Currencies and the Commodification of Environmental Law

By James E. Salzman, J. Ruhl. 2000

183 citations recorded by the source corpus.

If one compares environmental trading markets (ETMs), they all seem to share a basic feature--they all exchange commodities that are fungible. A CFC molecule, kilo of herring, or ton of sulfur dioxide seems much the same as another, both in terms of its identity and impact. It's trading apples for apples. Indeed ETMs must assume fungibility--that the things exchanged are sufficiently similar in ways important to the goals of environmental protection and resource allocation efficiency. Otherwise, there would be no assurance that exchanges were equivalent, that trading ensured environmental protection. This core assumption of fungibility, however, turns out to be less obvious and more problematic than first appears.In this Article we develop a comprehensive analytical framework for evaluating ETMs from the perspective of commodity nonfungibility and explore the challenges that nonfungibilities (trading apples for oranges) present. We argue that in order for ETMs to deliver on their promise of environmental protection, they must satisfy three standards of adequacy. "Instrumental adequacy" involves the choice of "currency" with which we value the traded commodities and carry out the exchange. A perfect ETM currency would accurately reflect ecological and social values and allow us to compare the exchanged commodities regardless of differences across the three dimensions of nonfungibility--type, space, and time. But nonfungibilities are present in almost all ETMs, most strongly in those trading habitat, and the perfect currency becomes simply too expensive to mint given time, knowledge, and financial constraints. Thus ETMs usually resort to using a crude currency--such as counting acres of wetlands--that will surely fail to reflect important values being exchanged or avoid negative externalities."Procedural adequacy" refers to ETM trading constraints adopted to compensate for less-than-perfect currencies. For example, if counting acres of wetland fails to account for the services delivered by different types of wetlands, we can restrict the ETM to in-kind trades. Naturally, increasing trading restrictions of type, space, and time decreases the volume of trading. ETMs using crude currencies thus must balance the desire to control externalities with the need to keep the trading market robust, or "fat." Through a case study of the wetland mitigation banking ETM, we demonstrate the inverse relation between currency adequacy and market restriction--i.e., the pressure on ETMs to keep markets fat even when it means sloppy accounting.Our discussion of "substantive adequacy" explores measures ETMs can take to police themselves when the combination of inadequate currencies and inadequate market procedures leaves the door open to trades that lead to loss of social welfare. We argue that the presence of significant nonfungibilities shifts the model of an ETM from a commodity market to a barter market, where discretion matters. We, therefore, call for use of ex post approval measures, in part to ensure meaningful valuation of the public goods exchanged and in part to counteract the agencies' and trading parties' inherent biases to encourage nonfungible trades. We further argue that it is inappropriate to use the conventional permitting process to carry out habitat trades and explore options for new institutional design of a "permit-plus" system that preserves the efficiency benefits of ETMs, while more clearly acknowledging the inherent costs in trading nonfungible commodities.

Subfields: Law, Political Science and International Relations, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/f28548c733f7d858b322b75473671432c6945c87

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Citations in the corpus

In markets we trust? Setting the boundaries of Market-Based Instruments in ecosystem services governance (2015, background): “Biophysical limits to commodification relate to the difficulties that arise in the attempts to break down ecological complexity into compartmentalized tradable units (Vatn and Bromley, 1994; Salzman and Ruhl, 2000) or, as Georgescu-Roegen (1971) would have put it, to the limits we encounter in our a”
Taming a Wicked Problem: Resolving Controversies in Biodiversity Offsetting (2016, background): “2015), issues of governance (Salzman and Ruhl 2000), and the many technical challenges associated with quantifying biodiversity losses and gains (Gonçalves et al.”
An assessment of market-based approaches to providing ecosystem services on agricultural lands (2007, background): “…water quality; Australia's Macquarie River Food and Fibre's payments to landowners for transpiration services achieved through afforestation (Salzman and Ruhl, 2000); payments by a hydropower plant in Costa Rica to upstream forest owners to reduce sediment loading through changed forest…”
Urban forests and pollution mitigation: analyzing ecosystem services and disservices. (2011, background): “Context varies according to locale thus decision makers should not assume that certain ecosystem services are equally important to all urbanites since ecosystem services e and their pollution problems e are location specific (Salzman and Ruhl, 2000; Wagner and Gobster, 2007; Wainger et al., 2001).”
Biodiversity offsets in theory and practice (2013, background): “But the impossibility of defining a consistent, fungible unit that comprehensively captures biodiversity (Purvis & Hector, 2000) means that biodiversity itself is not a tradable market commodity (Salzman & Ruhl, 2000; Walker et al., 2009), hence the need for proxies such as credits.”
Smart spatial incentives for market-based conservation (2008, background): “Some examples are conservation and wetland mitigation banking in the US (Salzman and Ruhl, 2000; Wilcove and Lee, 2004; Fox and Nino-Murcia, 2005) or markets schemes in Australia (Coggan and Whitten, 2005; Latacz-Lohmann and Schilizzi, 2005).”