Marketable Permits: Managing Local, Regional and Global Commons

Abstract

"This dissertation analyzes applicability of marketable permits for managing natural common-pool resources, especially the atmosphere as a sink for carbon dioxide (a global common-pool resource). It focuses on factors affecting 'performance' of marketable permits, which is operationalized as: (a) effectiveness to reduce resource overuse, and (b) market liquidity (number of trades, proportion of resource users who trade, and price dispersion). Multiple markets for common-pool resources are examined. These are: sulfur dioxide allowance trading, Wetlands Mitigation Banking, early emission trading programs, Regional Clean Air Incentives Market, Lead Phasedown Program, and production permits for ozone-depleting substances. Drawing on secondary data, this dissertation employs the Institutional Analysis and Development framework to examine the effects of the following factors on the performance of marketable permits: (1) resource characteristics affecting resource 'measurability'; (2) users' characteristics; (3) legal and regulatory environments; and (4) rules regulating users and resource-use. Three major findings emerge for devising rules to manage the global atmosphere as a sink for carbon dioxide. First, marketable permits perform better when the resource-use is severely limited by an authorized agency and the limits are enforceable at low costs. Given that only countries are parties to the Framework Convention on Climate Change, marketable permits for global atmosphere will have to rely on national limits enforced by national governments. Internationally, compliance with national limits will have to be reviewed periodically and non-compliance at the country level sanctioned. Second, countries should have autonomy to devise their own monitoring and enforcement systems. These systems need to be audited regularly by an accredited third party. Third, within and across countries, differences in the reliability of measuring resource flows attributable to various users will require non-uniform exchange ratios. These ratios should be determined by the scientific advisory board to the Convention, not by market mechanisms. Rather than having as many exchange ratios as resource users, various resource users will be classified into categories. National regulators should have the autonomy to classify projects into various categories. These categorizations will be reviewed regularly by third-party auditors. Buyer liability will create incentives for correct categorizations."