Do Initial Allocations of Property Rights Matter?

posted by Mark Edwards

If the last two years of American economic life have demonstrated anything, it is that property rights are not static.  Sometimes things that were once private property become public property (see, e.g., Motors, General).  Sometimes things that were once public property become private property, then become public property again, before they presumably become private property again (see, e.g., Mae, Fannie).  And sometimes things that were once considered inherently communal and thus inamenable to private property rights at all, become divided and privatized (see,e.g., the air).

Tradeable carbon emissions allowances are an example of the latter.  There’s a lot to like in the cap-and-trade programs proposed under the Waxman-Markey and Kerry-Boxer bills.  I hope some robust version of them passes and becomes law.  But one sticky issue that needs to be resolved is how initial allowances to fill airspace with carbon gases should be allocated.  Options include auctioning off all of the allowances, giving the allowances to existing carbon producers, and, most politically palatable, something  in between – some mixed proportion of free allocations and auctions.

Economist Robert Stavins, in the Coasean tradtion, has insightfully argued that  (with some caveats, including that transaction costs in this cap-and-trade program are similar to the transaction costs in others) the initial allocation of allowances doesn’t matter in most significant ways:  it will have no effect on the distribution of allowances after trading, and will have no effect on the total magnitude of emissions and their attendant social costs.

But there is another factor economists have not addressed, that could effect the total magnitude of emissions and their attendant social costs, and that may well depend in part on the method of initial allocations: compliance.

Law Professor Christine Parker and political scientist Peter May, among others, have demonstrated that compliance with business regulation is highest when the regulated businesses believe that the regulatory regime is fair.  Lower levels of compliance reduce the effectiveness of the regulation in producing the desired outcome, and increase the costs of achieving it.  In the world of carbon emissions, this would mean a higher total magnitude of emissions and a reduced benefit to the public through the higher costs required to achieve them.

My research into Icelandic fisheries suggests that in moving natural resources from communal to private property through cap and trade programs, initial allocations of rights do have an important effect on the perceived fairness of the regulatory regime, and thus on the willingness of the regulated to comply with it.

In Iceland, the government decided to protect fish stocks by freely allocating tradeable fishing rights and implementing catch quotas.  Permits were issued to fishing vessel owners based on their average catches during a three-year test period.  New entrants to the industry must now buy their way in by purchasing or leasing rights from others through the Icelandic Quota Exchange.  Although the system has been successful in reducing the overall catch, the perception that it is unfair has led to open defiance.  In an extraordinary case before the Icelandic Supreme Court, one fishing company did openly what many apparently do quietly — defied the system on the grounds that it was unfair.  

Transactions costs, of course, are inevitable, but it is not transaction costs that have produced resistance to the Icelandic system.  Rather, resistance is itself is a type of transaction cost, broadly construed, produced by the perceived unfairness of the initial allocation of rights.  In other words, the initial allocation of rights does indeed effect the overall effectiveness of a private property system. 

There has been considerable uproar over the potential free allocation rights to current carbon emissions producers.  Whether or not, as a matter of classical economic theory, the initial allocation of rights should effect the overall effectiveness of the program, the perception of fairness or unfairness will probably effect compliance with the system, and that in turn will effect its overall effectiveness.  It is important, therefore, for policy makers to bear in mind that the perceived fairness of initial allocations of property rights does indeed matter.

  December 5, 2009 at 9:53 am  Tags: Environmental Law, property  Posted in: Economic Analysis of Law, Empirical Analysis of Law, Environmental Law, Property Law, Uncategorized   Print This Post   One Comment

A Big Day for Enviros

posted by Steph Tai

Hi everyone! I’m psyched to be able to blog here, and to start on what to me is a really great legal day.

So how about that Supreme Court? And its decision in the two Clean Air Act cases today? The blogosphere’s been all over this already, but I have to say, as someone whose first Supreme Court amicus briefs (team-written with some very wonderful colleagues, I should say) were in these two cases, today was incredibly satisfying.[*] (Or, in more cas-speak: OMGWOW.)

One thing I’ve been trying to emphasize in my classes, though (perhaps to the frustration of my students) is that litigation is not the end all and be all. And these cases illustrate that. The Supreme Court’s decision in the global warming case, for example, is merely a remand back to the EPA to consider the petitioners’ request for a rulemaking–albeit one taking into account the Supreme Court’s guidance in Mass v. EPA. The EPA, therefore, could conceivably still reach the same decision on remand, albeit with more legally defensible reasoning. The PSD (Prevention of Significant Deterioration) case involving Duke Energy also involves a remand, and allows the lower court, on remand, to consider whether EPA’s allegedly inconsistent positions on this issue is “retroactively targeting twenty years of accepted practice.”

My anticipatory frustration is that although what happens next is as much a part of the whole story as the Supreme Court proceedings, there will be somewhat less press coverage of those later administrative (and political) proceedings. This is not to blame the press, really. I mean, it’s reflective of legal teaching, even, where the focus is more on the individual court “cases,” and less on the overall outcome (regardless of where the outcome “arises”). Hell, I see this in administrative law, where students are a lot more excited about reading current individual cases, than reading draft rulemakings and the comments made about them.

So I guess this is just a rambly way of getting to a question: how does one effectively “teach” the interaction between individual case decisions, administrative decisions, and broader societal politics? I don’t want to make my classes into any sort of poli sci/public administration class, and certainly couldn’t do effectively even if I wanted to. Yet I also believe that if we’re training students to advocate as effectively as possible for their clients, then we as educators should give them practice in thinking beyond strategizing about individual cases.

[*] A short recap: In Massachusetts v. EPA, the Supreme Court held that the EPA did have the authority to regulate greenhouse gases, and required it to re-review the plaintiffs’ request for a rulemaking. According to the Supreme Court, “Under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.” And in Environmental Defense Fund v. Duke Energy, the Supreme Court upheld the EPA’s regulations requiring permits for changes in power plants that lead to an annual increase in emissions, rejecting Duke Energy’s argument that permits can only be required when the changes lead to an increase in the hourly rate of emissions.

  April 2, 2007 at 11:16 pm  Tags: administrative law teaching, clean air act, duke energy, Environmental Law, mass v. epa  Posted in: Administrative Law, Environmental Law, Law School (Teaching)   Print This Post   6 Comments