Vanderbilt University Law School Scholarship@Vanderbilt Law Vanderbilt Law School Faculty Publications Faculty Scholarship 2000 Currencies and the Commodification of Environmental Law J.B. Ruhl James Salzman Follow this and additional works at: https://scholarship.law.vanderbilt.edu/faculty-publications Part of the Law Commons Recommended Citation J.B. Ruhl and James Salzman, Currencies and the Commodification of Environmental Law, 53 Stanford Law Review. 607 (2000) Available at: https://scholarship.law.vanderbilt.edu/faculty-publications/462 This Article is brought to you for free and open access by the Faculty Scholarship at Scholarship@Vanderbilt Law. It has been accepted for inclusion in Vanderbilt Law School Faculty Publications by an authorized administrator of Scholarship@Vanderbilt Law. For more information, please contact [email protected]. Currencies and the Commodification of Environmental Law James Salzman* and J.B. Ruhl** The success of several environmental trading markets (ETMs) has led to proposalsfor broader use of ETMs in environmental and resource management policy. The successful ETMs all share a basic feature-they exchange units of trade that arefungible, such as tons ofsulfir dioxide or kilos offish. Thisfeature of trading promotes resource allocation efficiency while advancing environmental protection. But most commodities exchanged in current and proposed ETMs, such as wetlands and endangered species habitat, exhibit nonfungibilitiesacross the dimensions of type, time, and space. Using ETMs to trade these commodities is no longer trading "environmental applesfor apples," and thus the rationaleforusing ETMs is calledinto question. In this article, the authors develop a comprehensive analyticalframework for evaluating ETMs from the perspective of commodity nonfungibility and explore the challenge presented by trading environmental apples for oranges. They argue that by focusing on nonfungible commodities and their currencies we can better explain the design ofETMs, their rules of exchange, andprovisions for public participation. * Visiting Associate Professor, Harvard Law School, Spring 2000. Associate Professor, Washington College of Law, American University. ** Professor, Florida State University School of Law. The authors are grateful for the comments of David Barron, Michael Bean, Jim Boyd, Meg Caldwell, Dan Cole, Dick Craswell, Christine Desan, David Driesen, Josh Eagle, Rob Fischman, George Fisher, Alyson Floumoy, Jody Freeman, Royal Gardner, Larry Goulder, Bob Hahn, Oliver Houck, Shi-Ling Hsu, Elena Kagan, Mark Kelman, Ricky Revesz, Carol Rose, Mark Seidenfeld, Joe Singer, Dick Stewart, Dan Tarlock, Buzz Thompson, Tom Tietenberg and participants at faculty workshops at Stanford, Boalt, Indiana, George Mason, Houston, Minnesota, American, and Florida State. The empirical research for this article was supported by the U.S. Environmental Protection Agency's Science to Achieve Results (STAR) program grant R82612-01. Because this article has not been subjected to any EPA review and does not necessarily reflect the views of the Agency, no official endorsement should be inferred. HeinOnline -- 53 Stan. L. Rev. 607 2000-2001 608 STANFORD LA WREVIEW [Vol. 53:607 INTRODUCTION ................................................................................................ 609 I. CURRENCY ADEQUACY: SELECTION OF THE CURRENCY INSTRUMENT ...... 616 A. The Mechanics ofMarketable Permits............................................... 616 B. Measures of Exchange ....................................................................... 622 1. Nonfungibilities of space................................................................ 627 2. Nonfungibilities of type ................................................................... 629 3. Nonfungibilities of time .................................................................. 630 C. Currency Design Strategies ............................................................... 630 1. Simple currency.............................................................................. 631 2. Universal currency......................................................................... 632 3. Comprehensive currency................................................................ 635 I. EXCHANGE ADEQUACY: CONSTRUCTING THE EXCHANGE MARKET ........ 637 A. Market Refinements Across Space, Type, and Time ........................... 638 B. Market Fragmentation,Background Markets, and OtherDesign Pitfalls.......................................................................... 642 1. Arbitrage........................................................................................ 642 2. The inevitable tradeoffbetween fat and sloppy or thin and bland. 645 Ill. CURRENCIES AND MARKET CONSTRAINTS IN THE REAL WORLD- W ETLANDS MITIGATION BANKING ................................................................. 648 A. Establishingthe Wetlands TradingMarket ........................................ 650 B. CurrencyAdequacy ............................................................................ 657 C. Exchange Adequacy ........................................................................... 662 1. Nonfungibility of type..................................................................... 662 2. Nonfungibility of space................................................................... 663 3. Nonfungibility oftime ..................................................................... 664 D. Fat and Sloppy Versus Thin and Bland.............................................. 665 IV. REVIEW ADEQUACY: DESIGNING APPROVAL AND INTERVENTION MECHANISMS ........................................................................................... 668 A. Approval Strategies............................................................................ 670 1. Wholesale review ............................................................................... 670 2. Retail review................................................................................... 671 B. Interest Analysis ................................................................................. 673 1. Tradingparties ............................................................................... 675 2. Agencies .......................................................................................... 676 3. Public interest ................................................................................ 679 C. ProceduralAnalysis............................................. ......... 680 1. Constrain agency discretion........................................................... 681 2. Inform agency discretion................................................................ 681 3. Increasepolitical accountability.................................................... 682 4. Strengthenjudicial accountability.................................................. 682 5. Providefor more meaningfulpublic participation ......................... 683 D. Design Impasse? ................................................................................ 687 V. CONCLUSION ............................................................................................. 693 HeinOnline -- 53 Stan. L. Rev. 608 2000-2001 Dec. 2000] CURRENCIES AND COMMODIFICATION INTRODUCTION Two major, integrally related trends define U.S. environmental law at the millennium. The first trend is to bring presently unregulated risks under the control of the regulatory system. The second trend... is toward bigger bubbles-toward broader and broader trading among pollutants and even among various types of risk reduction ....I Picture a playground where children in business suits trade environmental protection like baseball cards. The front sides bear slick images of endangered species, drops of acid rain, and vanishing habitats. The flip-sides show all the statistics-population remaining, acreage consumed, who benefits from the wetlands, who is harmed by the pollution. And the kids sit huddled round in an excited circle, busily swapping cards. To snag Jamie's prized cattail wetlands, Ben must part with his cherished saltwater marsh. There are differences, of course, between this imaginary playground and a market in real environmental commodities. A "bad trade" in baseball cards is in the eyes of the beholder and, at worst, damages only a child's ego. When parties trade environmental protection, though, what seems a good trade looking at the pictures may lose its appeal once we take a closer look at the statistics and the effects of the trade on the environment itself. Over the last decade there has been a sea change in environmental law and policy, marked by growing interest in market-based instruments of environmental protection. In particular, approaches that explicitly commodify environmental impacts by creating markets for their sale are on the rise. These environmental trading markets (ETMs) now operate in a range of regulatory settings where parties exchange credits to emit air pollutants, extract natural resources, and develop habitat.2 In fact, every major environmental policy review in the last five years has called for even greater use of ETMs.3 Markets 1. E. Donald Elliott & Gail Chamley, Toward Bigger Bubbles, F. FOR APPLIED RES. & PUB. POL'Y 48 (Winter, 1998) [hereinafter Elliott & Chamley]. 2. First proposed in the 1960s, ETMs have been championed by legal and economics scholars as superior to traditional command-and-control regulatory approaches. Proponents claim that by allowing