Grandfathering: Environmental Uses and Impacts
Abstract
“Grandfathering” grants preferential treatment to existing resource users over new entrants based on prior use. Grandfathering is based on the concept of first-in-time or prior appropriation and has been applied to a broad range of environmental and resource issues. We synthesize legal, economic, and political science perspectives and find that grandfathering removes incentives for users to anticipate regulations with proactive abatement. We analyze institutions ranging from long-enduring common-property regimes to climate negotiations to identify how grandfathering can be detrimental to sustainability, but we also show that it can be the only possible mechanism for bringing stakeholders to the table.
Introduction
How should rights and liabilities be allocated under new regulations? Or in international treaties? Do preexisting users have a legal right or ethical claim to preferential treatment? Such questions arise in many contexts, ranging from taxation and land use regulation to domestic and international pollution control. This article explores some key implications of “grandfathering,” a principle that provides advantages to existing resource users/polluters at the expense of new entrants/sources.
Grandfathering allocates entitlements and liabilities according to a “rule of first possession” (Nash 2009). In the case of pollution control, this means that existing polluters are subject to laxer standards than new sources, at least for some period of time. Under an emissions trading system, quotas might be allocated freely, rather than by sale or auction, based on historical pollution levels. To scholars and policymakers versed in the history of pollution regulation, the word “grandfathering” evokes highly visible examples such as the New Source Performance Standards under the U.S. Clean Air Act (Nash and Revesz 2007). We show in this article that grandfathering is also very relevant for international emissions trading schemes established under the Kyoto Protocol. Grandfathering has also played a prominent role in U.S. land use law for nearly a century and an increasing role in U.S. and international regulatory law as it has developed since World War II (Serkin 2009; Cole and Ostrom 2012). Moreover, the concept of grandfathering has been applied in other legal realms, including some where its application is less explicit. These include proportional taxation systems (Graetz 1977), allocation of agricultural support in the European Union (ECOFYS 2017), U.S. property taxes (TRB 1992), Chinese market liberalization policies (Lau, Qian, and Roland 2000), U.S. health care policy under the 2010 Affordable Care Act (Eibner et al. 2010), and allocation of individual transferable quotas (ITQs) for fishers in Iceland (Eggertsson 2012, 30) and elsewhere (Anderson, Arnason, and Libecap 2011).
The literature on grandfathering cuts across academic disciplines, but it has figured more prominently in the legal and political science literatures than in the economics literature. We seek to increase understanding of the use and implications of grandfathering through four related contributions. First, we connect the legal, economic, and political science literature and present the concept of grandfathering much more broadly than the traditional contexts of permit distribution systems and new source performance standards. In particular, we look at case studies of common-property regime (CPR) management and commitments under international agreements. Second, we examine some of the welfare consequences of both one-time and repeat-use grandfathering, with the latter presenting a particularly severe threat to the mitigation of climate change over the next century. When grandfathering is repeated and eventually becomes the norm, then the anticipation of tougher standards over time, combined with the expectation of grandfathering, creates a race to establish first possession and a perverse incentive to increase baseline emissions or resource use levels.1 When initial allocations of valuable resources are made in accordance with a rule of first possession (or “capture”), resource races and incentives for overuse often arise. However, we also explore case studies, particularly in the context of CPRs, in which the implications of grandfathering are more nuanced and can create benefits by encouraging investment that might counteract welfare costs. Grandfathering can also be a reward to entice resource users to the table in the early, exploratory stages of regulation. Third, we establish some principles for distinguishing between grandfathering that is detrimental and grandfathering whose benefits could offset or outweigh its social costs. Our fourth contribution concerns cases in which grandfathering is welfare reducing. Here we offer some preliminary suggestions for reducing its incidence and social costs, which often stem from rent seeking in political markets by regulated entities. In fact, in some contexts, such as climate change mitigation, if grandfathering is not curtailed, it will continue to be an obstacle.
Two effects of grandfathering are well established: it undermines the likelihood of meeting a policy’s targets (e.g., by extending the life of old pollution-intensive capital) and it creates fairness implications over which policymakers and scholars often disagree. In addition, we believe there are potential long-term consequences of grandfathering, such as resource races and increased emissions baselines. However, grandfathering has been so widely used that we lack sufficient counterfactuals with which to compare it—that is, what would resource extraction and pollution levels look like if regulations had never grandfathered prior use or emissions? This lack of information may then also affect regulators’ ability to reliably estimate marginal cost functions for abatement and set welfare-maximizing targets. For this reason, we emphasize the importance of analyzing cases from a wide range of pollution control management systems, including, in particular, long-enduring CPRs.
The next section begins with a definition and brief history of the concept of grandfathering and discusses its use in different disciplines. We explore several aspects of the relationship between grandfathering and fairness and efficiency and we discuss arguments in favor of strong property rights, which state that grandfathering may be constructive in defining rights, exploring a resource, and securing a transition from unmanaged open access to sustainable stewardship. We also note, however, that rewarding polluting incumbents can be detrimental to long-term social welfare and that repeated grandfathering can discourage proactive behavior. We discuss the extent to which the principle of grandfathering entrenches the status quo in many pollution control cases. Next we investigate empirically how grandfathering is used in the local management of CPRs throughout the world. We then discuss the role of grandfathering in multilateral climate negotiations and end with some tentative conclusions and lessons learned.
Grandfathering: Definition, History, and Uses
The term “grandfathering” is based on first possession or appropriation (Epstein 1979; Rose 1985; Lueck 1995). A grandfather clause is an exemption from, or relaxation of, regulatory requirements, allowing actors to continue an activity following an institutional change that either legally prohibits or regulates the activity for others. Such a regulatory exemption may be limited in time or to certain actions. It may be lost if a plant is expanded (or, more generally, if the preexisting activity is expanded or substantially modified). In environmental and resource policymaking, regulators frequently set up markets for resource use; if permits are not auctioned but are allocated freely, there must be some rule for this free allocation. A common approach is to give most of the permits to those with a historical record of use, and this permit allocation method (allocation proportional to historical use) has become another use of the word grandfathering.
