Tradable permit programs: What are the lessons for the new Alaskahalibut catch sharing plan?

Isabel L. Call a,n, Daniel K. Lewb

a Department of Agricultural and Resource Economics, 1 Shields Avenue, University of California, Davis, Davis, CA 95616, United Statesb National Marine Fisheries Service, National Oceanic and Atmospheric Administration, Alaska Fisheries Science Center, United States

a r t i c l e i n f o

Article history:Received 21 June 2014Received in revised form16 October 2014Accepted 18 October 2014Available online 26 November 2014

Keywords:Tradable permitsRecreational fishing quotaEmissions tradingWater quality tradingWater marketsTransferable development rights

a b s t r a c t

To address long-standing allocation conflicts between the Pacific halibut commercial fishing sector andrecreational charter (for-hire) sector in Alaska, an Alaska halibut catch sharing plan (CSP) is beingimplemented in 2014 that has a provision allowing the leasing of commercial individual fishing quota torecreational charter businesses. This one-way inter-sectoral trading allows for the charter sector toincrease its share of the total allowable catch while compensating commercial fishermen. This type ofcatch shares program is novel in fisheries. In this paper, the literature on non-fisheries tradable permitprograms (TPPs) that have similarities to the Alaska halibut CSP program is examined. Several successfulTPPs are discussed, including ones from emissions trading programs, water quality trading programs,water markets, and transferable development rights programs. They are then evaluated in terms of theirsimilarities and differences to the Alaska CSP program. Characteristics not part of the current CSP thatother TPPs have used and that may increase the likelihood for the CSP to be effective in achieving itsprimary goals (if they are implemented) are identified, such as allowing more flexible transfers(e.g., internal transfers), intertemporal banking, cooperative structures, and multi-year leasing.

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1. Introduction

Pacific halibut fishing in Alaska is dominated by two usergroups: commercial fishers and guided anglers using charterboats. The large commercial sector operates within an individualtransferable quota (ITQ) system that allocates revocable, butotherwise perpetual, access to a fixed share of the annual totalallowable catch (TAC) across participants. Meanwhile, the recrea-tional fishery includes a small, and until recently, growing chartersector which serves guided anglers targeting the same stock. Thegrowth in the recreational charter sector in recent years has led totensions with the commercial sector since there was an absence ofa hard allocation between the recreational and commercial sectorsbefore now. Over the past decade the recreational fishery has beenregulated primarily by periodically-updated limits on the size andquantity of fish each angler may retain, not by explicit catch limitsfor the sector. Because the charter sector's harvest levels haverepresented a relatively small share of the TAC over the past twodecades,1 there was little need for the formality of a market-based

allocation system like ITQs in that sector [45], at least prior to therecent growth that has led to an increasing share of the TAC beingharvested by the recreational charter sector. To address theresulting tension between the sectors, starting in the 2014 seasona catch sharing plan went into effect with two primary features:first, it explicitly allocates the annual TAC across both sectors; andsecond, it allows charter operators to lease quota from commercialfishers and offer them to anglers fishing from their boats.2

Commercial fishers, who are only rarely permitted to lease quotato each other, will now be able to lease to charter sectorparticipants, thereby gaining flexibility to manage their harvestswithin each year. For charter businesses willing to lease quota, thiswill allow them to offer their clients the opportunity to potentiallycatch and keep more halibut or ones that are not subject to size

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Marine Policy

http://dx.doi.org/10.1016/j.marpol.2014.10.0140308-597X/& 2014 Elsevier Ltd. All rights reserved.

n Corresponding author. Tel.: þ1 206 455 1419.E-mail addresses: ilcall@ucdavis.edu (I.L. Call), dan.lew@noaa.gov (D.K. Lew).1 In the two International Pacific Halibut Commission management areas

covered by the new CSP, charter catch has represented between 7.4% and 13.3%

(footnote continued)of total removals, relative to the commercial sector's share of 69.0–80.1%, between1996 and 2012. (Note that other removals include unguided sport fishing, wastage,and by catch.) These statistics were computed using data from ADF&G [1] andNPFMC [40] for Area 2C; NOAA [37] and NPFMC [41] for Area 3A; and Stewart [51]for both areas.

2 Each season, commercial fishers may lease quota, denominated in pounds, tocharter halibut permit holders (those charter boat operators that have a permit tohave clients fish for halibut). Upon lease of the pounds, the pounds are no longeravailable to the commercial fishers during that fishing season (subject to conditionsdiscussed later).

Marine Policy 52 (2015) 125–137

restrictions that may be placed on charter boat harvests. Thisunique system of one-way inter-sectoral transfers provides ameans of coordination between user groups with fundamentaldifferences in scale and objectives.

This paper reviews examples of non-fisheries tradable permitprograms (TPPs) and identifies lessons for the ITQ leasing provi-sions of the Alaska halibut catch sharing plan (hereafter denoted“the CSP”). Given the nascent nature of the CSP and the novelty ofmany of its features relative to other fisheries managementprograms, the experiences of non-fisheries TPP programs may bejust as instructive as other fisheries programs in outlining poten-tial instruments and features that may arise as it evolves.3 Thefocus here is on programs in which multiple asymmetric groupsengage in unidirectional trades, attempting to identify those inwhich established trading programs evolve to incorporateresource users previously excused or excluded from relevant regu-lations. The work is germane to a growing fisheries literature onthe application of catch share programs to new settings [12], aswell as the quest for more participatory regimes that combine theadvantages of standard ITQ approaches and fisheries cooperatives[18,10,3].

Established TPPs can provide useful insights for newer pro-grams, like the CSP. Jardine and Sanchirico [20] suggest that manyfishery ITQ programs in developing countries are a part of a secondwave of ITQs in new communities and settings that offer smaller,but potentially significant, economic benefits. The CSP can beviewed as part of this wave of new programs, correcting the“inadequate consideration” given to recreational fisheries in thefirst wave of ITQ program establishment ([48]; 152) and able tobenefit from the experience and regulatory structure of thecommercial sector's established ITQ program. Meanwhile, innon-fisheries settings, the lessons from emissions trading systems(ETSs) are being modified for water quality trading (WQT) pro-grams [13,46], which are slowly gaining traction after years ofresearch. Unlike many ETSs, but like some fisheries managementsettings, WQT programs must directly address the spatial specifi-city of an externality-generating activity. A similar type of TPPused in land use planning is transferable development rights(TDRs). TDRs are particularly relevant to the CSP because tradingis typically limited to unidirectional transfers from “sending” to“receiving” zones, just as trades under the CSP flow only from thecommercial sector to the charter sector. This unidirectionality isalso a common characteristic in western water markets (WMs),where growing urban water demand is being met by increasingflows of water from the agricultural sector.

The next section presents an overview of key features of theCSP. This is followed by discussions of ETSs, WQT programs, WMs,and TDR programs, with general program characteristics as well asdetails on several applications. The paper concludes with asummary and synthesis of key lessons for the CSP.

2. The Alaska halibut catch sharing plan

The CSP [38] replaces the previous system for allocating halibutbetween the commercial and charter sectors and introduces a newsystem for transferring catch from the commercial to the chartersector. Under the previous system, projected charter catch (alongwith other non-commercial removals and projected commercialwastage) was subtracted from Total Constant Exploitation Yield(Total CEY) to establish the commercial sector's allocation eachyear [37]. This allocation is divided among members of the

commercial sector as “quota pounds,” based on the number of“quota shares” they hold that designate the portion of each year'stotal allocation they can harvest. Within a given year, quota shareholders may engage in a very limited amount of leasing of quotapounds.4 If they fail to exhaust their quota pounds, they may savea small percentage for use in the following year as underage;similarly overage provisions allow them to overfish by a smallamount that is deducted from their quota pounds the followingyear (along with a penalty).5 The charter sector, meanwhile (asnoted earlier), has been constrained solely by specific manage-ment requirements, such as daily limits on the number and size offish that can be caught, which were designed to limit total chartercatch to guideline harvest levels (GHLs) set by the North PacificFishery Management Council to approximate area-specific histor-ical catch levels. GHLs served as benchmarks rather than directrestrictions and were exceeded every year from 2004 to 2010 inInternational Pacific Halibut Commission Management Area 2C,which spans waters off southeast Alaska.6 Although limited fishstocks resulted in lowering of both the GHL and commercial catchlimits over recent years, the percentage of total catch taken by thecharter sector increased. Given the status of the stocks andhistorical shares, “it [was] not possible for any allocation underthe proposed [catch share] to make participants in both fisherieswhole economically” [37], p. 39130).

