3.5 Registration and trading

The value and reliability of a right will crucially depend on the supporting institutions; ie, the arrangements for registering it, tracking use and enforcement on the right holder and against third parties. Such institutions can be established by contract but this depends on having legally enforceable use rights. In the absence of existing generic structures, such as land, this will require statutory definition of the rights in question. Whether the registry or trading systems require government intervention will depend again on the extent to which generic regimes such as competition regulation apply, the existence of net benefits from a unified approach, and the political and social environment.

Consents under the RMA are transferable between owners, but not between types of activity or locations, reflecting the specific nature of the environmental assessment required before a consent is issued. This includes aquaculture consents. Mining permits for minerals are recorded by the Crown and can be transferred. Supporting resource consents are managed by councils as usual under the RMA.

Trading water is generally restricted to within the same catchment for management and environmental reasons, but even then may be complicated by technical barriers, even quite minor ones such as variation in pump sizes (Kearney and Sinner 1997). Water trading can also be restricted to within the same intended use to protected current users. In 1999 77% of allocated water in New Zealand was for irrigation[7], 7% for industrial use, and 16% for industrial water supply (Robb et al 2001). Water for hydro generation is not included in these figures which cover only abstraction, reflecting a wider difficulty in the statistical and legal classification and protection of non-abstractive uses of water.

As for use rights generally, before trading in water can occur “water rights systems need to be clarified …. and mechanisms set up to facilitate trade in water rights in order to strengthen the legal framework and institutions that enable the efficient allocation and use of water” (OECD 2003 :41). Such systems will only be set up where the benefits will clearly exceed the cost and there is sufficient urgency to overcome inertia. This combination of scale of both crisis and payoff necessary to justify action has apparently not yet materialised in New Zealand, although the current legislation to require planning and allocation to best use in the Waitaki catchment where irrigation and hydro generation are in conflict may indicate a change.

The process of defining carbon sink credits in New Zealand has already demonstrated the importance of defining the nature of rights, of demonstrating that they have or will have definite value, and establishing systems for tracking and trading them (though only government trading is currently envisaged). It has also shown the highly political nature of decisions about the initial allocation of rights (eg, over existing forests). All this has occurred even before confirmation of the activation of the Kyoto Protocol and the emergence of any true market for such rights, which depends on international activity given New Zealand’s status as a net seller in the initial period at least.

Fishing quota is recorded centrally and is freely transferable unless it forms part of the assets transferred to Maori as part of the 1992 settlement. A minimum quota holding is imposed to simplify enforcement.

The fishing experience in New Zealand has demonstrated the advantages of a clearly specified transferable right, with built in procedures for taking changes in the nature of the resource into account, in allowing the industry to grow and respond to market pressures while operating sustainably. Such markets have not developed for water or pollution rights. The reasons include problems in specification and valuation of rights, but also relate to issues of market procedures and size which can potentially be addressed through central facilitation of either standard or integrated registry and trading systems.

3.6 Transition

Establishing new rights means constraining existing ones, or to put it another way the “adoption of a new class of property rights will generally involve a shift in wealth towards the users of those rights and away from nonusers of the rights and from society at large” (Hansmann and Kraakman 2002 :42). In particular a new resource-related right automatically reduces existing defined or undefined rights over the same resource; eg, exclusive occupation for a marine farm reduces the rights of boaters or swimmers.

Interactions with other rights regimes can be one of the most complex aspects of establishing a new right. One example of this is the effect of separating the value of a right from the value of the land to which it relates. One example from New Zealand was the debate about separating the value of shares in dairy co-operatives from the value of farm land. Another more common example is water rights, where the separation can affect local government through reduction in the rateable value of land,[8] unless the water is taxed as an improvement on the land (Kearney and Sinner 1997). Aquaculture is particularly complex as the proposed reforms involve first defining which areas can be used for aquaculture rather than the full range of other potential uses, and only then allocating the aquaculture space itself.

The incentives for those who receive new rights to support a change are obvious enough, “modifications occur because individuals perceive they could do better by restructuring exchanges” (North 1994 :361). However, what allows them to achieve their goals at the expense of those with existing interests or who would benefit from alternative new rights structures? There is limited understanding of the circumstances that facilitate or impede such transitions between rights structures; ie, “specifying the mechanism by which transitions occur” (Banner 2002 p360). How do we “achieve the efficient, competitive markets … and economic rules of the game (with enforcement)” and “under what conditions does a path get reversed” and new institutions established (North 1991 :98 and 111)?

What we can say is that bringing in a new property rights regime requires dealing with the collective action problem (who will bear the cost of the work rather than free-ride, while avoiding unnecessary forced-riders) and transition costs such as valuation and allocation (Banner 2002). It also requires dealing with vested interests through trade-offs, grandfathering of rights or by political fiat. Those interests can be very local and individual, or reflect wide social or sectoral views such as preference for water rights to be retained within agricultural uses, or within existing regions, or for rural versus urban communities, or even a fear of monopoly control (Kearney and Sinner 1997).

Grandfathering is one of the most common mechanisms for achieving change, as long as the benefits overall exceed the costs of such measures, because it reduces the impact on vested interests. When introducing transferable rights the effects of such measures on the initial allocation may not matter provided that barriers to subsequently transferring the rights to alternative users are low enough; i.e. the Coase Theorem. (Coase 1988)

These issues have not been explored extensively in New Zealand with the exception of fisheries quota and “allocation issues are not explicitly provided for in the RMA, which specifies only the use of the resource consent process” (NZBR 1995 :25). Where transferability is limited, however, the costs of initial misallocations can be high (Guerin 2003b). Grandfathering can also affect the legitimacy of the new regime if it is seen as buying off some parties or as favouritism and can reduce the level of revenue available to government for covering implementation costs or funding offsetting activities.

In the fisheries example in New Zealand, the introduction of quotas has been based on previous fishing history as a means of managing existing interests and smoothing the transition. In practice this caused major disputes around which historical data was used and inconsistencies in policies and application. For radio frequencies the approach was to tender new space and charge a discounted fee for existing users, easing the new entrants but also protecting the position of the incumbents while limiting their opposition to the change. This is an area where the historical structure of the sector and political realities and perceptions of fairness appear to matter as much as theoretical market efficiency. It is seldom practical to ignore such factors.

Transitions also take time. This is because of the complexities of establishing the new rules, registers and information sets, but also because people take time to adjust to and accept the new arrangements. “Institutions will be stable only if under girded by organizations with a stake in their perpetuation” and ”developing norms of behaviour that will support and legitimise new rules is a lengthy process” (North 1994 :366).