Etymology
The term “grandfathering” originated in racist constitutional amendments passed in southern U.S. states after the Civil War. These amendments imposed literacy and property restrictions for voting and were intended to prevent former slaves and their descendants from voting without impeding the voting rights of poor and illiterate whites. Thus the amendments exempted persons whose ancestors (“grandfathers”) had possessed the right to vote (see Robertson 1995).
However, grandfathering has served less nefarious purposes. It is implicit in common-law property principles of “first possession” and in constitutional rules requiring compensation for expropriation of recognized property rights (U.S. Const. amend. V). For centuries, common-law courts have used grandfathering (implicitly or explicitly) in allocating property rights and duties among competing claimants. In the law of finders, for example, as between two rightful claimants, neither of whom is the actual owner, the first in time has superior title.2 In land use law, otherwise lawful preexisting uses that do not conform to new zoning regulations are allowed to continue (but not to expand or change significantly) for some period of time,3 so that landowners’ investments are not stranded (Serkin 2009). Indeed, one can find examples of grandfathering throughout the legal system, from taxation (Shaviro 2000; Zodrow 1992) to automobile safety and building codes (Rotenberg 2007).
Grandfathering has featured prominently in U.S. environmental law since the federalization of pollution control began more than 40 years ago (Levinson 1999). Examples include traditional command-and-control rules that apply only to new air pollution sources, such as New Source Performance Standards for industrial emitters (Clean Air Act, 42 U.S.C. § 111), and emissions trading schemes such as the U.S. Acid Rain Program (Clean Air Act, 42 U.S.C. § 404), where emissions allowances, permits, or credits are allocated freely only to existing polluters.
Grandfathering and Percentage Reduction Targets
Grandfathering is also implicit in regulations that impose percentage-reduction targets based on historical baselines. A percentage-reduction target means that a firm’s or country’s mandated reduction is dependent upon, and increases with, its baseline emissions in the years prior to the new regulation, thus “grandfathering” historical emissions. This means that actors that abated emissions prior to the regulation are disadvantaged relative to actors that did nothing prior to the regulation. Here grandfathering is a disincentive for proactive behavior. The Kyoto Protocol, to be discussed later, is a prominent example.
Many political scientists and moral philosophers are critical of grandfathering (Caney 2009, 2011; Moellendorf 2009; Meyer and Roser 2010; Knight 2013; Duus-Otterstrom and Jagers 2011). Knight (2013) distinguishes between strong, moderate, and weak grandfathering. The strong form is strict proportionality of rights to historical usage, irrespective of other factors. Caney (2009, 127) represents the strong view of grandfathering, arguing that grandfathering implies: “first, that the fair share of emissions for any actor should be a function of its past share of emissions and, second, that these emissions rights should be handed out free of charge.” Moderate grandfathering would also include other considerations. Weak grandfathering holds that allocations should be based mainly on other factors; that is, prior use would be important only when other considerations tie. Thus the stronger the proportionality of allocation in relation to past behavior, the stronger the application of the grandfathering principle.
Clearly, not all percentage-based pollution-control regulations are characterized by grandfathering. For example, the 1970 U.S. Clean Air Act, which required a 90 percent reduction in automobile emissions of carbon monoxide and hydrocarbons within 10 years, grandfathered rights to owners of old cars but did not grandfather rights to producers. It applied equally to all auto manufacturers, old and new, foreign and domestic. This was a simple performance-based standard. Even when polluters are advantaged by percentage-based grandfathering, these advantages can be offset by offering “early-action” rewards. For example, the 1990 Clean Air Act Amendments (CAAA) provided extended compliance periods for emitters of hazardous air pollutants that achieved a 90 percent reduction in emissions from 1987 levels before the new standards took effect (see 42 U.S.C. § 7412(i)(5)). Such provisions undo some of the perverse incentives of grandfathering under the CAAA.
Alternatives to Grandfathering
Although grandfathering is common in cap and trade schemes, it is not ubiquitous. Alternative allocation mechanisms include auctioning (see, e.g., Cramton and Kerr 2002) and output-based distribution (see Quirion 2009). An example of the former is the Regional Greenhouse Gas Initiative (RGGI), established by ten states in the northeastern United States, under which all allowances are auctioned (with floor prices) and existing plants are not advantaged by either free allowances or less-stringent emissions standards (see, e.g., Holt et al. 2007). Examples of the latter (output-based distribution) include per capita allocations. Each allocation mechanism has a separate distributional profile and creates different incentives for innovation (see, e.g., Fischer, Parry, and Pizer 2003). Experimental tests of the comparative efficiency (including innovation and investment incentives) of alternative allocation mechanisms have found that grandfathering is generally more costly and less efficient than the alternatives (see Goeree et al. 2010; Wråke et al. 2010; Camacho-Cuena, Requate, and Walchman 2012; Grimm and Ilieva 2013).