The need to address allocation-related conflicts between thetwo sectors was clear as early is the initial implementation of theIFQ program, but disagreement precluded the establishment of acharter IFQ program or the integration of the charter sector intothe commercial IFQ program. It took more than a decade for thenew CSP, ratified for the implementation in the 2014 season, toemerge as a viable compromise. Under the program, regulatorsdecide how much of the Total CEY goes to each sector at the samepoint in the regulatory process each year, according to a specificformula. Both sectors receive higher allocations when biologicalconditions result in a higher combined catch limit. To providestability to the charter sector, its relative share is higher when thecombined catch limit is lower, but lower when the combined limitis higher, meaning that it receives a smaller negative shock in badyears and less of the windfall in the good years than thecommercial sector. This can be justified by the supposition ofdeclining marginal utility of recreational fishing [7].

What makes the CSP a tradable permit program is the leasingprovision by which commercial fishers are authorized to leasetheir annual allocations to charter operators. During the transac-tion, the specified amount of the commercial fisher's current-yearquota allocation (i.e., their quota pounds) is converted frompound-units to fish units, called guided angler fish (GAF) usingan average weight of a GAF halibut for the previous year [37].7

While still subject to catch regulations, such as daily bag limits and

3 A general examination of similarities and differences between fishery ITQprograms and non-fishery TPP programs can be found in National ResearchCouncil [32].

4 Leases in the commercial sector are allowed only within one of four vesselclasses or for extenuating circumstances, with the intention of maintaining anowner-operated fleet [36] out of concern for the “linkages between fisheries andsocial and economic life in fishery dependent communities” [42]. Leases accountedfor a little over 11% of the volume of transfers between 2004 and 2013 in both Area2C and Area 3A [35].

5 Note that the Total CEY is computed conservatively accounting for theabundance, size composition, and lifespan of halibut so that small overages donot incur the risk of stock collapse.

6 The CSP covers two International Pacific Halibut Commission managementareas of the Alaska halibut fishery, Area 2C in the southeast Gulf of Alaska and Area3A in the south central Gulf of Alaska.

7 The rules for conversion of pounds into GAF account for the differencebetween the weight of charter-caught and commercial-caught fish, but not anypotential price effects of GAF that will encourage charter anglers to retain largerfish than those caught the previous year. If this is a problem, it is most likely tooccur in the first year when average net weight of all charter halibut in the prioryear (before the launch of the CSP) is used instead.

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size restrictions, guided anglers can now potentially avoid thesemanagement measures if the charter operators they use hold GAF.A guided angler using a charter operator's GAF is subject to therestrictions placed on unguided anglers, which in recent years havebeen less severe. For example, suppose that unguided anglers havea daily limit of two fish of any size and guided anglers have a dailylimit of one fish with a maximum length of 37 in. The guidedangler may exceed the limits in one of two ways. Using one GAF,they could retain one fish 37 in. or less and one of any length.Using two GAF, they could retain two fish larger than 37 in. Otherthan the ability to lease quota pounds to members of the chartersector as GAF, the new CSP makes no changes in the managementof the commercial sector.

The CSP essentially integrates charter operators into theseasonal market for quota pounds which has operated in alimited fashion among commercial fishers since 1995. Under theCSP, a fundamental difference in the treatment of quota in thetwo sectors is that commercial fishers' quota shares representperpetual access to a fixed percentage of the commercialsector's share, whereas charter operators may only access quotapounds (in the form of GAF), which are available only during agiven fishing season. Perpetual access may incentivize steward-ship among quota share holders, including self-policing andmonitoring of other users [12]. When quota are both perpetualand transferable, there are mechanisms for consolidation amongmore efficient operators and the removal of excess capital (e.g.vessels) that spread the increase in the fishery's value acrossboth buyers and sellers of quota [5]. By leaving perpetual accessin the hands of commercial fishers, the CSP leaves the respon-sibility for resource stewardship to the commercial sector. Thecomposition of the charter sector will adjust if more profitableoperators use GAF-leasing to capture a larger share of therecreational market, but any charter operators exiting themarket will not be compensated like commercial fishers whocan sell their quota shares when they exit.8

Other than unidirectional transfer of ITQ as GAF, the onlyother type of transfers authorized by the new CSP are volun-tary and mandatory returns of GAF to (commercial) quota-holders in the event that they are not used by anglers guidedby the charter operators holding them. Voluntary returnsinvolve written agreements between parties specifying thedate of the return. Returns are mandatory as the season drawsto a close; specifically, 15 days before the end of the commer-cial halibut fishing season, a date published annually in theFederal Register. In one of the few provisions for intertemporalflexibility, returned GAF may count toward commercial fishers'underage and associated carryover for the next fishing year.Because GAF is automatically returned, charter operators arenot allowed to carry over unfished GAF from year-to-year. Tothe extent that more carryovers may compromise the long-runhealth of fish stocks, charter operators' lack of access tounderage is aligned with their limited intrinsic incentive tomaintain fish stocks relative to commercial fishers with per-petual quota shares.

Commercial fishers are subject to many limits on ITQtrading that are maintained in the new system, and wellcataloged elsewhere [26]. The focus here is on provisionsrelated to the new CSP. Quantity restrictions of the leasingprovisions apply to both commercial and charter participants.Commercial quota share holders may lease out no more than1500 pounds or a fixed percentage of their annual allocation as

GAF.9 Meanwhile, charter operators can lease no more than400 or 600 GAF per year per charter halibut permit they own,depending on the number of anglers they are permitted tocarry.10 The restrictions “are intended to prevent a particularindividual, corporation, or other entity from acquiring anexcessive share of halibut fishing privileges as GAF” and toallow “all charter businesses the opportunity to lease IFQ asGAF” [37].

If they are binding, quantity restrictions limit the extent oftrading, thus reducing potential gains for both commercial andcharter operators. The incidence of the other transferabilityrestrictions falls mainly on the charter sector. As noted above,the GAF return provisions extend commercial operators' ability toaccrue underage (i.e. to bank a certain amount of one year's quotaallocation and harvest it the following year) to quota that wereconverted to GAF. Consequently, the GAF returns provisionsimplicitly restrict charter operators from having the same inter-temporal flexibility as commercial operators. Similarly, whilecommercial operators are granted a limited amount of overage(i.e. harvest exceeding their allocation that are borrowed from thefollowing year's allocation), charter operators are precluded fromusing GAF they do not currently hold.11 Charter operators are notonly excluded from inter-year flexibility but also some flexibilityacross trips, as they are prohibited from obtaining GAF afterharvesting the fish to which they apply. Finally, the leasingprovisions of the CSP do not allow GAF transfers across charterhalibut permits (CHPs). However, because CHPs are not tied tospecific vessels, operators with multiple vessels are not prohibitedfrom changing their plans regarding which boat can offer guidedanglers GAF.

Fisheries quota programs have arisen around the world with awide range of goals including sustainability and economic effi-ciency. When quota programs reduce the likelihood of TACoverages, they reduce environmental harm. By permitting tradebetween participants, they can result in the minimization offishing costs in single-species fisheries [48] or, in the case ofbycatch trading programs, they provide a buffer against unpredict-ability of fish stocks [44]. In some instances, they have served tomanage conflict between user groups [23]. While addressing someof these goals, the Alaska halibut CSP is a unique new innovationto quota-based fisheries management, extending an establishedand well-functioning quota market to fishers long regulatedwithin a very different framework and thus unaccustomed toconsidering directly the economic costs of their own harvest onother users. Although the charter sector might eventually run upagainst ecological constraints and develop its own coordinationmechanism in isolation, the historic dominance of the commercialsector within the same fishery means that competition, ratherthan pure scarcity, is the catalyst for this institutional innovation.By bridging two user groups whose competition poses differentproblems for regulators than they would cause in isolation, theCSP is not typical fishery management quota program. Becauseother settings outside fisheries demonstrate similar creativeblends of market-based and command-and-control regulation

8 Charter operators may sell their charter halibut permits, which are requiredin order to obtain GAF (discussed further below), but doing so would compensatethem only for access to lease contracts, a less valuable attribute than quota sharesthat can be sold by members of the commercial sector.

9 The maximum percentage of quota holdings that can be leased out is 10% forfishing in Area 2C and 15% for Area 3A.

10 Charter boat operators are required to have a “charter halibut permit” (CHP)that specifies the number of anglers that may fish for halibut on the permit per trip.As of October 2012, the average number of anglers allowed to fish at a time per CHPwas 6.1 (see http://alaskafisheries.noaa.gov/ram/charter/apps_permits.htm formore information).

11 When quota are viewed as assets that can be owned and GAF as asset flowsthat can only be leased, the rules for underage and overage make sense. Charteroperators are unable to own the asset, and therefore it is natural that they areunable to borrow against future year's allocations stemming from the asset.

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across diverse user groups, a wider range of TPPs is tapped forinsights into the likely success and challenges of the CSP.

