Of TEAs and takings: compensation guarantees for confiscated tradeable environmental allowances.

• Author: Span, Henry A.

Over the last twenty years, the prospect of using market mechanisms and property-rights concepts to manage environmental resources has drawn increasing attention within the environmental literature(1) and from policymakers.(2) One predominant method of using the power of market forces to achieve environmental goals, such as limiting air and water pollution, involves the issuance of tradeable environmental allowances (TEAs).(3) A TEA is a permit to perform a certain quantifiable activity over a period of time--for example, to emit a ton of sulfur dioxide over the course of a year. Since a TEA can be traded, it will flow to its most efficient user, and environmental goals will be achieved at substantial cost savings. The issue that this Note examines is whether the government should constitutionally guarantee TEA-holders compensation when, because of changed conditions or changed policy goals, the government decides to confiscate or otherwise limit the rights conferred by TEAs. It is the thesis of this Note that while there are some policy masons for guaranteeing compensation, public choice theory suggests that guarantees will lead to overprotection of TEA-holder interests more often than they will prevent underprotection. This is because in most TEA settings, the regulatees will enjoy organizational advantages that enable them to protect themselves politically from unexpected regulatory jolts such as confiscation without compensation.

The actions authorized by TEAs usually can be categorized as (1) putting something into the commons (emissions) or (2) taking something out of the commons (extractions). Examples of the former include air(4) and water(5) pollution, while commercial fishing(6) is the predominant example of the latter. A third, less easily characterized category includes TEA programs designed to regulate land development for historic preservation,(7) protection of wetlands,(8) protection of habitats,(9) or general local land-use management.(10) Without the requisite allowances, one is prohibited from emitting, extracting, or developing

The rationale behind the implementation of TEA programs is to place the incentives created by property rights and markets at the disposal of environmental conservation. While.. any permit- or license-based system can place limits on activity levels simply by capping the total number of permits that will be issued, TEA programs promote the efficient use of permits by making them tradeable. Those for whom the TEAs are more valuable will purchase them from those who value them less.(11) For example, those who can most efficiently cut their pollution levels will sell their excess allowances to those for whom emissions reduction is more costly, while those who can most profitably fish will buy allowances from less profitable operations. The overall target is met, whether it be a certain amount of sulfur dioxide emitted or sea clams harvested, at a substantial cost savings. In the emissions context, TEA programs also create incentives to develop pollution-abatement technologies because the less pollution one emits, the fewer allowances one has to buy (and, conversely, the more allowances one can sell).(12)

An important issue that has been raised by the proliferation of TEA programs is the property status of TEAs. One question in particular that has received attention is whether or not the government is constitutionally required to provide compensation under the Takings Clause of the Fifth Amendment(13) if it confiscates or in other ways adversely alters the rights granted by TEAs. The approach typically taken to the compensation question is to decide first whether TEAs count as property for the purposes of the Takings Clause, and then, if they do, to apply takings doctrine in an effort to determine whether their confiscation or alteration counts as a mandatorily compensable "taking."(14)

This doctrinal focus is misguided. Even ardent proponents of compensation admit that whether TEAs count as property for purposes of the Takings Clause depends on the language the government uses when it creates TEA programs.(15) If this is true, then the important question is not whether the government is constitutionally bound to provide compensation, but whether the government should constitutionally bind itself to provide compensation.(16) This is a policy issue that depends on considerations of efficiency, fairness, and political pragmatism.

The primary issue regarding constitutionally guaranteeing compensation is whether so doing optimally structures the incentives faced by private and public decisionmakers. Ultimately, this Note concludes that the government can achieve substantially the same efficiency results through assurances and consistent regulatory practice, and that in most TEA contexts, ex ante constitutional guarantees are unlikely to improve government decisionmaking. This is because, as mentioned earlier, TEA-holders are likely to enjoy considerable organizational advantages that make it unlikely that alterations in programs that are substantially adverse to their interests will occur without compensation, particularly if the overall benefits of granting compensation outweigh the overall costs. This is especially likely to be the case in the context of TEA programs that regulate emissions and extractions. TEA-holders in those programs are generally industrial polluters and commercial fishers, precisely the sort of business groups that public choice theory suggests will have a disproportionate voice in regulatory decisionmaking.(17)

An exception to the general organizational advantage of TEA-holders might exist, however, in the context of the third type of TEA program, namely, those that regulate land development. Insofar as owners of undeveloped land generally do not share the organizational advantages enjoyed by industrial polluters and commercial fishers, it might be appropriate to offer those governed by transferable developmental rights (TDR) programs constitutional protection from uncompensated TEA confiscations in certain contexts.

Part I provides background on the general nature and structure of TEA programs and describes the ways in which governments might decide to curtail TEAs, as well as their reasons for doing so. Part II discusses the various policy considerations that are relevant to the decision whether or not to guarantee compensation constitutionally. Part III focuses on the impact of guaranteed compensation on public decisionmaking, ultimately concluding that constitutionally guaranteed compensation is unnecessary in most TEA contexts.

1. BACKGROUND

   1. The Mechanics of TEA Programs

      TEA programs operate by first setting an overall regulatory limit on use of a resource and then allocating individual allowances to persons or entities, who are free to buy, sell, lease, bank, or trade them.(18) Each TEA can represent either an absolute quantity (for example, one ton of pollution) or a percentage of a total (for example, five percent of the annual total allowable catch (TAC) of a given fish stock).(19) As the examples suggest, the former method is usually utilized in emissions-control programs,(20) while the percentage method is usually utilized in extraction-control programs.(21)

      Similar in structure to programs that regulate emissions, transferable development rights (TDR) programs set a limit on overall land development in the region governed by the program and then allocate TDRs, defined as absolute quantities, to individual landowners on the basis of that limit.(22) But unlike both emission and extraction programs, TDR programs usually create different development zones within the overall TDR region, each of which permits a different level of development regardless of the number of TDRs that one holds.(23) For example, particular parcels within the TDR region might be zoned residential or marked for historic preservation. As a result, fewer TDRs would be allowed to be applied to these parcels than to those with less restrictive zoning. More drastically, parcels might be designated as wetlands or as habitats for endangered species and all development on them barred. In that case, although the owners of such designated parcels would be granted the same number of TDRs per acre as everyone else in the TDR program, they would not be able to apply them to their own land. Their only recourse would be to sell their excess TDRs to those who owned parcels in less restricted zones and who, without the additional TDRs, could not develop their land to the maximum extent allowed by law.(24) The idea is that receipts from the sale of TDRs will compensate those who own restricted land, thereby avoiding the need to deplete the public treasury.(25) Zones in which landowners are not able to use all of their TDRs on their own land are generally referred to as "sending" zones, while those in zones in which landowners need to purchase additional TDRs to develop their land to the fullest extent are generally referred to as "receiving" zones.(26)

      The initial allocation of TEAs can be performed either by giving them away, usually on the basis of past use of the resource in question, or by auctioning them to the highest bidder. The former method seems much more prevalent,(27) perhaps reflecting the political strength of those groups regulated by TEA programs. Another possibility, one utilized by the emissions reduction credit (ERC) programs permitted by the Clean Air Act,(28) is to assign each source a baseline connected to past activity levels, with TEAs (in this case, ERCs) being granted when the entity makes permanent reductions in emissions below that baseline.(29) In other words, if a factory is assigned a baseline cf twenty tons of sulfur dioxide emissions per year, and it makes permanent changes in its production process that reduce its emissions to fifteen tons per year, it can then sell the right to emit five tons of sulfur dioxide to another factory...