Other initial allocation issues involve determining both the eligibility to receive permits and the governance process for deciding the proper allocation.34 Controversies have arisen, especially in fisheries, about both elements. In fisheries the decision to allocate permits to boat owners has triggered harsh reactions among both crew and processors.

In some fisheries the allocation to boat owners has transformed the remuneration arrangements from a sharing of the risks and revenues from a catch on a predefined share basis to a wage system. Though this transformation can result in higher incomes for crew (Knapp, 1997), the change in status has been difficult to accept for those used to being co-venturers, thereby sharing in both the risk and reward of fishing (McCay et al., 1989; McCay and Creed, 1990).

Processors also have staked their claim for quota (especially in Alaska), albeit unsuccessfully to date (Matulich et al., 1996). The claims are based on the immobility of the processing capital and the fact that allocating quota to boat owners changes the bargaining relationship in ways that could hurt processors (Matulich and Sever, 1999).

Finally, some systems allow agents other than those included in the initial allocation to participate through an “opt-in” procedure. This is a prominent feature of the sulfur allowance program, but it can be plagued by adverse selection problems (Montero, 1999, 2000b).

Transferability Rules

Although the largest source of controversy about tradable permits seems to attach to the manner in the permits are allocated initially, another significant source of controversy is attached to the rules that govern transferability. According to supporters, transferability not only serves to assure that rights flow to their highest valued use, but it also provides a user-financed form of compensation for those who decide voluntarily to no longer use the resource. Therefore restrictions on transferability only serve to reduce the efficiency of the system. According to critics, allowing the rights to be transferable produces a number of socially unacceptable outcomes, including the concentration of rights, the destruction of community interests, and the degrading of both the environment and traditional relationships among users.

Making the rights transferable allows the opportunity for some groups to accumulate permits. The concentration of permits in the hands of a few either can reduce the efficiency of the tradable permits system (Hahn, 1984; Anderson, 1991; Van Egteren and Weber, 1996) or can be used as leverage to gain economic power in other markets (Misiolek and Elder, 1989; Sartzetakis, 1997). Although it has not played much of a role in air pollution control, it has been a factor in fisheries (Palsson and Helgason, 1995).

Typically the problem in fisheries is not that the concentration is so high that it triggers antitrust concerns (Adelaja et al., 1998), but rather that it allows small

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