activity of any type required. At some locks, congestion costs under the current system are considerable. It is the opportunity to reduce these costs that would motivate support for, and participation in, some form of reservation or permit system. The intensity of use of a reservation or permit system will reveal the degree to which congestion delays actually are a serious matter to different commercial users of the waterways.

In nascent markets, it may be years before an equilibrium price is established and becomes common knowledge. Public agencies may take on the role of administering an auction (as with SO₂ allowances), setting offer prices (as with California Water Bank and the Edwards Aquifer land-fallowing program), or collecting and disseminating transaction data (as with the U.S. Environmental Protection Agency's Internet database on SO₂ allowance trades). Eventually, private brokers enter to provide services; such as with the SO₂ allowance market and in a few active western U.S. water markets. Confidentiality regarding prices and other transaction details sometimes is required by would-be traders as a condition for market participation. This is the case for the U.S. tradable permit program in ozone depleting chemicals (Tietenberg, 2000) and for water trading among irrigators in California's Central Valley who do not want price levels disclosed.

Lack of information on the value of the tradable right is a hurdle that can be overcome by public reporting of transactions. Public agency leadership in establishing real-time information channels for navigation users to trade permits would be essential to getting a trading program started. In addition, trading rules and reporting requirements should limit transaction costs to those necessary to account for trade-related information costs and externalities (if any). "Only emissions trading programs with low transaction costs have succeeded." (United Nations, 1998, p. 24). A low-cost trading mechanism is particularly important in the context of trading lockage permits, as the gains from trade are likely to be modest, thus dampening trading by any notable costs and inconveniences.

A trading program quickly becomes meaningless if users can exceed use limits with impunity and so have little incentive to trade. Although the SO₂ allowance program involves continuous monitoring of emissions, stiff fines for noncompliance, and public access to data on trades, prices, and emissions, loopholes in groundwater pumping enforcement allow water users to expand their use beyond permitted levels, undercutting market development (Anderson and Snyder, 1997). Enforcement concerns have arisen in Alaska halibut and sablefish fisheries as the budget for monitoring and enforcement has been less than one-fourth of that requested and key staff positions have gone unfilled (NRC, 1999).

A meaningful lockage permit trading program will require monitoring as barges enter the locks to assure that they are indeed next in the queue, given assigned permits and any trades that have occurred. Fines or other penalties for violating established trading rules and rules for use of locks (such as allowable time in the lock) and moving through queues need to be established at levels that are high enough to discourage violations.

Documenting of the welfare gains from permit trading programs requires a well-defined baseline of comparison. In principle, one seeks to compare net benefits from resource use with and without the trading policy. In practice, this requires construction of a counterfactual — what would have occurred without the program? One could hypothesize a baseline in which command-and-control policies were used to achieve the same level of resource use and environmental quality that a tradable permit program achieves. Stavins (2000) uses this type of baseline to estimate abatement cost savings for the SO₂ allowance program.

Politically, adoption of a tradable lockage permit program requires an expectation of net benefits for relevant constituencies. In the case of navigation on the Upper Mississippi, benefits to navigation interests primarily would be in the form of reduced congestion delays. However, perceptions regarding the benefits hinge upon what stakeholders believe would occur in the absence of a permit program. If such a program is viewed as a means to live with the current lock infrastructure, given that no lock extensions are forthcoming, a permit program may be welcomed. If the program is viewed as delaying, or weakening the case for, lock extensions that otherwise would be forthcoming, it will be bitterly opposed. During the era when federal largesse was still available to develop additional water supplies, tradable water permits were an anathema to water users. Once that era had clearly ended, trading was an acceptable means of managing a finite resource.

The advent of tradable permits signals a paradigm shift to a new era of declining subsidies, environmental constraints on customary use patterns, and resource transfers—changes often bitterly resisted

bitterly resisted by resource users and those businesses and communities linked to them. Some attempts to develop tradable permits may cycle through many rounds of public debate over rules for trading and who should get permits. Once trading begins, new litigation and ambiguities in the trading rules take time to be resolved.

A mature market with routine transactions and least-cost attainment of policy goals is the ideal outcome of a tradable permit program, an elusive outcome if the economic and political impetus for trading has not ripened sufficiently (cf. Colby, 2000). Consequently, those advocating a tradable permit approach do well to foster realistic expectations about how long it may take to establish a working program.

In some programs (fisheries ITQs, SO² allowances), early trades occurred primarily within a firm or parent corporation, with interfirm trading taking much longer to occur because of greater uncertainty about the reliability of the trading partner and higher information and negotiating costs. This phenomenon may be observed with tradable lockage permits as well and could limit efficiency gains from trading.

One of the advantages of tradable permits is the potential for environmental advocates to “put their money where their mouth is” by acquiring and permanently retiring permits, thus decreasing overall use of the resource. Such transactions are common with SO² allowances and water permits and might provide a vehicle for environmental advocates to directly influence navigation use of specific reaches of the UMR–IWW system. However, environmental acquisitions would be pointless if navigation interests could acquire additional lockage permits upon request and at zero cost.

In the case of inland waterway navigation (as with fisheries and water use), there are noncommercial users of the resource who must be considered when tradable permits are developed. Should recreational boaters be required to have a lockage permit, or can they better be accommodated by implementing standardized rules for queuing recreational boats at the locks? Noncommercial constituencies, when not adequately considered, create political and legal obstacles to a successful tradable permit program. Recreational fishing interests in Alaska still are effective gadflies in the fisheries ITQ programs. Noncommercial boaters are actively litigating river-running permit systems in national parks that do not address their interests. When non-commercial interests are neglected, there often are repercussions for the commercial permittrading program.

Tradable permit programs are directly linked to the politics of public subsidies to resource users. Naturally, resource users strongly prefer new infrastructure development, paid for by tax dollars, to a tradable permit program. They will vigorously resist tradable permits and other nonstructural measures if federally subsidized improvements are viewed as still possible.

Trading rules that avoid imposing unnecessary costs help jumpstart the market, as does low-cost access to information on trading activity and prices during the interim period before the market becomes active enough to attract private brokerage and information services.

Finally, a powerful incentive is needed to achieve any notable policy change. A strong external mandate—a court ruling, an act of Congress, an international treaty—makes use limits and tradable rights more palatable. State and local officials can then blame the higher authority for the disruption of customary resource use and lobby heavily for compensation, creating new inefficiencies if they are successful.

Anderson, T. L. and P. Snyder 1997 Water Markets: Priming the Invisible Pump Washington, DC : Cato Institute

Colby, B. G. 2000 Cap-and-trade policy challenges: A tale of three markets Land Economics 72 : 638-658

National Research Council 1999 Sharing the Fish: Toward a National Policy for Individual Fishing Quotas Washington D.C. : National Academy Press

Stavins, R. N. 2000 Market based environmental policies, in Public Policies for Environmental Protection P. R. Portnoy and R. N. Stavins eds. Washington D.C. : Resources for the Future

Tietenberg, T. H. 2000 Tradable permit approaches to pollution control: Faustian bargain or paradise regained? in Property Rights, Economics and the Environment M.D. Kaplowitz ed. Stanford, Connecticut : JAI Press