Tradeable permits : policy evaluation, design and reform

187 Pages·2004·1.635 MB·English

by  OECD

Tradeable Permits
POLICY EVALUATION, DESIGN AND REFORM
Tradeable Permits
The search for cost-effective environmental policy measures in OECD countries
has led to an increase in the use of tradeable permit systems. After many years of
experimenting in a limited number of countries, tradeable permits in environmental
policy can now offer effective solutions. In particular, in the context of the Kyoto
POLICY EVALUATION, DESIGN
Protocol on climate change where several countries are now implementing carbon
trading schemes. An EU-wide system will also come into force in 2005. AND REFORM
However, careful monitoring and assessment of such systems and, in particular their
environmental effectiveness and economic efficiency, is crucial.
This publication brings together the reports presented at the 2003 OECD workshop on
Ex-Post Evaluation of Tradeable Permits and reviews the recent secondary literature on
the evaluation of tradeable permits and policy evaluation. Areas covered include:
(cid:127) How well tradeable permit systems work and the design features that contribute to
desirable outcomes.
(cid:127) How tradeable permits have been applied in a variety of different contexts including
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Tradeable Permits
Policy Evaluation, Design and Reform
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
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process of economic development; and
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accordance with international obligations.
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became members subsequently through accession at the dates indicated hereafter: Japan
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OECDConvention).
© OECD 2004
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TRADEABLE PERMITS:

POLICY EVALUATION, DESIGN
AND REFORM

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
1
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT

(copyright page)

2
FOREWORD
In 2003, the OECD Environment Directorate organised a workshop on the ‘Ex Post Evaluation of
Tradeable Permits’. The workshop brought together both economists who have been responsible for
undertaking policy evaluations of tradeable permit systems, as well as policymakers responsible for
the design and implementation of the programmes themselves. In addition to reviewing the efficiency
of existing tradeable permit systems, it also sought to shed light on the evaluation process itself, as
well as on more general issues associated with the links between policy evaluation and the public
policy process. This publication brings together the reports presented at the workshop, as well as a
general review of the recent secondary literature on the evaluation of tradeable permits, and on policy
evaluation generally.
Tradeable permits were chosen an especially suitable focal point for examining the wider issues
associated with policy evaluation since their use is increasing rapidly (including, but not limited to,
the requirements created by the Kyoto Protocol), and as such the demand for insights derived from
the evaluation of actual experience is great. In addition, tradeable permits have been controversial
and are somewhat unfamiliar to most decision-makers, and this adds to the need for solid information
upon which policymakers can base their decisions. And finally, tradeable permit systems are also
somewhat unique in that in the normal course of their operation they reveal information about the
costs of compliance and estimated emissions, and can even provide motivation for significantly
improving the quality of the data necessary for sound policy evaluation. This can significantly reduce
the cost and increase the reliability of ex post evaluations.
In this report we examine how tradeable permits have been applied in a variety of different
contexts. These include controlling air pollution, the degradation of wetlands, agricultural pollution,
water scarcity and fisheries depletion. In addition to focussing on a wide variety of natural resource
and pollution applications, the case studies cover a variety of geographic locations (Australia, the
Netherlands, New Zealand and the United States). Moreover, existing evaluations have employed a
wide variety of methodologies, assessing different evaluation criteria, and undertaken under different
institutional arrangements. As such, the workshop discussions, the case studies and the review of the
literature highlighted the diversity of uses to which evaluations can be put, as well as the diversity of
means by which they are undertaken and integrated with the policy framework more generally.
Tom Tietenberg (Department of Economics, Colby College, Maine) and Nick Johnstone (National
Policies Division, OECD Environment Directorate) were responsible for the preparation of the
publication. Special thanks is extended to the academics responsible for the preparation of the case
study evaluations, as well as the government officials who presented overviews on their national
policy evaluation systems, and provided valuable inputs to the workshop discussions. Carrie
Delecourt provided invaluable assistance both in the organisation of the workshop and in the
preparation of the final manuscript. The book is published under the responsibility of the Secretary-
General of the OECD.

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TABLE OF CONTENTS

Chapter 1. EX POST EVALUATION OF TRADEABLE PERMITS:
METHODOLOGICAL ISSUES AND LITERATURE REVIEW

By Tom Tietenberg and Nick Johnstone..................................................................................................................... 9

I. Introduction............................................................................................................................................................. 9
II. Criteria for the Ex Post Evaluation of Tradeable Permits...................................................................................11
III. Methodological Issues in Ex Post Evaluation.......................................................................................................14
IV. A Review of Ex Post Evaluations of the Impacts of Tradeable Permit System................................................20
V. Conclusions............................................................................................................................................................34
References....................................................................................................................................................................36

Chapter 2. EX-POST EVALUATION OF THE RECLAIM EMISSIONS
TRADING PROGRAMMES FOR THE LOS ANGELES AIR BASIN

By David Harrison, Jr., PhD.........................................................................................................................................45

I. Introduction.............................................................................................................................................................45
II. Overview of RECLAIM and Initial Experience....................................................................................................47
III. More Recent Experience with RECLAIM.............................................................................................................54
IV. Conclusions Regarding RECLAIM Experience....................................................................................................64
References....................................................................................................................................................................67

Chapter 3. THE US SO CAP-AND-TRADE PROGRAMME
2

By A. Denny Ellerman...................................................................................................................................................71

I. Introduction..........................................................................................................................................................71
II. The Political and Regulatory Context of Title IV...............................................................................................72
III. Institutional Location and Methodology............................................................................................................73
IV. Economic efficiency...............................................................................................................................................75
V. Environmental Effectiveness................................................................................................................................83
VI. Dynamic Effects.....................................................................................................................................................83
VII. Other Costs and Effects.........................................................................................................................................92
VIII. Conclusions and Implications.............................................................................................................................94
References....................................................................................................................................................................95

