Currencies and the Commodification of Environmental Law

88 Pages Posted: 31 Jan 2000 Last revised: 28 Dec 2014

See all articles by James E. Salzman

James E. Salzman

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management; University of California, Los Angeles (UCLA) - School of Law

J. B. Ruhl

Vanderbilt University - Law School

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Abstract

If one compares environmental trading markets (ETMs), they all seem to share a basic feature--they all exchange commodities that are fungible. A CFC molecule, kilo of herring, or ton of sulfur dioxide seems much the same as another, both in terms of its identity and impact. It's trading apples for apples. Indeed ETMs must assume fungibility--that the things exchanged are sufficiently similar in ways important to the goals of environmental protection and resource allocation efficiency. Otherwise, there would be no assurance that exchanges were equivalent, that trading ensured environmental protection. This core assumption of fungibility, however, turns out to be less obvious and more problematic than first appears.

In this Article we develop a comprehensive analytical framework for evaluating ETMs from the perspective of commodity nonfungibility and explore the challenges that nonfungibilities (trading apples for oranges) present. We argue that in order for ETMs to deliver on their promise of environmental protection, they must satisfy three standards of adequacy. "Instrumental adequacy" involves the choice of "currency" with which we value the traded commodities and carry out the exchange. A perfect ETM currency would accurately reflect ecological and social values and allow us to compare the exchanged commodities regardless of differences across the three dimensions of nonfungibility--type, space, and time. But nonfungibilities are present in almost all ETMs, most strongly in those trading habitat, and the perfect currency becomes simply too expensive to mint given time, knowledge, and financial constraints. Thus ETMs usually resort to using a crude currency--such as counting acres of wetlands--that will surely fail to reflect important values being exchanged or avoid negative externalities.

"Procedural adequacy" refers to ETM trading constraints adopted to compensate for less-than-perfect currencies. For example, if counting acres of wetland fails to account for the services delivered by different types of wetlands, we can restrict the ETM to in-kind trades. Naturally, increasing trading restrictions of type, space, and time decreases the volume of trading. ETMs using crude currencies thus must balance the desire to control externalities with the need to keep the trading market robust, or "fat." Through a case study of the wetland mitigation banking ETM, we demonstrate the inverse relation between currency adequacy and market restriction--i.e., the pressure on ETMs to keep markets fat even when it means sloppy accounting.

Our discussion of "substantive adequacy" explores measures ETMs can take to police themselves when the combination of inadequate currencies and inadequate market procedures leaves the door open to trades that lead to loss of social welfare. We argue that the presence of significant nonfungibilities shifts the model of an ETM from a commodity market to a barter market, where discretion matters. We, therefore, call for use of ex post approval measures, in part to ensure meaningful valuation of the public goods exchanged and in part to counteract the agencies' and trading parties' inherent biases to encourage nonfungible trades. We further argue that it is inappropriate to use the conventional permitting process to carry out habitat trades and explore options for new institutional design of a "permit-plus" system that preserves the efficiency benefits of ETMs, while more clearly acknowledging the inherent costs in trading nonfungible commodities.

JEL Classification: K32, Q2, Q28, Q3, Q38

Suggested Citation

Salzman, James E. and Ruhl, J. B., Currencies and the Commodification of Environmental Law. Stanford Law Review, Vol. 53, 2001-2002; FSU College of Law, Public Law and Legal Theory Working Paper No. 05. Available at SSRN: https://ssrn.com/abstract=206628 or http://dx.doi.org/10.2139/ssrn.206628

James E. Salzman (Contact Author)

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management ( email )

4670 Physical Sciences North
Santa Barbara, CA 93106-5131
United States

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States

J. B. Ruhl

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

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