3. Tradable permit program (TPP) types

Three types of non-fisheries TPPs are outlined to facilitate acomparison with the CSP.12 The first two, emissions tradingsystems (ETSs) and water quality trading (WQT) programs, fallwithin the broader category of pollution control programs. Bothwater markets (WMs) and tradable development rights (TDR)programs address the allocation issues resulting from urbanpopulation growth, which puts pressure on water and land usedfor agricultural and other rural activities. Pollution control TPPs(ETS and WQT programs) explicitly manage environmental extern-alities, while WMs and residential development-centered TDRscan also be framed in terms of the negative environmentalexternalities generated by water diversion and poor siting,respectively.

All TPPs seek to reduce environmental externalities by impos-ing a cap on externality-generating behavior. By allowing permitsunder that cap to be tradable, they also reduce the economicexternalities of achieving the cap. The most obvious environmen-tal externality in fisheries is overfishing; however, the use ofcommand-and-control regulation to prevent exceeding TACs canresult in economic externalities in the form of the race-to-fish,which incentivizes overcapitalization and results in lower thannecessary economic returns. In fisheries the choice and enforce-ment of the cap to reduce long-run environmental externalities,which is often achieved by other means than a TPP, is lesscontroversial than tradable permits systems to reduce economicexternalities. However, some of the other TPPs reviewed here havebeen established as a means of building consensus around theimposition of new regulation of environmental externalities.

3.1. Emissions trading systems (ETSs)

TPPs for air pollution, or ETSs, are well-studied. First hypothe-sized in the 1960s by Crocker [8] and Dales [9], they have beenshown to be equivalent to taxes in reducing uniformly-mixedpollutants to a specified level [2,52]. The greater the variance ofcontrol costs across space, time, and the regulated individuals, thegreater the potential cost savings of TPPs relative to command-and-control regulation, such as individual-specific caps (e.g. vesselor facility caps) and mandatory technological improvements [11].If regulators are uncertain about the costs and benefits of control,and if the costs and benefits are uncertain, TPPs also outperformtaxes [49].

ETSs were first applied in the US in 1976 under the Clean AirAct [53]. Instead of prohibiting new businesses from locating inhigh-emissions areas, the US Environmental Protection Agency(EPA) began to certify voluntary emission reductions by existingfirms as emissions-reduction credits that new firms could buy inorder to operate. This not only eliminated the tradeoff betweeneconomic growth and environmental goals, “but also made eco-nomic growth the vehicle for improving the air. It turned theproblem on its head and made it part of the solution” ([53], p. 46).Before long, the program was expanded to allow trades betweenexisting businesses and across time via credit banking.

Three particular ETS programs provide key points of compar-isons to the CSP: the US Lead Phasedown, Los Angeles' RegionalClean Air Incentives Market (RECLAIM) for NOx and SO2, and the

Northeast NOx Budget Trading Program. All three programs aresimilar to the CSP and other fisheries management regimes in thatthe demand for credits is generated by a program-wide cap.

Before making comparisons, it is important to bear in mind animportant difference in how the cap operates between these typesof TPPs. In ETSs, the cap is typically designed to shrink over time,though it may ultimately settle at some non-zero level.13 Conse-quently, ETSs are often framed as phasedowns, seeking a cost-effective way to achieve reductions in environmental externalities,whereas the CSP is designed more as an efficiency-improvingallocation of a given level of externalities (though the cap variesover time in response to fish stock level). For this reason, it isinstructive to attempt to distinguish successful credit-trading fromsuccessful credit-reduction.

3.1.1. Lead tradingThe US Lead Phasedown between 1978 and 1987 is an early

example of the successful application of the theory of ETSs [34].Since the 1920s, refineries had added lead as a cheap way toincrease fuel octane levels and increase engine performance.Around 1975, the advent of catalytic converters in all cars requiredthe use of unleaded fuel, and the US EPA stepped in to speed upthe lead phasedown in light of the negative health effects ofleaded gasoline emissions. The agency initially relied on technol-ogy standards and binding performance standards for lead contentfor individual refineries (much like the use of gear restrictions andvessel-specific caps in fisheries), but incorporated a tradingcomponent in 1982 when EPA regulations (along with fleet turn-over) had already halved average rates of lead per gallon. Bankingof lead permits was allowed between 1985 and 1987. By this point,the phasedown was mostly complete and a very low uniformstandard was imposed on refineries. In 1996, lead additives werebanned altogether.

An important mechanism underlying the lead ETS was the“emissions bubble” that extended the individual caps acrossmultiple refineries, making them jointly responsible for reducingaverage lead content per gallon.14 Bubbles encouraged refineriesto form groups, much like fisheries cooperatives regulated bycooperative-level fishing caps [6]. Each refinery in a bubble facedsteep penalties for non-compliance with its own size-specificstandard, adjusted to account for trades within the bubble.

Credit banking was also allowed, whereby refineries could savesome of their credits relative to the 1985 standard for use some-time before 1987. Banking provisions functioned like ITQ underageprovisions, providing intertemporal flexibility over a limited hor-izon. Trading and banking co-existed throughout 1985, but tradingwas eliminated at the beginning of 1986. Thus, the only source offlexibility for refineries in the last two years of the phasedownwastheir own prior reductions in lead additives per gallon [34]. Ban-king has been credited as a key to the success of the program [49],but has also been also critiqued for promoting hoarding ratherthan trading [47].

One argument in favor of an ETS-approach to the lead emissionsproblem was the disproportionately high compliance cost for smallrefineries [49]. Held to less severe standards and granted extendeddeadlines for compliance, small refineries also benefitted directly fromaccess to purchasable credits. Purchasing credits in the early yearsessentially extended their deadline for making the capital investmentsnecessary to reach targets. Consequently, small refineries were typi-cally permit buyers rather than sellers [34], and the phasedown can beframed as a case study of unidirectional permit trading between

12 Note that many terms are used to describe the unit of trade in various TPPs,including quotas, credits, and permits; they are treated as interchangeable here.

13 This feature of ETSs is shared by water quality trading (WQT) programs andis discussed further below.

14 The official term was “inter-refinery averaging”.

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distinct user groups. A key difference between the US Lead Phasedownand fisheries quota programs is the progressive reduction in the capover time.

3.1.2. NOx tradingTwo relevant ETSs regulating nitric oxide and nitrogen dioxide

(NOx) emissions resulting from combustion and responsible forground-level ozone problems (i.e. smog) in densely populatedareas are now discussed. Los Angeles' Regional Clean Air IncentivesMarket (RECLAIM) for NOx and SO2, begun in 1994 and stilloperational, was the first major ETS implemented by a local jur-isdiction. It is now managed by the South Coast Air Quality Dist-rict, which covers portions of four counties representing nearlyhalf of California's population. Many industries are included, suchas refineries, power plants, and cement factories. Two innovationsaddress concerns about overconcentration of emissions. First, dueto the geography of the Los Angeles basin, emissions generated incoastal areas drift inland, exacerbating air pollution there. Toaddress this, the coastal zone was distinguished from the inlandzone, and firms in the coastal zone are prohibited from usingcredits generated inland. Second, although banking is prohibited,participants are grouped into two overlapping reporting periods,giving them some degree of intertemporal flexibility to trade withthose in a different reporting period [11].

Begun a few years later in 1999, the Northeast NOx BudgetTrading Program (NBP) was the first major ETS to transcend statelines [11]. Operating in several states and Washington, D.C.,15 itcovers a fairly homogeneous group of large electricity generatorsand industrial boilers, though states may choose to incorporateother industrial sources. The program has been implemented inthree phases (1999–2003, 2003/4–2008, and 2009 to the present),each with lower NOx caps, and administered by different regula-tory bodies.16 The caps are set at the state-level, allowing stateregulators flexibility in meeting them; in all cases, states furtherpartition the cap across firms based on historical emissionslevels.17 Initial allocation rules and guidelines for trading aredecided by individual states, though in both of the first twophases, the EPA provided a model rule, including provisions fortrading, banking, cross-jurisdictional trades, administration, andmonitoring. Some, but not all of these provisions could be adaptedby states [31].

One notable provision of the NBP, eventually adopted in thesecond phase by all but one state, allows states to set asideportions of their NOx budgets for new firms and/or energyefficiency and renewable energy projects [31]. Like the leasingprovisions of the Alaska halibut CSP, the NBP set-asides createspace in the industry for new entrants. Uncertainty over how newentrants will utilize their shares is addressed by allowing theallocations to return automatically to more-established partici-pants; in the case of the NBP, set-asides remaining at the end of aseason were allocated to regulated firms in proportion to theiroriginal allocations.

In the NBP, trading operates only during summer months,when NOx emissions are most damaging to ozone levels. Provi-sions for inter-year transfers could lead to negative environmentalconsequences in such a setting, much as overfishing is a concernfor fisheries that limits underage and overage provisions. The

NBP's solution is to allow a special kind of banking called Pro-gressive Flow Control, which limits the use of banked emissions ina given year to 10% of that year's cap. Once 10% of the cap isreached, additional banked credits can only be redeemed for halftheir initial value [11].

