5  Property rights in the environment

Arguments for creating new property rights in the environment are generally based on arguments that market failure caused by externalities requires corrective government intervention, or that the market failure itself is solely due to inadequately specified property rights and it can be fixed by completely specifying private property rights in the environmental goods. The latter point is a more debateable proposition than is often acknowledged, given the impact of transaction costs when large numbers of people, large areas and uncertain scientific information on impacts are involved.

This paper does not attempt to analyse whether there is a market failure in the environment (in general or in specific cases) or why such failures may arise (although lack of secure property rights is one example). Instead it deals with how a property rights approach can contribute to addressing such a failure, while recognising that the response must reflect the underlying cause.[25]

5.1  Intervention options – command and control or market-based instruments

Regulation of the environment, as for other regulatory endeavours, may be prescriptive through a Command And Control (CAC) approach as in Table 6, or more flexible through Market-Based Instruments (MBI) such as taxes or transferable permits or quotas as in Table 7 (IC, 1997). Much more detailed regulatory typologies are available but the key features are captured by these two categories and the key question for any approach is its cost-effectiveness (Cole, 1999). Both approaches create property rights, implicit or explicit, which affect the incentives of those being regulated.

A CAC approach can mean there are “no firm-level gains from discovering and applying new technologies, since all producers will use the same technology”, thereby creating both environmental and economic costs in the longer term. Restrictions on technology also hinder competition (Yandle, 1999, p11).

MBI approaches avoid these dynamic costs, and the negative environmental effects of subsidy regimes in terms of increasing use of energy, land, fertiliser and so on, but have been criticised as regressive (Steele, 1999).[26]

Using MBIs effectively requires detailed knowledge, good governance arrangements, competitive markets, and adequate administrative capacity (Sharp, 2002). The similar requirements, however (including information needs), for applying a CAC approach effectively and efficiently tend to be under-rated.

Creating a market requires addressing the reasons why a market did not previously exist. Typical causes include high transaction costs, ill-defined or enforced ownership, uncertainty and asymmetric information (PC, 2002). Government intervention to better define a right, provide for registration and exchange and impose disclosure requirements can resolve these problems but is not a panacea (see Table 8). Problem areas in market design tend to be scientific uncertainty, market liquidity and the role of regulation.[27]

Source: PC (2002)

It has also been suggested that a complete specification of property rights would resolve environmental problems by internalising costs and relying on the incentives of private owners to conserve resources for the future. This, however, assumes that all environmental benefits can be internalised (so market prices capture all values) and that the necessary information will be available to owners, that scale economies are manageable, transaction costs are bearable, and that the legal framework will operate efficiently (Cole, 1999). These are not, in total, practical conditions. “Strengthened markets in environmental rights could reduce, but not eliminate, the burden on our regulatory system” (Esty, 1999, p1538). Even with such rights of course there is still a role for government (see Section 4.4) “in providing a structure of law to support the exchange of property rights and to ensure their vindication” (Esty, 1999, p1538)