BOX 5.1 The Zero-Revenue Auction
Although auctions have many desirable allocation characteristics, their use has been limited by the reluctance of resource users to pay for the resources they use. One mechanism that has successfully circumvented this barrier is the zero-revenue auction. It is currently used in the Clean Air Act's Acid Rain Program to control sulfur emissions.
After an initial allocation of IFQ shares based on historic catch or some other criterion, under a zero-revenue auction the government would take back some proportion of the allocation each year (approximately 3% in the sulfur allowance program) for sale in an auction. Quota holders are allowed to buy back the quota they put up to bid, but they will succeed only if they are the highest bidder. Revenue is returned to the holders of the auctioned quota shares. In principle, the auction could involve either quota shares (e.g., 0.5% of TAC) or annual quota (e.g., pounds of fish in 1999). Significantly, all components of auction transactions (e.g., price, identification of buyers, quantities transacted) are public information. Privately arranged transfers could also take place any time among eligible participants as long as the control authority was notified and the transfer was approved.
A zero-revenue auction could improve an IFQ program in several ways. First. it provides excellent information about prices, which is helpful not only to fishermen in planning their investments, but also to bankers as they seek to value this uncommon form of collateral. Public information about prices also serves to facilitate private trades outside the auction. Second, the zero-revenue auction guarantees the steady flow of IFQs in the market, ensuring that potential entrants are not precluded from fishing.