The Use of Grandfathering for Transition Relief
Grandfathering may be the result of rent seeking by polluters. Alternatively, it may be a partial remedy when prevailing social norms provide insufficient support for collective action (Ostrom 2000). To illustrate, we first examine the argument that it is unfair to change the rules in the middle of the game (see, e.g., Stavins 2006). Under this argument, grandfathering is justified as a form of “transition relief” (see, e.g., Huber 2011; Masur and Nash 2010; Van Alstine 2002; Revesz and Westfahl Kong 2011).4 That is, grandfathering reduces the perceived unfairness of changes by delaying or reducing their impacts on certain economic actors (see Michelman 1967). Revesz and Westfahl Kong (2011, 1581) refer to this as the “old view” of grandfathering and contrast it with the “new view,” which considers transition relief to be undesirable because it removes incentives to anticipate changes in the legal environment. According to this view, if businesses anticipate other changes in markets—such as changes in tastes, demand, and technology—why should they not also be required to foresee and adapt to changes in the law? One proponent of this view argues that transition relief or grandfathering merely reduces the total benefits of the proposed legal change by easing the burden on a number of entities that should have been regulated (Graetz 1977). Kaplow (2003) makes a similar argument against transition relief on the grounds that it causes excessive investment in business activities that are risky and likely to be banned later. Transition relief might also crowd out the development of private regulatory insurance markets (see Masur and Nash 2010). Shavell (2008) counters that the complete absence of transition relief might harm some firms that recently complied with previous regulations, for instance, by installing end-of-pipe abatement devices. In some cases it would be unreasonable to ask these firms to immediately scrap this equipment and install some other, more expensive equipment to comply with new regulations. In the end, the decisive factor seems to be how hard it would have been to foresee the new regulation.
Grandfathering in Defense of Property Rights
To its critics, grandfathering is seen as rent seeking that is unrelated to fairness nor efficiency. Grandfathering often appears to be used as a politically expedient way to reward incumbents, based on a perceived need to obtain their “buy-in” to gain regulatory approval (Nash 2009, 812; Montero 1999, 1027). On the other hand, strong supporters of property rights view grandfathering as desirable precisely because it does enforce existing property rights. A pragmatic approach might be to accept strong property rights if the owners actually do contribute to resource quality. In fact, natural resource rents are far from being fixed; they evolve over time and may expand or contract depending on institutions. For example, a fishery might be worthless if overharvested but could become valuable through conscious conservation efforts. Anderson, Arnason, and Libecap (2011) argue in favor of rewarding strong involvement by resource owners in resource stewardship to ensure that the right stakeholder groups are formed to protect and enhance the resource. Huber (2011) concludes that the nature of transitional relief depends substantially on the costs of regulatory initiatives, which in turn are shaped by the dynamics of the regulated industry and institutional arrangements.
If failure to obtain “buy-in” from stakeholders would kill a proposal to conserve and improve a resource, then grandfathering could be justified. It is, however, a fine line, and in other cases grandfathering is just a polite word for caving in to politically powerful polluters, watering down regulation to increase the rents to favored interest groups. If polluters have sufficient political clout to block regulation, they may need to be “paid to play.” In international negotiations, countries often require “side payments,” such as Russia receiving excess emissions allowances in exchange for ratifying the Kyoto Protocol (see, e.g., Cole 2008, 250). However, just how often grandfathering has actually been used to obtain “buy-in” is empirically unclear.
It is often asserted that economic theory assures an efficient allocation of pollution rights and duties regardless of the allocation method (Montgomery 1972). However, such a Coasian analysis is based on unrealistic assumptions, including zero transaction costs, a condition that Coase (1960) himself noted never exists in the real world. Economists who have analyzed transaction costs in pollution trading have shown that sometimes the final allocation of allowances has, in fact, been unaffected by the initial distribution (Stavins 1995). This does not mean that transaction costs were zero, but rather that such costs were not high enough to impede postallocation bargaining. In addition, there are conditions under which the efficiency of final permit allocations is effectively locked in by initial allocations. These include uncertainty, market power, behavior that is not profit maximizing, strategic price manipulation, or high transaction costs (see Hahn and Stavins 2011).
Grandfathering and Perverse Incentives
The previous two subsections have presented arguments, both ideological and more pragmatic, in favor of grandfathering. However, when not used judiciously, grandfathering can reduce economic efficiency and social welfare, for instance, by creating perverse incentives for polluters to increase emissions prior to regulation in order to maximize their postregulation quotas. For example, new source performance standards create perverse incentives for owners of existing sources to extend the life spans of those sources through repairs and retrofitting to avoid compliance with the new standards. Thus the focus of U.S. clean air legislation on new sources is at least partly responsible for the many old and heavily polluting coal power plants operating today (see, e.g., Becker and Henderson 2000, 385–86, 415). As mentioned earlier, carefully crafted exemptions (like the early-action rewards) can be designed to incentivize some polluters to take early (preregulatory) action to reduce emissions, including providing extended compliance deadlines for polluters who have already reduced emissions significantly. The granting of such exemptions encourages proactive behavior and thus the efficiency case for or against granting such relief appears to be contingent on whose emissions are being allowed and why. Grandfathering through the free allocation of pollution permits arguably violates the “polluter pays principle,” which is based on concepts of both fairness and efficiency (Woerdman, Arcuri, and Clò 2008). In the next section we discuss how grandfathering can affect baselines and reduce the incentive for proactive behavior.
Grandfathering and the Strategic Overuse of Resources
When legislative changes become frequent or repeated and thus expected, grandfathering may eliminate incentives to proactively reduce pollution or resource exploitation. The expectation of grandfathering creates incentives to overuse and to under-abate in order to set favorable baselines. The lack of proactive investments makes the regulator’s job more challenging because without investments in abatement technology, it is difficult for regulators to prove that a given performance level is achievable at reasonable cost. This means that regulators may be forced to settle for suboptimal standards. Moreover, if grandfathering is expected whenever there is a new standard, baselines will be continually inflated, exacerbating environmental harm over time.
