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TRADABLE PERMITS IN
WATERWAY TRANSPORT
• JIM FAWCETT
• ECONOMIST
• GALVESTON DISTRICT
DEFINITION OF TRADABLE
PERMITS
• Tradable permits involve regulators determining an
overall level of tolerable activity, such as pollution,
or in this case, waterway rights, then allocating
tradable rights, permits, or quotas to operators
generating the pollution/trips, up to a tolerable level.
Companies that keep their trip levels below the
allotted level can sell their surplus permits to other
firms or use the allotment for one of their other
facilities to offset excess trips there. Firms that run
out of allowance must buy them from other
companies or face legal penalties. In either case it is
in the financial interest of the participating firms to
reduce trips as much as they efficiently can.
REASONS TO USE TRADABLE
• By containing the number of tradable permits
or monitoring tradable rights, government is
able to contain market activity in terms of:
• Trips.
• Use of resources.
• The volume of industry activity in a particular
area.
• To increase the efficiency of the system.
WHY THE INTEREST IN
TRADABLE PERMITS?
• The Corps has always been interested
in the efficient operation and use of the
inland waterway system. It is thought
to be a low cost, less environmentally
intrusive,
and an alternative to a
structural increase in capacity.
ECONOMIC EVALUATION
•
•
•
•
•
Define the issue
Identify options
Obtain costs
Identify and calculate benefits
Do the economic evaluation
DEFINE THE ISSUE
• Under present management practices,
shippers and towboat operators are
mainly motivated to consider their own
costs
while
neglecting
the
government’s costs. The issue then
becomes one of allocating access and
use to eliminate or mitigate delays.
NONSTRUCTURAL OPTIONS
•
•
•
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•
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Tradable permits
Congestion tolls
Scheduling traffic
Charging for time taken at a lock
Self help
Vessel tracking
TRADABLE PERMITS
• Tradable permits is the only option I
will discuss since all the remaining
options have been thoroughly detailed
in the literature and are beyond the
scope of this study.
• Governments can employ three major
means to reduce externalities such as
inefficient use of waterways:
• 1. Regulatory, or ‘command and
control’ approaches are the oldest and
simplest
way to control negative externalities.
• These
often
involve
significant
administrative costs, do not encourage
reductions below official limits, and
typically fall with equal force on all.
• 2. In the case of trips, governments
could impose a ‘trip’ tax as an
alternative means of reducing trips by
making fuel more expensive.
• But governments would need to guess
to some extent the likely reduction that
would be achieved by such a tax.
• Moreover, subsequent spending by a
government of the revenue raised
would transfer some of the benefits
back to inefficient users, partially
offsetting the initial reduction in their
incomes.
• 3. A third option is to employ tradable
permits. Tradable trip permits would
entitle the permit holder to a specified
number of trips. By issuing only a
limited number of permits, it forces the
operator to choose the most costeffective means of reducing trips (more
efficient, larger barges, longer tows,
more efficient lightering methods, etc.).
• Permits will therefore command a price
like any other asset or commodity in
short supply. To meet permitted trip
quotas, companies would need to
either reduce their current numbers of
trips, or obtain sufficient trip permits
from others.
• Permits can be bought and sold. But governments
will limit the number of permits to less than the
current level of trips (otherwise there would be no
need to have permits). Permits will therefore
command a price like any other asset or commodity
in short supply. To meet permitted trip quotas, users
would need to either reduce their current level of
trips, or obtain sufficient trip permits from others.
• Users able to reduce their trips relatively cheaply will
do so, rather than purchasing permits. Those
operators who face higher reduction costs will tend
to purchase permits to satisfy requirements. In this
way, reductions in trips are made by those operators
who can do so at least cost (being compensated by
users who face higher costs).
COSTS-DIRECT AND
INDIRECT
Direct - Implementation:
• 1. Scheduling traffic.
• 2. Coordination.
• 3. Charging congestion fees.
• 5. Monitoring waterway traffic
Indirect
• 1. Industry coordination efforts.
• 2. Increased air pollution, environmental damage,
and accidents.
• 3. Increased industry operational costs.
CALCULATE THE ECONOMIC
BENEFITS
• 1. Delay costs = delays/tow x tows x
$/hr
• 2. Air pollution = emissions x cost for
their removal.
• 3. Implementation costs = cost for
setting up, staffing, and operating a
traffic scheduling center.
• Discount, total, and annualize
ECONOMIC ANALYSIS
• Compare the benefits and costs of the
alternatives to the baseline condition.
NED PLAN
• The alternative that provides the
highest net benefits, provided the net
benefits are positive.
SUMMARY
• There are substantial uncertainties in the
benefits and costs of intervention through trip
change policy. The problem is made even more
difficult by the very long time horizons involved
and the uncertain geographic distribution of
effects. In addition, there are irreversibilities,
both in the tradable permit system and in
methods for controlling trips.
• Despite
these
uncertainties,
overall,
assessments of the costs and benefits of trip
control suggest that limited but gradually
increasing control is warranted.
• Economic analysis has strongly underscored the
point that market-based policies are desirable for
cost-effective trip control.
• I have surveyed the literature on one such incentivebased instrument, tradable permits, and have
pointed out lessons for its use.
• Issues that need to be decided are: At what level
should trading be established (inputs or trips)? How
should permits be allocated (freely or via auctions)?
• What are the incentives for technological
innovation? How can negative impacts of market
power be avoided? How can an effective monitoring
and enforcement framework be established?