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Chapter 4. THE DUTCH NUTRIENT QUOTA SYSTEM: PAST EXPERIENCE
AND LESSONS FOR THE FUTURE

By Ada Wossink........................................................................................................................................................... 99

I Introduction............................................................................................................................................................ 99
II. Environmental Problems In Animal Agriculture And Initial Policy Regulation............................................100
III. Overview Of The Quota System...........................................................................................................................101
IV. Evaluation..............................................................................................................................................................108
V. Overview of Main Results.....................................................................................................................................111
VI. Conclusion: Implications For Policy Reform......................................................................................................116
VII. References.............................................................................................................................................................118

Chapter 5. EVALUATING THE NEW ZEALAND INDIVIDUAL TRANSFERABLE
QUOTA MARKET FOR FISHERIES MANAGEMENT

By Suzi Kerr.................................................................................................................................................................121

I. Introduction ..........................................................................................................................................................121
II. Overview of the Tradeable Permit Regime..........................................................................................................121
III. Context of Evaluation.............................................................................................................................................123
IV. Description of Assessment Methodology............................................................................................................125
V. Main Results ..........................................................................................................................................................126
VII. Potential Implications For Policy Reform............................................................................................................131
References....................................................................................................................................................................133

Chapter 6. LEARNING FROM THE MARKET: EX-POST WATER
ACCESS ENTITLEMENT AND ALLOCATION TRADING ASSESSMENT
EXPERIENCE IN AUSTRALIA

By Michael D. Young.....................................................................................................................................................135

I. Background...........................................................................................................................................................136
II. Definitional Overview...........................................................................................................................................137
III. The Condition of the Resource..............................................................................................................................137
IV. The Trading Environment.....................................................................................................................................137
V. Market Assessments..............................................................................................................................................138
VI. Overview of the Evaluation of the Tradeable Permit Regime.........................................................................144
VII. Concluding Comments.........................................................................................................................................147
Appendix 6.1 Executive Summary Of “Interstate Water Trading: A Two Year Review....................................147
References....................................................................................................................................................................152

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Chapter 7. COMPENSATING FOR THE IMPACTS OF WETLANDS FILL:
THE US EXPERIENCE WITH CREDIT SALES

By Leonard Shabman ....................................................................................................................................................155

I. Introduction............................................................................................................................................................157
II. Wetlands Credit Sales: Origins and Current Status............................................................................................160
III. Wetlands Credit Sales in their Regulatory Context............................................................................................160
IV. Toward a Market-like Credits Sales Programme................................................................................................164
V. Conclusion.............................................................................................................................................................166
Appendix 7A:The Approach to Programme Evaluation..........................................................................................167
References....................................................................................................................................................................169

Chapter 8. THE MANAGEMENT OF EX POST PUBLIC POLICY EVALUATIONS

By Tom Tietenberg and Nick Johnstone.....................................................................................................................173

I. Introduction...........................................................................................................................................................173
II. Policy Evaluation as Performance Management................................................................................................173
III. Timing of Evaluations to Encourage Policy Reform..........................................................................................174
IV. Ensuring Adequate Data Collection....................................................................................................................176
V. Providing Access to Data for Evaluators............................................................................................................177
VI. Selecting the Institutional Location of Evaluators.............................................................................................179
VII. Providing Appropriate Personnel Incentives....................................................................................................181
VIII. Resisting Strategic Behaviour..............................................................................................................................182
IX. Providing Adequate Quality Control..................................................................................................................183
X. Disseminating and Communicating Results......................................................................................................184
XII. Generating Demand for Evaluation....................................................................................................................185
XIII. Conclusions ..........................................................................................................................................................185
References....................................................................................................................................................................187
7
Chapter 1
EX POST EVALUATION OF TRADEABLE PERMITS:
METHODOLOGICAL ISSUES AND LITERATURE REVIEW
by
Tom Tietenberg
Department of Economics
Colby College, Maine1

and

Nick Johnstone
National Policies Division
OECD Environment Directorate1
I. Introduction
The workshop on the ‘Ex Post Evaluation of Tradeable Permits’ held at the OECD on January
21st–22nd, 2003 had multiple objectives. It sought not only to add to our stock of knowledge about how well
tradeable permit systems work and the design features that contribute to desirable outcomes, it also
sought to use detailed analysis of case studies to shed light on the evaluation process itself, as well as on
more general issues associated with the links between policy evaluation and the public policy process.
Alongside environmentally related taxes, tradeable permits (TP) are increasing in importance in
OECD Member countries as governments seek to introduce more flexible market-based instruments to
address environmental problems. However, unlike taxes they are quantity-based, rather than price-based,
environmental policy measures. A quantitative limit is introduced either as a maximum ceiling for “cap
and trade” schemes, or as a minimum performance commitment for “baseline and credit” schemes.
Moreover, these targets can be either in absolute terms or in relative terms. And finally the permits can be
denominated either in terms of 'bads' (i.e. pollution emission) or 'goods' (i.e. natural resources). Amongst
economists, and increasingly amongst the environmental policy community in general, it is felt that TP
schemes can provide significant benefits in terms of economic efficiency and environmental effectiveness
(see OECD 2002 for a full definition).
The workshop was designed to build on previous work at the OECD on the use of tradeable
permits (OECD 1999a, Godard 2001, OECD 2002), as well as the ex post evaluation of environmental policy
instruments (OECD 1997a and Smith 2002). Tradeable permits were seen an especially suitable focal point
for examining the wider issues associated with policy evaluation for a number of reasons:

1. The views expressed in this chapter are those of the authors and do not necessarily reflect those of the
institutes with which they are affiliated, or the OECD.
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