From the point of view of the user, two components of financial burden are significant: (1) extraction or control costs, and (2) expenditures on permits. Although only the former represent real resource costs to society as a whole (the latter are merely transfers from one group in society to another), to the user both represent a financial burden. The empirical evidence suggests that when a traditional auction market is used to distribute permits (or, equivalently, when all uncontrolled emissions are subject to an emissions tax), the permit expenditures (tax revenue) frequently would be larger in magnitude than the control costs; the sources would spend more on permits (or pay more in taxes) than they would on the control equipment (Tietenberg, 1985).


The downside occurs when the investments being rewarded were initiated purely for the purpose of increasing the initial allocation of tradable permits. Not only are these investments inefficient, but rewarding them undermines the ethical basis for an initial allocation based on historic use.


The “new source bias” is, of course, not unique to tradable permit systems. It applies to any system of regulation that imposes more stringent requirements on new sources than existing ones.


Tradable permits systems are perfectly compatible with the principles of co-management. In this case the community would play a large role in defining the goals and procedures in the system; see National Research Council (1999:135-138).


This setaside has not been used because sufficient allowances have been available through normal channels. That doesn’t necessarily mean the setaside was not useful, however, because it may have alleviated concerns that otherwise could have blocked the implementation of the program.


The revenue is returned to the original permit holders rather than retained by the government, hence the name “zero-revenue auction” (Svendsen and Christensen, 1999).


This concern does not arise in all communities because in several fisheries and in air pollution control, the effect of any particular transfer or set of transfers is negligible.


These effects may be less pronounced in short river systems. This may be one of the reasons why tradable permit markets in water are so active in Chile (Hearne, 1998).


In an unprecedented complaint filed in California during June 1997, the Los Angeles-based Communities for a Better Environment contends that RECLAIM is allowing the continued existence of toxic “hot spots” in low-income communities. Under RECLAIM rules, Los Angeles-area manufacturers can buy and scrap old, high-polluting cars to create emissions-reduction credits. These credits can be used to reduce the required reductions from their own operations. Under RECLAIM most California refineries have installed equipment that eliminates 95 percent of the fumes, but the terminals in question reduced less because the companies scrapped more than 7,400 old cars and received mobile source emission reduction credits, which they credited toward their reduction requirements. The complaint notes that whereas motor vehicle emission reductions are dispersed throughout the region, the offsetting increases at the refineries are concentrated in low-income neighborhoods (Marla Cone, Los Angeles Times, as cited in GREENWIRE, 7/23/97:http:/www.eenews.net/greenwire.htm). Though this particular complaint was eventually dismissed by the court, the forces of discontent that gave rise to the suit are far from silenced.


In fisheries, for example, stock assessments sometimes depend on the size and composition of the catch. If the composition of the landed harvest is unrepresentative of the actual harvest due to illegal discards, this can bias the stock assessment and the total allowable catch that depends on it. Not only would true mortality rates be much higher than apparent mortality rates, but the age and size distribution of landed catch would be different from the size distribution of the initial harvest (prior to discards). In fisheries this is known as “data fouling.”


Prior to 1988, the expected positive effects of ITQs did not materialize in the Dutch cutter fisheries due to inadequate enforcement. Fleet capacity increased further, the race for fish continued, and the quotas had to be supplemented by input controls such as a limit on days at sea (National Research Council, 1999:176).


Not only has the recovery of monitoring and enforcement costs become standard practice in some fisheries (New Zealand, for example), but funding at least some monitoring and enforcement activity out of rents generated by the fishery already has been included as a provision in the most

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