Both the NBP and RECLAIM are considered successful in light ofthe overall NOx reductions that have been generated. The NBP iscredited with improving air quality in 80% of the worst areas itcovers [31] and facilities covered by RECLAIM have reducedemissions by 20% relative to facilities still regulated by com-mand-and-control policies [14]. Both programs involve progres-sive reductions in emissions caps, a key difference between themand the CSP. In RECLAIM, initial allocations actually exceededexpected emissions in order to promote early participation, butwere reduced to half of baseline levels over the following 10 years.After 2003, they were expected to be constant. The NBP requiredoverall emissions reductions in two phases, 1997–2002, and 2003–2008. However, unlike the US Lead Phasedown, these progressivereductions did not culminate in full “phase-outs” of the pollutantbut rather stabilized it at a fixed level. Although the progressivecap reductions typical of ETSs should make us cautious aboutcomparing ETS program features to the CSP, they contribute to abroader definition of success that focuses not on the environ-mental benefits of meeting the caps but rather the creation of awell-functioning market that allows participants to meet the capsat the lowest economic cost.

3.2. Water quality trading (WQT)

Water quality trading is generally less advanced than emissionstrading due to the diversity of water pollution sources and theincreasing contribution of nonpoint sources to effluent loads [54].WQT programs begin with nutrient caps on individual facilities ora watershed, which can then be coupled with a system in whichdischarge allowances (from regulated sources) or reduction credits(from non-regulated sources) may be traded. Nonpoint sources aretypically not regulated,18 but may be included in trading programsif a system is developed for generating verifiable reduction credits.Because there is often a greater differential in marginal abatementcosts between point and nonpoint sources than point sources,there are substantial gains to including nonpoint sources in WQTprograms even when they are not directly regulated [13].

The centrality of point sources in almost all programs emanatesfrom the relative ease with which they can be monitored and thelow costs of allocating emissions caps among them. In the US, theClean Water Act of 1972 requires states to measure nutrient loadsin water bodies and impose Total Maximum Daily Loads (TMDLs) ifthey are too high. TMDLs serve as regional emissions caps. Mean-while, National Pollutant Discharge Elimination System (NPDES)permits are allocated to individual firms based on the equipmentthey use. Compliance with NPDES is high among point sources, but“the gains from point source controls are reaching their limits”([13], p. 148). Pollutants from nonpoint sources are beginning toexceed those from point sources, making compliance with NPDESpermits insufficient for meeting TMDLs in some regions. Mean-while, the costs of emissions reductions by nonpoint sources areoften lower than those by point sources [15]. Not surprisinglythen, nonpoint sources are increasingly being included in regula-tory frameworks.

Except under special provisions decided on a case-by-casebasis, the EPA's WQT policy prohibits purchased credits fromoffsetting sources' compliance with their NPDES permits; trading

15 The number of participating states has varied over time, but began with 22.16 In early phases of the program, the EPA was the primary administrator, but

as of 2008 states were required to administer it. See Napolitano et al. [31] for moredetails.

17 Some states update firms' allocations periodically, based on lagged emissionslevels, to account for entry and exit of electricity-production units. The incentive toincrease production in order to receive higher future allocations is consideredoffset by the cost of waiting out long lags [11].

18 New Zealand's Lake Taupo Nitrogen Trading Program is the only nonpoint–nonpoint source trading program in the world [15].

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is intended to facilitate compliance with TMDLs only when pointsources' full compliance with NPDES permits fails to satisfy region-wide TMDLs, prompting additional regulations for point sources[13]. These regulatory barriers are one reason WQT programs havefailed to take off as a primary mechanism for managing waterpollution.

Similar to some NOx and many other air pollutants, effluentsare non-uniformly mixed pollutants. Therefore, considering theheterogeneity of both private and social costs of effluents, theiroptimal allocation across space is not guaranteed via free trading.The solution in many WQT programs is trading ratios, whichrequire participants in sensitive areas to purchase more than onereduction credit for every unit of their own abatement offsetthrough trading. Trading ratios are used in 25 of the US's 28 WQTprograms [15] and, if well-chosen, offer a solution that can“increase the benefits of water quality regulation if high-damagesources also have high abatement costs” [13], p. 159, meaning thatthey would invariably choose to buy permits rather than engage intheir own abatement. It is obvious, however, that requiring tradingratios runs the risk of preventing cost-effective achievement ofenvironmental goals.

Although enthusiasm for WQT programs has persisted sincethe Clean Water Act of 1972, few programs have demonstratedhigh levels of trading [21,13]. Here, three programs are reviewed.The Minnesota River Basin Trading Program and the Great MiamiTrading Program in Ohio are both active, but because they arerelatively new, little data are available on their structure orfunctioning. Begun almost 30 years ago, the Lake Dillon WQTprogram in Colorado is the most-studied but not very active; theintensive evaluation of a range of available program details none-theless allow its lack of trading activity to be instructive.

The Minnesota River Basin Trading Program, established in2006, allows for bilateral exchanges in phosphorous effluentpermits across 47 point sources (including publicly owned treat-ment works and industrial point sources). Forty-five point sourceshave participated in trades thus far, including 17 facilities in 2011.One program feature that has proved crucial is “aggregate per-mits” (similar to fisheries cooperatives and ETS bubbles) that allowmultiple point sources to share a single permit and decide amongthemselves how to allocate the effluents. Trading ratios aredefined for each point source pair and range between 1.1:1 to1.2:1. Although very little is published on the program, Fisher-Vanden and Olmstead [13] identify it as one of the most promisingWQTs for future research.

The Great Miami Trading Program is a “prototypical WQTprogram, [in which] a municipal wastewater treatment plant…offsets a legal requirement to reduce its pollution load by purchas-ing credits from farmers who adopt nutrient-reducing practicessuch as conservation tillage” [33], p. 156. There are 314 pointsources, of which seven municipal wastewater treatment plantsare identified as the primary dischargers. More than 1000 farmersin the watershed are eligible to apply for funding from the GreatMiami Trading Program for newly-implemented managementpractices that reduce nutrient loads (nitrogen and phosphorus),and the program is unique among WQT programs in allowing adiversity of management practices. Unlike other WQT programsmotivated directly by TMDLs emanating from federal policy, thewatersheds covered by the Great Miami program are not subject tobinding nutrient criteria; all agreements are made in anticipationof future regulation. “Investor” point sources buying credits at thisearly stage and banking them for future use are receiving lowertrading ratios than “contributors”will receive once regulation goesinto effect. In this case, the trading ratio-based subsidy is thedriver for credit demand.

The Lake Dillon WQT program was the first point-nonpointWQT program in the US and has been written about extensively

[21,50]. At its inception in 1984, four municipal wastewatertreatment plants were identified as point sources and issuedNational Pollutant Discharge Elimination System (NPDES) permitsbased on their 1983 flows, which capped total emissions for theLake Dillon watershed [54]. At this time, half of the controllablephosphorus loads originated from non-point sources, notablyprivate sewage disposal systems. EPA cost studies estimated thatnonpoint sources could reduce the same amount of phosphorus asthe four point sources at half the cost [21]. Consequently, tradesbetween point and nonpoint sources in existence prior to 1984were allowed in the management plan, but at a 2:1 trading ratio(i.e. point sources offsetting one credit of their own abatementmust buy two reduction credits from non-point sources).

Although a phasedown of total effluents was built into theinitial Lake Dillon effluent management plan, regulators weremore concerned about expected increases in effluents than theneed to reduce effluent loads below the baseline. The program'sinclusion of non-point sources seems well-poised for changingconditions in the region; since 1984, nonpoint sources haveovertaken point sources in terms of their share of phosphorusemissions. New nonpoint sources are held to very strict man-datory control practices and required to offset their phosphorusloads by buying credits. Credits are generated by any entityinstalling new control structures or by pre-1984 nonpointsources reducing emissions. Although nonpoint sources existingprior to 1984 are not directly regulated, the program technicallyallows for nonpoint–nonpoint trades including nonpointsources established after 1984. However, there is no evidencethat any trades under these provisions have occurred. Onereason may be the adoption of new waste-removal technologyby point sources, which effectively eliminated their demand forcredits [13].

As a TPP focused on incorporating users previously excusedfrom prevailing management systems, WQT programs are argu-ably part of the second wave of pollution control TPPs, much likethe CSP is part of the second wave of market-based fisheriesmanagement. The fear of generating both spatial and temporalhotspots has led to severe restrictions in trading across waterpollution sources and over time, consequently limiting the abilityof programs to reduce compliance costs by reallocating effluents.The use of aggregate permits in the Minnesota River Basin WQTprogram and banking in the Great Miami WQT program indicate arange of methods for relaxing these restrictions that may berelevant to the CSP.