These perverse incentives of grandfathering result from the strategic gaming of future allocations. The U.S. sulfur dioxide trading program avoided most of these perverse incentives by sticking to an early (1985–1987) baseline. In the European Union emissions trading scheme (EU ETS), however, baselines have been updated. Such updating—the repeated nature of the grandfathering—is the problem (Sterner and Muller 2008). If grandfathering had been done only once with an early baseline, then some arbitrary transfers of wealth would have occurred, but the more perverse incentives would have been avoided. If firms expect repeated grandfathering, they have an incentive to overutilize resources, as when fishermen race to fish down a stock they know will soon be regulated because they want to get favorable baselines for future quotas. We believe case studies can help clarify these issues. Thus, in the next two sections, we discuss experiences from two very different areas—CPRs and international climate negotiations—to identify possible effects of grandfathering.
CPRs and Grandfathering
The literature on CPRs identifies a number of criteria—or design principles—for sustainable resource management over long time periods (Ostrom 1990). These design principles include rules regarding the appropriation and provision of common resources that are adapted to local conditions and collective-choice arrangements that allow most resource appropriators to participate in decision making. As Ostrom (1990) explains, “Without defining the boundaries of the CPR and closing it to ‘outsiders,’ local appropriators face the risk that any benefits they produce by their efforts will be reaped by others who have not contributed to those efforts” (emphasis added). Morrow and Hull (1996) suggested a restatement of this design principle (later accepted by Ostrom 2005): “the resource itself and the users of the resources are clearly defined, and the appropriators are able to effectively defend the resource from outsiders.”
Resource allocation in CPRs differs from the allocation of rights to emit pollutants in cap and trade systems. For example, cap and trade systems are government-designed institutions, while CPRs typically are locally created institutions that evolve over time. As Rose (2002) has explained, in tradable pollution permit systems, government agencies determine the total quota and allocate shares among regulated entities. By contrast, in a traditional CPR, “the user groups’ own practices set individual entitlements. These entitlements generally depend on longstanding residence, reputation, and adherence to community norms—norms that are often very elaborate, and that are enforced by the community members themselves” (Rose 2002, 236). The term “grandfathering” is not typically used in this literature. Nevertheless, we believe that an examination of CPRs can shed light on a number of very closely related rules that have been successful in various systems. First we consider mechanisms for exclusion of non-members. Then we discuss various other rules that determine the distribution of resources and the allocation of labor among local stakeholders in order to identify alternatives to grandfathering for allocating entitlements.
Exclusion of Outsiders as an Example of Grandfathering
Requiring “long-standing residence” can clearly be viewed as an example of grandfathering, and rules limiting or excluding new entrants are a common feature of many CPRs, for good reason. Exclusion is the key institutional feature that distinguishes a CPR from open access. Under open access, no one can exclude anyone else from using resources, while in a CPR, an ownership group excludes outsiders (see, e.g., Cole 2002; Cole and Ostrom 2012). Exclusion is often based on simple principles of grandfathering, such as “first in time, first in right.” In many cases, however, this kind of grandfathering does not appear to create perverse incentives to overuse scarce resources, as is the case in pollution control contexts. To the contrary, exclusion is one feature of a set of rules that favor the incumbents, who are generally the key to ensuring long-term conservation. As noted by McKean (1996), “vesting…shared rights in those who live nearest the resource,” and, we might add, those who know the resource best, “enhances the incentive to protect the resource among those who face the lowest enforcement costs and who could, given inappropriate incentives, destroy the resource most easily.” In fact, research has emphasized the vital importance of involving local users in the design and implementation of CPRs. For example, the issuance of harvesting rights to local forest users is positively correlated with levels of investment in active monitoring of forest use (Coleman 2009; Coleman and Steed 2009). When local users are not directly involved in management decision making and believe the rules to be illegitimate, unfair, or ineffective, they are more likely to adopt “evasive strategies” that undermine CPRs (see Cole and Ostrom 2012, 47). However, the participation of local users in designing and implementing CPRs almost always ensures institutional designs that grandfather their own uses, while disadvantaging new entrants.
The importance and power of local stakeholders
One example that illustrates the importance of local involvement is irrigators in Fowler, Kansas (U.S.), who successfully managed scarce groundwater supplies by creating a CPR. The regime evolved in two stages: (1) with government consent, new entrants were excluded by closing off new well drilling within a 2-mile radius around the entire township and (2) incumbents limited their own groundwater use to sustainable levels by water metering. Allocation rules among incumbents varied between equal allocation and allocation in proportion to historical use or acreage, and the exclusion of new entrants plainly constitutes grandfathering. As one farmer explained, “When enough folks had drilled, we just got together and created a barrier to entry against the young and the poor.” This CPR has reduced groundwater use to sustainable levels in Fowler, but it has also imposed costs on outsiders and raised equity concerns. Meanwhile, groundwater use continues at unsustainable levels in other areas where large aquifers cross political boundaries and thus do not allow for easy exclusion of outsiders (Oye and Maxwell 1995, 204).
The type of grandfathering implemented in Fowler has been observed in many common-property systems. For example, Ostrom (1990, 173) finds that “almost all of the 99 fishers currently using Port Lameron Harbour” on Canada’s east coast “are descendants of fishers who settled in the area during the last decades of the eighteenth century.” As one descendant expressed it, “I’ve fished here all my life. So did my father and his father. Men in my family have been fishin’ here for a long time. If anyone’s got a right to fish here it’s me and I’m no different than most of the fellas fishin’ here” (Ostrom 1990, 174).
In another example, Törbel and other Swiss communities exclude outsiders from participating in common-pasture systems. Traditionally, Swiss agricultural lands suitable for crops have been privately owned, but the large, upland pastures are held in common (see Netting 1976). Beginning in 1483, foreigners were explicitly excluded from participating in Törbel’s common-pasture system, even if they purchased private agricultural lands in the community. Subsequent land purchasers could only gain access to the common pastures upon formal invitation to community membership from incumbent rights holders (Ostrom 1990). This constitutes grandfathering with a very long time lag, which avoids the disadvantages encountered with grandfathering in some pollution-control policies because the long time lag means that outsiders have little incentive to engage in strategic behavior, such as buying up agricultural lands in order to gain access to the common pasture.
