Uninternalized externalities plague most other policy instruments as well. This precondition is not meant to differentiate tradable permit systems from other approaches, but rather to point out the conditions under which such systems work more smoothly.


Some empirical support for this proposition in implemented programs is beginning to appear. For example, one study of compliance behavior in the United Kingdom fishery (which was not an individual transferable quota, or ITQ, fishery) found that individuals who felt more involved in the management system had a statistically significantly lower probability of a violation (Hatcher et al., 2000).


Requirements of the act include the duty to end overfishing, to rebuild overfished stocks, to protect essential fish habitat, to reduce bycatch, and to consider fishing communities (National Research Council, 1999).


At least one major analysis of this relationship makes it clear that the Secretary of Commerce and the National Marine Fisheries Service have erred on the side of micromanagement rather than delegating too much authority to the regional councils (National Research Council, 1999:8).


Consider the following example from the Raymond Basin in California: “Under the Water Exchange Agreement, each party must offer to the ‘exchange pool’ its rights to water in excess of its needs for the coming year, at a price no greater than the party’s average water production cost. Parties anticipating that their access to water wil1 be inadequate to meet their needs for the coming year submit requests to the exchange pool. The watermaster matches the offers to the requests, with the lowest priced water allocated first, then the next lowest, and so on. The actual allocation does not involve the transfer of water, but rather the right to pump specific quantities of water” (Blomquist, 1992:87-88).


McCay (2001) provides examples of other forms of co-management in fisheries. Most of her examples do not involve ITQs, and those that do have limited participation by users.


For example, Article XIV of the California Constitution of 1879 denied the ownership of water to individuals and granted them a usufructuary right—the right to the use of the water (Blomquist, 1992). The 1981 Water Code in Chile stipulates that water is a national resource for public use, but rights to use water can be granted to individuals (Hearne, 1998).


One prominent exception is the New Zealand ITQ system. It grants rights in perpetuity (National Research Council, 1999:97).


Compare this case with a case where the rights were defined in tons. If biological conditions indicated the need to lower the TAC significantly, the need to confiscate existing rights might trigger suits seeking compensation against the resource manager.


Other systems achieve this result by allowing rights holders to lease the rights to others for a specific period of time.


Livingston (1998) reports on an unpublished World Bank survey that found that out of 35 developing countries examined, more than half had rainfall variability of 40 percent.


In the western United States, the number of rights expected to be fulfilled in any given year is determined by snowpack measurements and satellite monitoring of streamflows (Livingston, 1998).


The scheme is sufficiently flexible that entitlements could rise over time, fall over time, or be constant. The main condition is that the time path be specified for the duration of that particular series.


Some programs have additional requirements. In the lead phaseout program, the annual limits declined over time until, in the final year, they went to zero (Nussbaum, 1992). In the RECLAIM program in Los Angeles, the limits decline 8 percent per year (Fromm and Hansjurgens, 1996; Zerlauth and Schubert, 1999).


An interesting third possibility emerges from an examination of the air pollution control experience in Chile (Montero, 2000a). Apparently the use of a grandfathered system of allocation, coupled with the high rents from holding those permits, induced a number of previously undiscovered sources to admit their emissions in order to gain entry to the program.


For example, assigning rights in this way is considered one factor in how the United States was able to implement a system to control acid rain after many years of failed attempts (Kete, 1992).

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