Posted: 31 Jan 2001 Last revised: 15 Jul 2017
In this article, we reconceptualize the debate over environmental trading markets (ETMs). In exploring efforts to promote nonfungible trading (i.e. trading environmental apples for oranges) we undertake a rigorous examination of environmental commodities and the measures of exchange (currencies) we use to trade them. We argue that by focusing on nonfungible commodities and their currencies we can better explain structure of ETMs, their rules of exchange, and provisions for public participation. In short, we contend that a more complete understanding of the root issues of commodity and currency provides a previously unlaid and strong foundation to understand better the potential and design of ETMs.
By breaking down the problem of ensuring environmental protection in the face of nonfungibilities, we create an analytical framework that can inform the assessment of any ETM. The structure flows from three distinct stages of an ETM's operation.
Currency adequacy involves selection of the currency unit - can the metric capture the significant values exchanged or do some important features remain external to the trades? Part I of the article sets out the theoretical issues underlying a currency's adequacy, examining the technical issue of how trading programs establish what the metric of exchange shall be and why many ETM currencies remain crude, that is, unable to account for important nonfungibilities across space, type, and time.
Exchange adequacy addresses construction of the exchange market - in the face of a currency that fails to capture significant values, how can the market be structured to ensure trades support environmental protection? Part II explores regulators' use of exchange restrictions to compensate for inadequate currencies. We postulate an inverse relationship between currency sophistication and intensity of market constraint. If an ETM relies on a comprehensive currency, there is little need for exchange controls; conversely, and more often the case, crude currencies will result in tightly constrained trading schemes if the market maker desires to restrict environmental externalities. As with currency adequacy, however, equally strong pressures counsel loosening of trading restrictions. Part III of the article tests our hypotheses with a detailed case study of wetlands mitigation banking.
Review adequacy concerns the institutional mechanisms for reviewing trades. If, in practice, neither currency nor exchange adequacy will often be achieved, then even trades of nonfungible commodities that fully comply with the ETM's rules will occasionally, perhaps systematically, fail to increase social welfare. We argue that when currency and exchange adequacy are not ensured, the model of exchange transforms from a commodity market to a barter market, from anonymous trading of generic commodities to individuals haggling over goods and services with unique attributes. In this setting, to what extent should we be willing to let owners of nonfungible environmental features strike deals which the rest of us cannot evaluate through any common medium of exchange and which many of us might not strike? Put more generally, who should determine the equivalency of such trades?
Keywords: trading markets, wetlands, ecosystem services, nonfungibilities, currencies
JEL Classification: N5, Q0, Q2, Q28
Suggested Citation: Suggested Citation
Salzman, James E. and Ruhl, J. B., Currencies and the Commodification of Environmental Law. Stanford Law Review, Vol. 53. Available at SSRN: https://ssrn.com/abstract=254391