3.3. Water markets (WMs)

In contrast to WQT programs, water markets (WMs) haveexperienced considerable trading activity. This is particularly truefor western states, where property rights for water diversionsare well established.19 One of the primary concerns for designersof WMs is their performance in drought years. Temporarywater banks and options markets both address drought, withtemporary water banks emerging as an ex post mechanism toreallocate water toward the most valuable use and optionsmarkets offering option holders the ex ante guarantee that theycan lease water at a pre-arranged price from permanent rightsholders in times of drought [16]. Here the focus instead is onpermanent water banks, which serve as clearinghouse

19 The legal logic differs substantially by geography, with wetter eastern statesemploying a riparian system that prohibits substantial diversion away fromstreams and dryer western states employing a rule of “prior appropriation” whichgrants water rights explicitly based on historic diversion and allows holders totransfer their diversion-based entitlements to users arriving after all the water in agiven stream is appropriated [43].

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institutions to match buyers and sellers over many years.20 Onemarket uses leasing within this structure to address waterscarcity during drought.

Western water rights systems have been criticized for ignor-ing the importance of in-stream uses. In recent years, watertrusts have been developed to offer environmental constituenciesa way to compensate water rights holders for forgoing divertingwater from streams. Here a detailed discussion of water trusts isforgone to focus instead on agricultural and municipal users,whose behavior is more market-driven and thus a closer analogto the participants in the new CSP. However, in both of thesettings covered, there exist active water trusts coexisting withmore traditional water rights buyers.

Two regions' water markets are selected for discussion: theSouth Platte basin in northeast Colorado and the middle and lowerportions of the Rio Grande basin on the southwest coast of Texas.In the South Platte basin, three markets are of interest: a marketfor water native to the basin (hereafter “native water transfers”),which are overseen by the Colorado Division of Water Resourcesand district water courts; a market for shares in the NorthernColorado Water Conservancy District (NCWCD) that are importedfrom the Colorado-Big Thomson Project at the headwaters of theColorado River (hereafter “C-BT sales”); and C-BT leases [19]. TheFalcon–Amistad water market in the middle and lower Texas RioGrande basin is named for the two reservoirs servicing it, andtechnically constitutes three distinct markets for multiple transac-tion types: permanent water rights sales within and between usergroups and both long-term contracts and temporary leases withinand across user groups (Leidner et al., 2011). While both theColorado and Texas regions face constrained water supply andincreasing demand from growing municipalities, agricultureremains dominant in the Falcon–Amistad system while municipaland industrial water uses have surpassed agricultural uses in theSouth Platte basin.

The South Platte WMs are considered first. The C-BT salesmarket is comprised of proportional surface water rights whichare bought and sold separately from the land on which they wereinitially based. These shares cannot be transferred away from theNCWCD. A single share represents a single acre foot of water, or atmost 1/310,000 of the total surface water available that year.Percentage quota allocations associated with each share aregradually distributed in November, April, and sometimes againas a supplemental quota, such that at most 100% (but often less) ofthe expected 1 acre foot per share is available to each share holder[39]. On average, 270,000 acre feet are imported to the region viathe C-BT market [19].

C-BT sales represent about 30% of supply of water to theSouth Platte Basin. In both the C-BT and native water transfersmarkets, the majority of transfers are from agricultural to urbanuses, representing 64% and 87% of total transfers from 1979 to1999 in each, respectively. Howe and Goemans [19] take thepersistence of agricultural to agricultural C-BT sales (26% overthe same period) as an indication that transaction costs are lowand the market functions well. Brookshire et al. (2004) considerthe C-BT markets to be a model for other WMs due to theirsimple property rights structure and consistently applied clearrules. Permanent transfers require a $70 fee and must bereviewed by the NCWCD board, which meets monthly to accessany third-party effects. Although the native water transfermarket is subject to higher transaction costs due to involvementof the district water court, it is far from inactive, with muchlarger trades at lower prices than those in the C-BT sales

market.21 C-BT leases are straightforward, requiring only apostcard mailed to the NCWCD (Brookshire et al., 2004). Theseare becoming more popular, as cities and towns release waterset aside for drought protection. Thus while the municipal andindustrial share of ownership surpassed agricultural ownershipin the late 1990s, their actual water use remains below agricul-tural use [19].

The Falcon–Amistad WM is also considered a model for othersWMs, exempting the middle and lower portions of Texas' RioGrande basin from much of the recent controversies about watermanagement. As mentioned above, agricultural users have heldmost of the water rights historically, with some increase in rightsheld by domestic, municipal, and industrial (DMI) users in recentyears.22 These two groups' water rights, while eligible forbetween-group transfers, are administered quite differently. DMIusers receive annual “fixed-volume” permits whereas agriculturalusers have rights to “fractional flow” of yearly reservoir inflows.DMI users are effectively prioritized over agricultural usersbecause their fixed volume is allocated before agricultural shares.In fact, each month municipal reserves are replenished with a fullyear's supply (Leidner et al., 2011).

In the Falcon–Amistad WM, water rights are fully tradablewithin sectors, but not across sectors. No between-sectors leasesare allowed. Leases within sectors, which require all the water tobe used within one year of the transaction, require only a phonecall to the watermaster. Sales require a change of use petition, butare handled relatively quickly and require no fee [4]. However,agriculture-to-DMI sales require “conversions” that transform theentitlement from a bankable share to a prioritized annual fixedvolume and engender a 40–50% reduction factor.23 This meansthat the quantity of water purchased by the DMI user is equal to40–50% of that year's reservoir inflow granted to the agriculturaluser selling the share (Leidner et al., 2011). Thus conversionsoperate under a similar structure as trading ratios in WQT (andTDRs, discussed below).

The majority of purchases since 1980 have been by municipalusers. Prior to 2000, small rights holders met much of the demand,but since then this source has been mostly exhausted and irrigationdistricts (IDs) have been pulled into the market. With data betweenMay 1996 and December 2008, Leidner et al. (2009) report thatmunicipal suppliers were net purchasers of 89% of all net purchases(with environmental groups and government agencies making upthe difference). Individual were responsible for 58% of the net sales;IDs for the remaining 42%.24 Over the same period, IDs participatedin 46 distinct sales; individuals in 359 sales of smaller volume.Leidner et al. (2009) note that while active in the market as sellers,IDs' participation may be constrained by their risk aversion, sinceselling their shares means giving up their pro-rata share of monthlyreservoir infill which may be more a certain source of water indrought years than water rights leased from other agricultural users.

Agricultural users can bank up to 1.4 times their initial alloca-tion of water for future months and years, whereas DMI users face

20 Many are more accurately classified as bulletin board markets, facilitatingtrades via physical or web-based platforms.

21 Between 1979 and 1999, median and mean C-BT sale sizes were 16.8 and 34acre feet, respectively, but 367.17 and 3425.31, respectively, for native watertransfers [19]. C-BT prices averaged $5312 per acre foot between 1990 and 2001,while native water transfers to municipal buyers (the only type with accessibleprice data) in the early 2000s ranged from $2000 to $2000 per acre foot [19].

22 Over the same period, annual municipal water allocations increased fromapproximately 275,000 to 315,000 TCM and irrigation rights dropped fromapproximately 2,150,000 to 2,000,000 TCM. Industrial and domestic water rightsaccount for approximately 75,000 TCM each year (Leidner et al., 2011).

23 Irrigation rights are divided into two classes, with Class A users receiving ahigher percentage of reservoir inflows and a higher reduction factor than ClassB users.

24 Net purchases over the 7 and a half years totaled 51,852 total cubic meters(TCM), approximately 2% of total allocations.

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a “use it or lose it” policy (Leidner et al., 2011). Characklis et al. [4]argue that such a distinction leads to inefficiencies, especiallysince DMI users are prohibited from leasing their unused alloca-tion to the agricultural sector. The CSP is arranged somewhatsimilarly, where the charter sector's pre-GAF “allocation” (i.e.maximum number and size of fish per trip per angler) cannot bebanked or traded, whereas members of the commercial sector maylease what they do not plan to fish (either within the commercialsector or now to the charter sector) or even save it for thefollowing year (up to the limit for underage).