Another rule from Törbel’s common-pasture system—“cow rights” —does have undesirable effects. The number of cows each farmer is entitled to send to the common pasture each summer depends on the number of cows he can afford to feed over the winter (see Cole and Ostrom 2012). This rule of proportional allocation allows wealthier farmers to garner more benefits from the common lands by putting more cows on the summer pastures. However, the provision that cows must be fed over the whole winter discourages rapacious behavior (i.e., adding excess cows to the pasture in spring and summer), which would deplete the pasture. Thus the cow rights rule minimizes perverse incentives, but at the cost of reinforcing existing wealth disparities.
Lottery mechanisms and equal access
Other CPRs avoid reinforcing existing wealth disparities through lottery-like mechanisms. In Japanese Iriaichi (common lands), for example, membership is based on long-term residence (a form of grandfathering), but access to the commons is not distributed among landowners according to their wealth (size of landholding). Instead, equal access to common resources is the norm, based on random distributions, frequent rotations, and scrupulous bookkeeping to ensure an overall balance between contributions, exchanges, and access. In exchange for equal access, each co-owner is expected to make roughly equal contributions to maintenance of the commons. Shirkers are excluded from access (McKean 1992).5
Alternatives to Grandfathering for Allocating Entitlements
Not all CPRs allocate entitlements based on the grandfathering of preexisting uses and users. In the Philippines, for example, irrigation communities called zanjeras are established pursuant to community land-sharing contracts. This system has three characteristics: (1) The contracts divide the irrigated area into three sections: one near the headwaters, one in the middle of the system, and one near the tail end. (2) Every farmer in the community (regardless of monetary assets) is allotted one equally sized plot in each of the three sections. (3) As a result, in times of water scarcity due to insufficient rainfall, all farmers are affected equally by decisions not to irrigate the bottom sections of land. Rather than relying on grandfathering to allocate entitlements to irrigation water, the zanjera system appears to track the contribution of labor and materials. More specifically the three zanjeras that contribute 48 percent of total labor and materials receive 55 percent of the water, the three zanjeras that contribute 30 percent of total labor and materials receive 25 percent of the water, and the three zanjeras that contribute 22 percent of total labor and materials receive 22 percent of the water (Ostrom 1990). Even if this allocation of irrigation water is suboptimal from an efficiency standpoint (see Siy 1982), it avoids incentives to “race to capture” scarce water.
In some cases, the absence of grandfathering has been associated with the breakdown of CPRs. For example, Sri Lankan fishers who “devised an ingenious system for rotating access to an inshore fishery” were unable to enforce a rule preventing the entry of new appropriators Ostrom (1990, 143). Over time, new entrants eroded the profits of CPR members and the fishery itself suffered (Ostrom 1990). Likewise, a study of communal forests in Burkina Faso found that new entrants were more likely than long-term residents to engage in destructive forest practices. Studies of irrigation systems in Mexico and India found that when irrigation waters were allocated equally, rather than proportionally to land ownership, thus disfavoring wealthier landowners, the latter tended to violate use rules more often, leading to poorer performance of the CPR (Dayton-Johnson 2000; Bardhan 2000).
On the other hand, laboratory experiments have found that those who believe they have reason to be given priority access to shared resources (e.g., through grandfathering) actually tend to consume more than their share of those resources (see Hoffman and Spitzer 1985; Samuelson and Allison 1994; Messick 1993). Grandfathering might also contribute to the less-than-flattering picture that Rose (2002, 252) presents of Maine lobstermen: for all their success in conserving lobster stocks over a long period of time, the lobstermen are observed to be “xenophobic, hierarchical, thuggish, and thoroughly misogynist.” Although it is difficult to assess whether and to what extent these are effects (or causes) of grandfathering, it is clear that the locals aggressively exclude would-be entrants.
Lessons Learned from CPRs
An important general principle concerning CPRs is that rules are discussed, enacted, and enforced at the local level through interactions among the resource users themselves. It seems unlikely that such a democratic discussion would endorse a rule that could be used to game the system and less likely still that the local community would endorse grandfathering rules that advantage some members over others. On the other hand, it is to be expected that members of village cooperatives (i.e., local voters) would grandfather themselves (as a group) at the expense of new entrants. As noted earlier, such behavior reflects the very nature of CPRs, as opposed to open-access systems. It is also consistent with common-sense notions of fairness based on traditional use (as expressed by the Canadian fisher earlier).
The case studies revisited here suggest that successful CPRs have some common characteristics. Limited quantitative data indicate that nearly all CPRs attempt to exclude outsiders (see Table 1). These data come from the Center for Behavior, Institutions and the Environment at Arizona State University, which maintains a database that includes several dozen case studies of social-ecological systems, including irrigation systems, fisheries, forests, and pastures.6 One of the variables in the database explicitly concerns the issue of exclusion. We examined the database and found that only 8 of the 43 cases for which responses were tallied did not involve an effort to grandfather in local appropriators by excluding outsiders. This is consistent with Ostrom’s (2005, 225) earlier finding that 30 of 33 groups of fishers with boundary rules for accessing inshore fisheries “limited fishing to those individuals who lived in a nearby community.”
