Currencies and the Commodification of Environmental Law
Salzman, James, Ruhl, J. B., Stanford Law Review
Two major, integrally related trends define U.S. environmental law at the millennium. The first trend is to bring presently unregulated risks under the control of the regulatory system. The second trend ... is toward bigger bubbles--toward broader and broader trading among pollutants and even among various types of risk reduction....(1)
Picture a playground where children in business suits trade environmental protection like baseball cards. The front sides bear slick images of endangered species, drops of acid rain, and vanishing habitats. The flip-sides show all the statistics--population remaining, acreage consumed, who benefits from the wetlands, who is harmed by the pollution. And the kids sit huddled round in an excited circle, busily swapping cards. To snag Jamie's prized cattail wetlands, Ben must part with his cherished saltwater marsh.
There are differences, of course, between this imaginary playground and a market in real environmental commodities. A "bad trade" in baseball cards is in the eyes of the beholder and, at worst, damages only a child's ego. When parties trade environmental protection, though, what seems a good trade looking at the pictures may lose its appeal once we take a closer look at the statistics and the effects of the trade on the environment itself.
Over the last decade there has been a sea change in environmental law and policy, marked by growing interest in market-based instruments of environmental protection. In particular, approaches that explicitly commodify environmental impacts by creating markets for their sale are on the rise. These environmental trading markets (ETMs) now operate in a range of regulatory settings where parties exchange credits to emit air pollutants, extract natural resources, and develop habitat.(2) In fact, every major environmental policy review in the last five years has called for even greater use of ETMs.(3) Markets for environmental commodities represent the new wave of environmental protection and, despite critiques both subtle and shrill, they are still building.
ETMs have provided an enormously fertile area for scholarship. Articles have explored the mechanics of trading programs,(4) debated the advantages of trading over command-and-control regulation,(5) and, most recently, assessed the application of ETMs in the international sphere.(6) Within this wealth of literature, however, a basic aspect of trading has largely escaped attention. Perhaps because it is so obvious, there has been scant consideration of the simple question--what is actually being traded?
If one compares trading programs, they all seem to share a basic feature. The CFC, fisheries, and proposed greenhouse gas ETMs, for example, all exchange commodities that appear to be fungible. One molecule of CFC, kilo of halibut, or ton of carbon dioxide seems much the same as another, both in terms of identity and impact. It is trading apples for apples (or pork bellies for pork bellies). Thus ETMs are considered a type of commodity market, where environmental credits go to the highest bidder. And for good reason, since the Chicago Board of Trade now sells rights to emit sulfur dioxide alongside pork bellies, orange juice, and grain futures.(7)
Indeed ETMs must assume fungibility--that the things exchanged are sufficiently similar in ways important to the goals of environmental protection--otherwise there would be no assurance that trading ensured environmental protection. While the precondition of fungibility may seem self-evident, this core assumption turns out to be more problematic than it first appears.
As an example of why fungibility matters, consider wetlands mitigation banking. This policy permits developers, once they have taken steps to avoid and minimize wetland loss, to compensate for wetlands that will be destroyed through development by ensuring the restoration of wetlands in another location. …