3.4. Transferable development rights (TDRs)

TDRs are a land use planning tool used in regions wheredevelopment in a particular area would result in significantnegative environmental or other externalities, thus promptingchanges in zoning and a need for compensatory zoning changeselsewhere to satisfy demand for new development. Most of theapproximately 140 existing TDR programs focus on preservingrural landscapes by channeling regional housing developmenttoward urban and infill areas. Some also preserve historical sites,protect environmentally sensitive areas, and expand affordablehousing. Here the focus is on rural preservation TDR programs, inwhich a more streamlined “downzoning” policy reduces thenumber of allowable residential units per acre in the designated“sending zones,” which are often quite large. In rural preservationTDR programs, there are two populations of interest: the rurallandowners who may sell credits, and developers who may buythem. When downzoning, TDR programs provide a means foraffected landowners to sell their development rights to developersworking in less sensitive areas, designated as “receiving zones.”The demand for TDRs is generated by the demand for housing andnew “bonus densities” set for receiving areas, which allow devel-opers who have purchased TDRs to increase the number of unitsper acre beyond baseline zoning [27].25 Bonus densities are akin tothe mechanism by which GAF allow charter anglers to harvestpotentially more halibut (2 fish instead of 1, if there is a 1-fish limitin place). The distinction between user groups and the unidir-ectionality of most TDRs makes them a good analogy for the CSP,in which charter (commercial) fishers are exclusively allowed to“receive” (“send”) credits. Another feature shared between TDRsand the CSP is that although they are not generally designed tophase down the externality-generating activity, but rather preventit from escalating by reallocating among different groups, theframework can be used for that purpose. From the perspective ofrural landowners, selling a TDR is equivalent to selling an “option”for future development, regardless of how soon such developmentmight have occurred.

Like WQT programs, many TDR programs experience very littletrading, usually due to problems on the demand side. McConnelland Walls [29] attribute inactive trading to regulators' choice ofbaseline zoning densities in receiving areas that are too close todesired levels for developers in receiving areas to be willing to payfor TDRs. Often underlying this regulatory failure is distaste forhigh-density new development among influential members of thecommunity; due to political opposition that makes new develop-ment risky, the marginal willingness to pay of the potential creditbuyers is strictly less than the marginal willingness to accept of thepotential sellers. Mismatches between regulation and economicand political conditions observed in TDR markets indicate thepotential for similar problems in the CSP, which must also consider

biological conditions. For example, if the halibut stock dynamicsresult in a high proportion of small fish one year, guided anglerswill be less likely to catch anything large enough to require GAF inthe presence of a size limit. Furthermore, that GAF leasing can beexpected to be sensitive to changes in the TAC, particularly giventhe special provisions for the charter sector in years with lowoverall TAC. In those years, the lower percentage granted to thecommercial sector will tend to increase the per-pound value of fisheven more than if their percentage allocation stayed constant,potentially pricing charter operators out of the GAF leasing market.

In TDR programs, low trading activity is considered a problem to befixed, as it may indicate that landowners are not being compensatedfor a measurable reduction in the value of their assets and thatregional housing needs are not being met by developers. Alternatively,however, low trading activity could simplymean that housing demandis low or rural areas are not in need of preservation. Similarly, lowtrading activity in the CSP could indicate a good match betweenhalibut demand and the baseline charter and commercial allocations,or potentially a failure to maximize efficiency or facilitate an increasein charter fishing (if those were explicit goals of the program). If lowtrading is considered a problem, regulators have various avenues forstimulating demand or supply. In TDR programs, low demand issometimes addressed by “downzoning” receiving areas, essentiallyrequiring more urban and infill development projects to acquiredevelopment rights. In the CSP, this would be analogous to makingthe bag or size limits for non-GAF catches more restrictive. Besides thepolitical difficulties of such an approach, TDR programs indicate otherdisadvantages, particularly leakage of development (analogously, fish-ing) to non-regulated areas or non-participation in the TPP, thoughthis is unlikely in the case of the Alaska halibut CSP given the paucityof charter boat sport fishing in non-regulated areas (i.e., outside Areas2C and 3A). Another approach to increase trading in TDRs is toincrease credit supply by downzoning sending areas; the monetaryvalue of the tradable permit serves as a partial compensation tolandowners in sending areas for the zoning change. In the CSP, theanalogous approach would be to place tighter limits on commercialfishing while preserving commercial fishers' ability to hold ITQ andsubsequently transfer it to GAF.

A final explanation for low trading in TDRs is that even thoughboth sellers and buyers would benefit from trades, they do notcarry them out due to transaction costs or a lack of information.Both Machemer and Kaplowitz [27] and McConnell and Walls [29]agree that regulators' understanding of price transparency in localland markets is key to ensuring active trading in TDR programs,though they advocate different mechanisms to achieve this.Machemer and Kaplowitz [27] emphasize the importance of banksto facilitate trading and flexibility, while McConnell and Walls [29]advocate newsletters and auctions. In the CSP, similar actions toovercome these barriers to trade can potentially address this issue.

Few TDR programs have been studied in depth and trading inthese programs is often thin. Johnston and Madison [22] describefour programs in detail; two have distinct receiving and sendingzones, and among them only one enjoys high levels of trading. Theactive program, in Montgomery County, Maryland, is furtherstudied in tandem with a similar program in Calvert County,Maryland, by McConnell and Walls [29]. Of the 58 programsreviewed by Messer [30], the Montgomery and Calvert Countyprograms rank second and fourth, respectively, in terms of thenumber of acres they have preserved. These two programs areparticularly interesting because they are relatively well-studiedand share the most similarities with the CSP.

Montgomery and Calvert Counties are both Maryland suburbs ofWashington, D.C. The Calvert County TDR program was begun in1978 and has preserved 13,000 acres. In Montgomery County, theTDR program was started two years later and covers 49,000 acres todate [29]. The programs have three primary functional differences.

25 Demand is sometimes supported further through downzoning in receivingareas, making bonus densities associated with purchased TDRs even moreattractive.

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First, the programs differ in the extent downzoning is appliedto sending areas. In Montgomery County, baseline zoning in the90,000-acre sending area was reduced from 0.2 to 0.04 residentialunits per acre, which provided a large incentive for propertyowners to sell their development rights to developers in receivingareas.26 At the other extreme is the Calvert County TDR. Baselinezoning of Calvert County sending areas was initially not reducedand a very large amount of land – 40% of the county's area – wasdesignated as receiving areas where density could exceed thebaseline level [29]. In this case, the absence of downzoning insending areas did not provide an incentive for selling of develop-ment rights to developers in receiving areas. This difference inprograms reflects different objectives, with Montgomery Countymore interested in the protection of specific rural areas and CalvertCounty more oriented toward small increases in density inunspecified nodes throughout the region.

Second, whereas sending and receiving areas are mutuallyexclusive in the Montgomery Country program (and most otherTDR programs) landowners within receiving areas of CalvertCounty are allowed to sell as well as purchase credits. This meansthat although credits cannot flow out of the receiving area,landowners in the receiving area are still eligible to sell creditsand face decent prospects for finding buyers. One consequence ofCalvert County's approach is that it avoids many of the costsassociated with carefully selecting receiving areas.27 AlthoughMontgomery County program managers attempt to support trad-ing activity by ensuring that developers' cost of purchasing TDRs ismore than offset by the value of increased density,28 the receivingzones are still sufficiently restrictive that developers have usedonly about 34% of TDRs available [29]. While a larger number oftrades have occurred in Calvert County, high baseline densities insending areas mean that these trades may fail to serve the largergoal of concentrating development in urban areas.

Finally, Calvert County has enacted county-wide downzoning(i.e. downzoning in both sending and receiving areas) twice: 1998and 2002. Additionally, in 1993, the county began purchasing andretiring some credits on a yearly basis. These two characteristicsmake the Calvert County program an example of a phasedownTDR program analogous to pollution control TPPs that aim toreduce total externality-generating behavior below a baseline [29].

4. Lessons for the CSP

To distill lessons for the CSP from the diversity of TPPsreviewed here, it is helpful to develop a classification of theprograms and a comparison of their key features. To that end,note that regardless of the context, TPP designers must decidewhich resource users will be subject to the cap, the extent ofregulation across users, and whether and how to restrict permittrading. These decisions are laid out from left to right in Table 1.Use of the term “regulations” in Table 1 refers only to regulationunder a TPP cap; for example, even though the pre-CSP chartersector was regulated via limits on the number and size of fishguided anglers could harvest, it is considered “unregulated” under

the relevant TPP (i.e. the commercial ITQ program) becausecatches within these limits did not count against any allocation.

For emissions, effluents, and management of fisheries andwater resources, the best way to guarantee minimal environmen-tal harm is to make all resource users subject to the cap. This is theunderlying logic of the new CSP, which transforms the Alaskahalibut fisheries IFQ program from a “partial-cap” applicable toonly the commercial sector to a “full-cap” management structureapplicable to all fishers, and can be seen by comparing thelocations of the CSP and pre-CSP programs in Table 1. WQTprograms, which include heavily regulated point sources, as wellas nonpoint sources that are difficult to monitor and are thusexempt from caps, are also partial-cap programs. As a consequenceof having only a partial cap, shares of effluent loads attributable tononpoint sources have grown [15], much as the growing Alaskahalibut fishery exceeded the GHLs before the new CSP wasinstituted. TDRs are also designated as partial-cap programs sincedownzoning in sending areas effectively caps development therebut not in receiving zones. Like the charter sector in the pre-CSPAlaska halibut fishery, not being covered by the cap does not meanthat receiving areas in TDR programs are fully unregulated; urbandevelopment is also subject to upper limits through zoning.29

However, unlike the other partial-cap programs, developers work-ing in TDR receiving areas are exempted from the cap not forpolitical or regulatory convenience but because their activities arenot considered harmful like development in rural areas. This is incontrast to both nonpoint effluent sources in WQT programs thatare excluded but still damage the watershed and the halibutcaught by the pre-CSP charter sector that directly reduced thestock being managed.