| Fisheries | Irrigation | |
|---|---|---|
| 1 – Yes, de jure and effective | 10 | 6 |
| 2 – Yes, de jure, but “outsiders” began to appropriate at a moderate level | 1 | |
| 3 – Yes, de jure, but “outsiders” began to appropriate at a relatively substantial level | ||
| 4 – de facto | 11 | |
| 5 – Yes, de facto, but “outsiders” began to appropriate at a moderate level | 3 | |
| 6 – Yes, de facto, but “outsiders” began to appropriate at a relatively substantial level | 2 | |
| 7 – No | 7 | |
| Data is missing or unknown | 2 | 1 |
| Question does not apply | 45 |
Historically, in CPRs that grandfather rights to original users, admittance into the group is typically slow and restricted. Mechanisms for allocation within the group of insiders can vary. Allocation is generally determined through a combination of tradition and participatory decision making. It often has elements that encourage the provision of labor and effort to maintain and enhance the overall resource. The allocation of benefits is often made in proportion to labor or historical values that are not easy to manipulate. Successful CPRs typically avoid rules that can be gamed strategically by members or outsiders. Proactive behavior is rewarded and more perverse forms of grandfathering (such as basing this year’s rights on last year’s catch) are avoided.
Climate Negotiations and Grandfathering
Climate negotiations are tasked with finding a path to considerable emissions reductions. This raises questions of both efficiency and fairness. The allocation of emissions rights among countries should not be confused with actual emissions. In climate economics, efficiency means that abatement should be undertaken where it is cheapest: as long as emissions rights are tradable, actual emissions can be separated from the allocation of emissions permits. This separation is crucial for ensuring both political acceptance and efficiency. Research shows that citizens of various countries are willing to make bigger economic sacrifices to protect the climate if the allocation burden is perceived to be fair, but perceptions of fairness often differ between countries (Carlsson et al. 2013) and tend to be self-serving (Johansson-Stenman and Konow 2010; Brick and Visser 2015). In the rest of this section we will focus on the allocation of permits and perceived fairness, particularly as related to grandfathering and various alternative allocation mechanisms.
Fairness in the Kyoto Protocol and the Copenhagen Conference of the Parties (COP 15)
The 1997 Kyoto Protocol was based on a mix of principles. For rich (i.e., Annex 1) countries, the dominant principle was equal percentage emissions reductions (EPRs).7 But middle- and low-income countries had few obligations according to the principle of “common but differentiated” responsibilities.8 Emission levels in 1990 were used as a baseline, which was favorable for former socialist states that had high emissions in 1990, before the collapse of many inefficient industries (see Cole 1998). Developing and middle-income countries did not undertake emissions reduction targets; this reflected concerns about fairness and historical responsibility, but the plan was for these countries to be included in later stages. In summary, we can say that this mix of principles amounts to what Knight (2013) would have called moderate grandfathering, and the underlying mix of principles reflects a conflict that has marked successive rounds of negotiation.
EPR versus equal per capita emissions
One of the fundamental reasons for the failure of the 2009 climate negotiations in Copenhagen (COP 15) was disagreement over the issue of allocative fairness concerning emissions reductions (Stiglitz 2015). There were two major competing principles: EPR and equal per capita emissions. EPR implies equal percentage abatement, which implies future emissions levels that are in proportion to historical emissions, and it is thus a form of grandfathering; that is, those who had large historical emissions are given large future emissions allocations. Although this may appear to be a logical and even uncontroversial approach in the United States or the EU, policymakers in low-emitting countries find EPR unfair and often argue for some form of equal per capita emissions. The difference between EPR and equal per capita emissions would have large financial implications for countries such as the United States and India (Agarwal and Narain 1991; Ahuja et al. 2015). For example, per capita emissions in the United States are 16 tons—approximately 10 times higher than in India (see Table 2). Today, India accounts for approximately 6 percent of total global emissions and 18 percent of global population. With grandfathering (or EPR), India would always have 6 percent of global emissions rights, while with equal per capita emissions, India’s emissions rights allocation would be the same as its share of the global population: 18 percent. The figures for the United States are roughly the opposite—16 percent of emissions rights with EPR and 5 percent with equal per capita emissions. This means that India has an incentive to argue for equal per capita allocations (Bretschger 2013), while the United States has an incentive to argue for an allocation based on EPR. Similarly, Lange et al. (2010) find that poor countries prefer egalitarian principles (which they refer to as “sovereignty”) and principles such as ability to pay rather than grandfathering.
| Country or region | 1990 | 2005 | 2010 | 2015 |
|---|---|---|---|---|
| USA | 19.2 | 19.3 | 17.3 | 15.5 |
| China | 1.9 | 4.1 | 5.8 | 6.6 |
| EU | 8.4 | 7.9 | 7.2 | 6.3 |
| India | 0.6 | 0.9 | 1.3 | 1.6 |
To understand the failure of the COP 15, it is important to consider just how unfair EPR must appear to negotiators from low-income and low-emitting countries like India. For more than a year before COP 15, the media was full of news of bids from the EU and other major blocks offering to reduce emissions by 15, 20, or 25 percent. As shown in Table 2, reductions of 25 percent would reduce per capita emissions in the United States and EU from approximately 17 to 13 tons and 7 to 5 tons, respectively. What would be the natural response from a country such as India, which had per capita emissions of approximately 1.5 tons at the time? Clearly it would not be in India’s interest to accept the notion of percentage reductions at all; rather it would make sense for India to advocate for the use of absolute emission levels.
Table 2 also shows that grandfathering benefits stagnant economies more than fast-growing ones. This is the main drawback of grandfathering for China, India, and other poor countries that have aspirations for high economic growth rates. These countries, particularly India, are still planning for massive economic growth to transform their economies. This means that any percentage reduction in (or even a cap on) emissions might threaten these countries’ development aspirations.
