suggests that the incentives for collective action should be, and apparently are, quite different in these two cases.

The Baseline Issue

In general, tradable permit programs fit into one of two categories: a credit program or a cap-and-trade program. The credit program involves a relative baseline. With a credit program, an individual access baseline is established for each resource user. The user who exceeds legal requirements (say by harvesting fewer fish than allowed or emitting less pollution than allowed) can have the difference certified as a tradable credit.

The cap-and-trade program involves an absolute baseline and trades allowances rather than credits. In this case a total resource access limit is defined and then allocated among users. Air pollution control systems and water have examples of both types. Fisheries tradable permit programs are all of the cap-and-trade variety.

Credit trading, the approach taken in the Emissions Trading Program (the earliest program) in the United States, allows emission reductions above and beyond legal requirements to be certified as tradable credits. The baseline for credits is provided by traditional technology-based standards. Credit trading presumes the preexistence of these standards and it provides a more flexible means of achieving the aggregate goals that the source-based standards were designed to achieve.

Allowance trading, used in the U.S. Acid Rain Program, assigns a prespecified number of allowances to polluters. Typically the number of issued allowances declines over time and the initial allocations are not necessarily based on traditional technology-based standards; in most cases the aggregate reductions implied by the allowance allocations exceed those achievable by standards based on currently known technologies.

Despite their apparent similarity, the difference between credit- and allowance-based trading systems should not be overlooked. Credit trading depends on the existence of a previously determined set of regulatory standards. Allowance trading does not. Once the aggregate number of allowances is defined, they can, in principle, be allocated among sources in an infinite number of ways. The practical implication is that allowances can be used even in circumstances (1) where a technology-based baseline either has not been, or cannot be, established, or (2) where the reduction is short lived (such as when a standard is met early) rather than permanent.

The other major difference is that cap-and-trade programs generally establish an upper aggregate limit on the resource use, while the credit programs establish only an upper limit for each user. In the absence of some other form of control over additional users, an increase in the number of users can lead to an increase in aggregate use and the eventual degradation of the resource.



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