The remainder of the TPPs reviewed – including the new CSP –

are full-cap programs. Due to the focus here on programs withmultiple user groups, most are characterized by regulations whichvary across program participants. The exceptions are the NBP,which is representative of other point-point pollution controlprograms in which no distinctions are made across participants,and the South Platte WMs in which agricultural and municipalusers face exactly the same markets for leases and permanentsales. As described in more detail in Sections 3.1 and 3.3, regula-tions vary across participants in the US Lead Phasedown, RECLAIM,the Falcon–Amistad WM, and the CSP, though in different ways.Small refineries were subject to less-stringent caps on leadadditives than large refineries in the lead trading program. Thetwo user groups in the RECLAIM are those in coastal and inlandareas, with trading discouraged that would result in increasedemissions inland. This distinction is similar to sending and receiv-ing zones in TDR programs, as discussed below in the context ofunidirectionality. The Falcon–Amistad WMs have perhaps themost complex differences between groups, with agricultural usersholding proportional rights, municipal users holding rights tofixed quantities, and transactions between the groups requiring a“reduction factor” to translate the units.

Table 2 presents key information about the tradability of permitsfor each program. Permit holders' ability to transfer permits acrosstheir own facilities or vessels represent the most basic form of trading,and one that is excluded from the table because it is allowed in all ofthe programs. Though external transfers may allow for greater costsavings when participants are heterogeneous, McCann [28] finds thatinternal transfers “often involve the least transaction costs, the leastuncertainty about legal claims, and no value attached to future scarcity

26 This means that a rural landowner with 100 undeveloped acres could havebuilt 20 units before the downzoning; after downzoning at most 4 could be built or20 sold. In this example, the rural landowner could supply at least 16 credits to theTDR market, having no incentive to keep them as they have no in situ value, but theprogram would allow for up to four more credits to be transferred as well.

27 In addition to experiencing greater trading flexibility within the receivingzone, developers in Calvert County are not exposed to many of the commonavenues for public disapproval of new development common in other counties[29].

28 This is done primarily by ensuring that the appropriate infrastructure is inplace [22].

29 Maximum densities in urban areas function differently from the maximumdensities in rural areas. By purchasing a TDR, a developer is eligible to exceed themaximum density specified in the zoning code up to new bonus densities. Thus theurban development “cap” has a very different rationale than the rural cap and capsin other TPPs.

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of permits” (p. 91). Kerr and Mare [24] find that 70% of all trades in theUS Lead Phasedown occurred within the same company. In the CSPprogram, it remains to be seen whether the GAF leasing provisionsappeal disproportionately to charter operators with multiple boatswho may use GAF associated with a single CHP on different boatsthroughout a season.

The CSP does not allow transfers of GAF between charter operators,a within-group trading restriction that is shared with WQT programsand most TDRs (as seen in the leftmost column of Table 2). The sale ofdischarge credits by point sources to other point sources in the LakeDillon WQT was prohibited due to public distaste for giving firms the“right to pollute” [54]. In contrast, one of the reasons credited for therelatively high number of transfers in the Calvert Country TDR is theability of landowners and developers in receiving areas to reallocateTDRs among themselves in addition to purchasing them from land-owners in sending areas. It is true that trading within groups does notreduce externality-generating behavior; in WQT programs the role ofwithin-group trading is to reduce point sources' costs of achievingtheir designated effluent reduction and in TDR programs it givesdevelopers the flexibility to change their building plans after theirinitial purchase of development rights. However, the objective of theCSP leasing provisions is (in part) to improve efficiency, not to reduceenvironmental harm, since the combined catch limit already guaran-tees sustainable fishery-wide harvest levels. For this reason, thecomparison of the Calvert Country TDR program's active trading withthe thin trading in the Lake Dillon WQT program suggests a potentialfor removing the restrictions for charter operators who may wish totrade with each other.

In theory, allowing within-group trading in the CSP shouldhave a limited effect. Since all GAF originates in the commercialsector, it is unlikely that charter operators selling GAF couldundercut the market price. However, trading among charteroperators would involve much lower transactions costs thantrading between sectors, offering an opportunity for charteroperators with relatively strong connections to commercial fishersto become brokers, subject to accumulation limits. These accumu-lation limits are likely to limit the profitability of this approach.

The success of cooperative institutions [6] and catch-balancingprograms [44] in fisheries, emissions bubbles in ETSs [13], andaggregate permits in WQT programs [13] as well as the persistentpopularity of agriculture-to-agriculture trades in WMs (particu-larly during drought) indicate, however, that reworking thepolicies around intra-sectoral trading and accumulation limits tofoster cooperatives among charter operators could increase trad-ing and improve economic efficiency.

The other kinds of transfers possible within TPPs are thoseacross sectors, either between regulated groups (for full-capprograms like ETSs and WMs) or between regulated and unregu-lated groups (for partial-cap programs like the CSP and TDR andWQT programs) (Table 2). Pre-CSP Alaska halibut fishing wascharacterized by a coexistence of multiple regulated user groups(different classes of commercial fishers) with a group not regu-lated within the TPP (charter fishers). As shown in the secondcolumns of Table 2, each class of commercial fisher was free totrade quota with others in his/her class, up to quantity restrictionsdesigned to prevent market power. Trading across classes wasrestricted to unidirectional trades, giving small operators theflexibility to “fish-down” by using quota designed for largervessels on their own boats [26]. Under the new CSP, these tradingrestrictions persist for the commercial sector, but now that thecharter sector is regulated with the trading program, a new systemof unidirectional trading has emerged. The CSP leasing provisionseffectively created a new class within the existing quota program,in which charter fishers may lease from any commercial fisher,using quota initially allocated to bigger boats to “fish-down” ontheir own.30

Table 1Classification of programs reviewed.

Criteria Classification

Cap coverage Full-cap: all participants covered Partial-cap: some participants covered

Regulation uniformity Single user group Multiple user groups Single regulated user group Multiple regulated user groupsPrograms NBP Lead trading, RECLAIM, WMs WQT, TDR Pre-CSP

Table 2Permit tradability across programs.

30 Commercial fishers can hold quota shares, not just lease them for a singleseason. Fish-down unidirectionality applies to these asset markets (for quotashares) but not the leasing market (for quota pounds) to which charter operatorshave access. If the charter sector is thought of as a new class of fishers in the quotasystem, they differ from small commercial fishers enjoying fish-down provisions inthat they can only lease, but not purchase, the quota shares designated for largervessels.

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Similar unidirectionality characterizes cross-group trades in theother programs reviewed. In the RECLAIM, trading flows from inlandto coastal zones, as well as within each zone, preventing a flow ofcredits to areas where pollution is worse. The same unidirectionalitycharacterizes trades between regulated and unregulated groups in TDRand WQT programs (i.e. TDR sending and receiving zones and WQTnonpoint and point sources, respectively), though as discussed, most ofthem prohibit trading within each group. In contrast to theseexamples, the distinction between small and large refineries in theUS Lead Phasedown was made not to restrict trading, but rather toshield less powerful participants from the sudden costs associatedwith either buying emissions permits or abating their own emissions.Thus, Table 2 indicates unlimited trading both within and betweengroups for this TPP. Similarly, there are no limits on the directionality oftrading in the Falcon–Amistad WM, but the reduction factor is anecessary (and potentially inhibiting) requirement for translatingbetween the two types of rights held by agricultural andmunicipal users.

Though the categorization of programs in Table 2 is helpful foridentifying the features common to programs within the same typeand differences between programs of different types, some features arebest compared across types. Table 3 presents six such features in aspectrum. The trading restrictions introduced in Table 2 are repro-duced in the first two rows. In the first row, unidirectionalityrepresents the left-most extreme, with free trading across groups onthe right. RECLAIM, WQT programs, TDRs, and the CSP are located onthe left, lead trading, the NBP, and WMs on the right, and the Falcon–Amistad WM, which imposes a trading ratio on agricultural-to-municipal trades, in the middle. The second row indicates the levelof allowable within-group transfers, ranging from a full prohibition inmost TDR and WTQ programs to free trading in ETSs and WMs, withthe Calvert County TDR and the CSP spanning from left to rightbecause within-group restrictions vary across user groups. The Min-nesota River Basin WQT allows point sources to trade with each otherwith a trading ratio, and is therefore at the center of the spectrum. Thethird row summarizes whether the programs are voluntary ormandatory. The application of downzoning to sending areas, eventhough it occurred after the initial inception of the program, is whatmakes the Calvert Country TDR a hybrid voluntary–mandatoryprogram.