The challenge of implementing emissions reductions in the interim
As countries could not even agree on the basic principles for negotiation, little progress was made at negotiations such as the COP 15. This in turn created a problem concerning emissions reduction policies in the interim. Clearly, environmentalists hoped that all countries would constantly strive to diligently reduce their own emissions as much as possible. In this context, repeated grandfathering is problematic because, as discussed earlier, it eliminates the incentives to be proactive. More specifically, if EPR is always going to be the underlying principle for allocating emissions rights, then countries will always want to have a “good” baseline for future negotiations, thus there is a disincentive for countries to abate because they might be “punished” later if future emissions reduction targets are calculated from a lower baseline.
It is generally not possible to know if a country is deliberately trying to affect future negotiations by getting a “good” baseline. To an outside observer the suspicion may easily arise. The choice of base year provides a good example. In preparation for the Copenhagen negotiations, most countries used 1990 as a base year, but the United States (which had strong growth from 1990 to 2005) chose 2005 as its base year. Another method for getting a good base year might be revising national statistics concerning historical emissions. In July 2010, China’s National Bureau of Statistics published revised data for energy production and consumption from 1996 to 2008, with total primary energy use revised upward for every year from 1998 to 2008. The total upward revision was roughly 20 percent, due largely to revisions in industrial coal combustion (Aden 2010). It is possible that earlier statistics underestimated emissions and that this sudden increase was due to more careful carbon accounting, but it is worth noting that this upward revision would certainly benefit China if future treaties use grandfathering.9 All in all, it is clear that the expectation of grandfathering is a disincentive to proactive emissions-reducing behavior and, in principle, creates incentives to manipulate data to acquire a good baseline for one’s own firm or country.
The Paris COP
The 2015 Paris COP negotiations were carried out against the backdrop of the conflict that had characterized the earlier negotiations: grandfathering (i.e., EPR) is unacceptable to poor countries and equal per capita emissions is unacceptable to wealthy countries. However, the Paris agreement instead relied on a bottom-up process in which each country formulated its intended nationally determined contributions (INDCs). This approach avoided the deadlock of the earlier negotiations, and in fact, there was unanimous agreement. Unfortunately these national plans do not add up to a viable program at the planetary scale, and thus further reductions will be necessary. One potential solution moving forward would be to agree on new percentage reductions from the INDCs. In this scenario, the INDCs would become a new baseline, and percentage reductions from this baseline would presumably be less controversial than percentage reductions from historical figures. Thus, in such a scenario, the bottom-up INDC process would reduce the dependence on historical emissions as a baseline but still serve the role of bringing the stakeholders to the table—a crucial role, akin to what has been described in the small-scale CPR literature.
Conclusions and Lessons Learned
This article has studied the origins and applications of grandfathering, focusing in particular on CPR management and climate negotiations. Our examination of the history, law, politics, and economics of grandfathering produced findings that were richer and more complex than we originally expected. First, we have shown that the perverse incentives created by grandfathering are widely underestimated. If firms or individuals can benefit by harvesting more now and thereby getting a larger share in the future, then many of them will engage in overfishing or overharvesting. However, we also recognize the rationale for—and the potential benefits of—grandfathering, for instance, in bringing stakeholders to the table by implicitly rewarding them. This suggests the need for a much more nuanced approach to grandfathering rather than simply arguing for or against it.
In the case of CPR management, one could argue that some form of grandfathering is essential because the successful protection and nurturing of a local resource requires the practice—or at least the possibility—of excluding outsiders. Such exclusion of outsiders should be viewed as a form of grandfathering incumbent rights. Much research has focused on identifying the complex web of activities that lead to sustainable resource management at the local level. One of the necessary first steps toward sustainable resource management is a proper process of inventory (i.e., charting and understanding the resource in all its complexity). Together with a scientific analysis of carrying capacity, careful documentation of claims and resource use lays the foundation for users to agree to scale back their use as part of a community plan of resource management. Thus this first step always involves bringing the stakeholders to the table, which can be difficult. Sometimes the process must include the indirect recognition of user rights based on prior use, which basically means that powerful users have to be paid to collaborate.
Common sense suggests that the people who have always used a pasture or fishery should continue as its stewards. However, our review of the literature on CPRs indicates that grandfathering is not the only allocation mechanism used. Other common allocation mechanisms have included equal allocation and allocation in proportion to supply of labor. One common principle has been for rules to be designed democratically by the resource users, which appears to avoid basing grandfathering on recent resource use in a way that could be used to “game” the system and provide incentives for rapacious behavior.
As we turn from traditional CPRs to regulatory systems for pollution control, the nature of the grandfathering game changes somewhat. The expectation of grandfathering rights to pollute through repeated updating should generally be avoided (see Böhringer and Lange 2005). Humanity continues to run up against planetary boundaries (Steffen et al. 2015) and thus it is likely that there will be negotiations concerning more issues in which resource use or pollution needs to be limited. If grandfathering is consistently expected, then the process of negotiating new environmental agreements will be distorted by resource users with an incentive for overuse in order to secure “good” baselines. They will also have insufficient incentives to cooperate on research and development into feasible solutions.
As summarized in Table 3, when it comes to regulation, the degree to which it can be anticipated is important. Row A depicts an unexpected new regulation, which could be due to unanticipated scientific discoveries or social changes. This illustrates how the first environmental regulations were viewed in the 1960s. When there is no expectation that a regulation will change, then anticipation is a nonissue and resource users may have legitimate claims to transition relief.
| Case | Implications of grandfathering | Comment |
|---|---|---|
| A. Unexpected regulation | Ambiguous and thus might be defended, at least on a limited time schedule. | If science changes suddenly, then a strong case can be made that incumbents should be given some period of grace to adapt. |
| B. Predictable changes in regulation | Negative; destroys incentives for research and development. | Anticipation of legal change should be incorporated into firm decisions; desirable to encourage new technology. |
| C. Repeated changes in regulation | Seriously negative; undermines proactive environmental behavior before the regulatory change and may promote rapacious behavior. | If grandfathering is expected for all new resource-related regulations, it creates incentives for overuse in order to establish a favorable (higher) baseline. |
However, when changes in legislation become routine and predictable, as in row B, or worse, are repeated, as in row C, then the negative aspects of grandfathering destroy incentives to proactively reduce pollution or resource exploitation in anticipation of legal change. In these cases, the transition relief argument for grandfathering is weaker and repeated grandfathering encourages rapacious harvesting or pollution. Avoiding the use of grandfathering may still be difficult in some contexts due to the power of incumbents. In order to counteract their influence, the policymaker might be able to include the voices of other agents, such as innovators of new technologies that would benefit from regulation. This line of reasoning might, for instance, be used to strengthen renewable power interests when seeking to mitigate climate change.
