TRADABLE PERMITS IN WATERWAY TRANSPORT

1. TRADABLE PERMITS IN WATERWAY TRANSPORT JIM FAWCETT ECONOMIST GALVESTON DISTRICT

2. 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. Tradeable permits involve regulators determining an overall level of tolerable activity, such as pollution, then allocating tradeable Tradeable permits involve regulators determining an overall level of tolerable activity, such as

3. 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.

4. 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.

5. ECONOMIC EVALUATION • Define the issue • Identify options • Obtain costs • Identify and calculate benefits • Do the economic evaluation

6. 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.

7. NONSTRUCTURAL OPTIONS • Tradable permits • Congestion tolls • Scheduling traffic • Charging for time taken at a lock • Self help • Vessel tracking

8. 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.

9. 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.

10. 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

11. operator to choose the most cost-effective 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.

12. 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).

13. 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.

14. 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

15. ECONOMIC ANALYSIS • Compare the benefits and costs of the alternatives to the baseline condition.

16. NED PLAN • The alternative that provides the highest net benefits, provided the net benefits are positive.

17. 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.

18. 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 incentive-based 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?