The fourth row of Table 3 compares programs in terms of theirintertemporal flexibility via banking. The ETSs covered here eachtook a different approach to banking, with the US Lead Phasedownrelying heavily on banking (even at the end of the program whentransfers across refineries were no longer allowed), the NBPallowing banking up to 10% of each firm's cap under its ProgressiveFlow Control program, and the RECLAIM eschewing bankingaltogether. Banking is strongly associated with program successin the literature evaluating ETSs, both because it incentivizes firms“to undertake emissions reductions before a trading partner isfound or a planned capacity expansion is implemented” and “toreduce emissions when abatement costs are relatively low, ratherthan to wait until regulators require it” ([17] p. 355). Theseadvantages are echoed in the context of WQT programs, whereresearchers promote banking because it would allow for betterlong-term investments, including upgrades by point sources andstreambank fencing, manure storage, and riparian easements byagricultural nonpoint sources [15]. In Woodward's [54] search foran explanation for thin trading in the Lake Dillon WQT, he arguesthat once wastewater plants were well below their emissions caps,“the lack of immediate scarcity would not necessarily haveeliminated interest in nonpoint source reduction if firms couldhave generated credits in the short run, anticipating that theymight be able to sell those credits in the future” (p. 238). Indeed,the intertemporal incentive offered by banking is the sole sourceof demand for credits in the Great Miami WQT program, in which

point sources are currently unregulated by caps but anticipatefuture regulation [33].

There is a link between credit banking and transferabilityevident in the locations of the WQT programs in the second andfourth rows of Table 3. Point sources in the Lake Dillon watershedare simultaneously prohibited from generating credits for eachother and for their own use in the future, which may have blockedpotentially significant economic gains. Maintaining the restrictionson intrasectoral transferability, the Great Miami Trading Programrelieves some of the pressure by allowing early abaters theopportunity to build up subsidized credits they can redeem inthe future. Given that the Alaska halibut commercial sector hassome degree of trading flexibility, both over time and acrossparticipants, there may be scope for the CSP to extend at leastone of these mechanisms to the charter sector. “True-up” periods,in which charter operators may buy GAF from commercial quotaholders or even other charter operators after the fish is caught, isanother potential avenue for flexibility.31 A similar practice isallowed for participants in the NBP ETS, who are granted 60-dayreconciliation periods after the end of their reporting periodto buy permits from other participants [25]. The NBP's overlappingreporting periods offer participants with too-few permits atthe end of their reporting period the opportunity to buythem from those in the same reporting period or those whosereporting periods have just begun. Similarly, charter operatorscould be allowed to appeal either to other charter operators (whodid not use all their GAF) or commercial fishers (whose seasonsextend beyond the recreational season) during a potential true-upperiod.

The relationship between banking and transferability is differ-ent in the Falcon–Amistad WM, where agricultural but notmunicipal users may bank shares for the following year. Thismeans that the attributes of their rights are very different andmakes transferability more difficult to administer. Characklis et al.[4] argue for extending the ability to bank to municipal users notin the interests of fairness but rather in the interest of efficiency,since municipal users' use-it-or-lose-it incentive may promoteexcessive water use.

There is also a link between banking and the time horizon oftransfers. In pollution control programs, the importance of long-term investments motivates banking. For the CSP, bankingmight offer longer time horizons, and thus greater stability.For example, amending the automatic GAF returns so charteroperators, and not just commercial fisherman, could fish unusedGAF in the following season would offer charter operators moresecurity and make them more willing to lease GAF in thefirst place.

However, as discussed in Section 2, such changes would needto be sensitive to the broader goal of maintaining the long-termhealth of the fish stock. There are problems with banking in botheffluent and fisheries contexts: “cashing in” on banked effluentscould cause irreversible damage to the watershed just as thewidespread use of banked quota could result in overharvestingand subsequent fishery collapse. These ecological considerationsreveal a delicate linkage between banking and whether holdingquota guarantees perpetual or season-specific access to theresource. The South Platte WMs, relying as they do on seasonalreservoir inflows, do not have banking provisions.

More detail on the time horizon of transfers is presented in the fifthrow of Table 3. By allowing both permanent transfers (sales) and

31 In several U.S. fisheries (e.g., the Gulf of Alaska Rockfish program), “true up”periods are used, but they typically have mechanisms in place for carefulmonitoring to facilitate enforcement (e.g., 100% observer coverage), which suggestsa potential barrier to their application to the CSP since there are only self-reportingmechanisms for monitoring harvest at present.

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limited single-season transfers (leases) of quota, the Alaska halibutcommercial sector is afforded much more flexibility than the chartersector, since quota leases to the charter sector are restricted to singleseasons. Similarly, WQT programs that allow credits to be generatedvia long-term investments in new agricultural practices give pointsources the full range of intertemporal options, especially whencombined with banking provisions. In the Great Miami Tradingprogram, contract lengths depend on the management practiceadopted by non-point sources, which typically produce resultsbetween 5 and 10 years. Contracts for changes in livestock manage-ment are even longer (up to 20 years). By allowing multiyear contracts,the program incentivizes larger projects than would otherwise bepossible [33].

Phasedowns are related to the time horizon of transfers, as theyaffect participants' expectations of how valuable their permits will bein the future. The extent of phasedowns is summarized for eachprogram in Table 3. Neither the CSP nor WMs are subject to phase-downs, though phasedowns may be relevant in conditions of extremeoverfishing or groundwater exhaustion.

This section has presented a comprehensive comparison ofunidirectional TPPs. The range of contexts in which they have beensuccessful bodes well for the future of the CSP. For each designfeature, the CSP tends to be located at the extremes, whereas otherTPPs often show up at intermediate points between the extremes.Combined with the detailed program descriptions above, Table 3presents a strong visual case that increased flexibility in one ormore design elements may be possible and beneficial as the CSPevolves. Although unique in many ways among fisheries catchshare programs, the CSP can draw from the experience ofprograms from a variety of other settings and will likely havelessons of its own to share as it develops over time.

5. Conclusions

This paper has discussed several non-fisheries TPPs toassess what lessons may be brought to bear on the new AlaskaHalibut CSP. In examining the institutional frameworks

governing trading in non-fisheries TPP contexts, severaldimensions have been identified that fishery managers maywish to consider in the future should they determine the needto adjust features of the CSP leasing program to meet theprogram's goals. Allowing more flexibility in transfers (e.g.,internal transfers), intertemporal banking, cooperative struc-tures, multi-year leasing, and access to perpetual sharesappear to be features of other successful TPP programs thatfishery managers may wish to consider should they determinechanges are needed.

The program's primary goal of capping total harvest acrosssectors is clearly served by the introduction of explicit sector-specific allocations. Which, if any, of the trading provisionsshould be adjusted depends in part on whether or not fisherymanagers determine changes are needed to meet the pro-gram's secondary goal of improving economic efficiency. It istoo early to evaluate whether the current features allowsufficient reallocation of Pacific halibut from the commercialsector to the charter boat sector to increase charter boatoperators' flexibility in offering their clients more attractivefishing experiences. A number of factors are likely important inthis respect, including how the charter angler-specific non-GAF harvest regulations will drive the latent demand for GAF,and whether this latent demand for GAF is sufficient forindividual operators to offset the additional lease costs,including the transactions costs associated with the leasingprocess. This paper has identified several ways to increase theappeal of leasing GAF, through changes to who can trade withwhom and the rules associated with use of GAF, that may spuradditional trading activity to the extent that it is determineddesirable. Trading volume in this context demonstrates notonly a good match between environmental goals and ecologi-cal and economic conditions, but also the political salience ofthe match. In a setting with good environmental controls but ahistory of conflict, the number of trades will undoubtedlyserve to measure not only the economic efficiency of theprogram but also, and potentially more importantly, the extentand evolution of cooperation between sectors.

Table 3Spectrum of key program features.

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Acknowledgments

The findings and conclusions in the paper are those of theauthors and do not necessarily represent the views of the NationalMarine Fisheries Service, National Oceanic and AtmosphericAdministration, or the U.S. Department of Commerce. The authorsthank Rachel Baker, Ron Felthoven, Kailin Kroetz, Amber Himes-Cornell, and Charles Almquist for useful comments that haveimproved the paper. All remaining errors are the authors'. Theauthors acknowledge funding support for Isabel Call from theNMFS Office of Science and Technology. However, the fundingsource had no involvement in the study design, analysis, orinterpretation of data; writing of the report; or decision to submitthe article for publication.

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