Sometimes grandfathering can be viewed as a legitimate response to potential “takings” if a new and unexpected regulation is enacted suddenly. Today it is reasonable to expect progressively stronger environmental regulation and there is a strong argument that polluters should be given incentives to correctly anticipate this. Assuming reasonable foresight, grandfathering may not be justifiable. If grandfathering is used, perhaps to ease political resistance from vested interests, it should be carefully designed to reduce its negative effects, most notably the tendency to crowd out proactive behavior. This includes strictly and explicitly making grandfathering temporary (e.g., granting exemptions for limited periods of time and based on vintage structures, or giving free permits only for limited periods of time before transitioning to systems of auctioned permits or taxation; see, e.g., Burtraw et al. 2007). This evolution away from grandfathering can be seen in the allocation of allowances under the EU ETS (see Woerdman, Roggenkamp, and Holwerda 2015, 56).
In the context of climate change, it is clear that emission goals in the near future are unlikely to be sufficiently stringent to achieve climate stability. Thus emissions targets will need to be revised over time. However, as we have discussed here, the anticipation of increasingly stringent standards combined with grandfathering can severely undermine incentives to invest in abatement or new technologies and can trigger resource-grabbing races to create entitlements ahead of new rounds of regulations. In order to avoid such perverse incentives for gaming the system, it is vital for the nations of the world to agree not to use current emission levels as baselines and instead to work together to find ways to encourage proactive investments.
Acknowledgments
This article originated in 2011 under a joint research program, COMMONS, funded by the Swedish Research Council FORMAS. The authors met several times in Bloomington, Indiana, and on the last occasion, in June 2012, when Elinor was hospitalized and very ill but still full of energy. She brushed aside questions of her health. Her computer stood amid the medical equipment and the last two sessions were seminars at her hospital bedside. Elinor passed away a week later, but she had left us with many essential thoughts and inspiration for this article, which was then about 80 percent finished. Elinor’s warmth, generosity, and enthusiasm for knowledge and curiosity as the ultimate form of life made a strong and lasting impression. She is dearly missed by all who had the extraordinary privilege of knowing her. The authors are grateful to Dallas Burtraw, Peter Grossman, Shi-Ling Hsu, Kerry Krutilla, Michael McGinnis, Arden Rowell, and Edwin Woerdman for their comments, to Frida Nilsson and Julie England for research assistance, and to Patty Lezotte for her adept, as always, copyediting.
Notes
1 In property law, this problem is well understood.
2 See, for example, the famous eighteenth-century case of Armory v. Delamirie, 1 Strange 505 (King’s Bench 1722), in which the Court of King’s Bench in England ruled that the plaintiff, a poor chimney sweep’s boy, had superior possessory rights to a lost jewel than a well-known local jeweler because, as a finder of the lost item, the boy had prior rightful possession.
3 In some U.S. states, preexisting, nonconforming uses must be allowed to continue indefinitely; otherwise, compensation must be paid for a taking of property. See, for example, PA Northwestern Distributors, Inc. v. Zoning Hearing Board, 584 A.2d 1372 (Pa. 1991). In other states, applying the doctrine of “amortization,” nonconforming uses can eventually be shut down, but only after a reasonable period of time to allow the landowner to recoup investment costs plus a reasonable return (see, e.g., Dukeminier et al. 2010, 952).
4 This is akin to the concept of “amortization” in land use law or “just compensation” for regulatory takings.
5 Another principle that is commonly found in CPRs is the granting of access to resources in proportion to work (Ostrom 1990).
6 See “CPR Database”: http://seslibrary.asu.edu/seslibrary/cpr/query. Note that pastures and forestry are excluded from our analysis because of the small numbers (one pasture case and two forestry cases) relative to fisheries and irrigation.
7 Practically all major industrialized countries or blocks (Canada, Japan, the United States, and the EU) agreed to emissions reduction targets of 6 to 8 percent. Australia was allowed an increase of 8 percent, but this is still, on the whole, very close to strict proportionality or EPR. The internal EU burden-sharing agreement departed somewhat more radically from such proportionality. The average reduction of 8 percent allowed for substantial increases for Portugal (27 percent) and Greece (25 percent), while other countries such as Germany undertook large cuts (21 percent), but this was influenced by unique factors such as German reunification.
8 Note that China revised its carbon emissions data upward again in the fall of 2015 (New York Times 2015).
9 A similar example, although from a different area, concerns fisheries data. Chinese catches were around 4 million tons throughout the 1970s and 1980s and then, during the 1990s, quadrupled to 16 million tons—one-fifth of the world total. Watson and Pauly (2001) model fish production in a detailed spatial model but are unable to explain this increase in catches. When the catch statistics provided to the United Nations Food and Agriculture Organization China were criticized, the government stopped reporting rapid increases and reported exactly the same catch level frozen at the 1998 level. Although we do not know if these levels are correct, it is clear that high baseline data would be helpful to China if world fisheries are regulated by EPR in the future.
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