Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers

As part of international climate change policy, voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines, adverse selection will reduce efficiency since participants will self-select into the program. In contrast, pure subsidies lead to full participation but require large financial transfers; this is a particular challenge across countries. A global social planner facing costless transfers would choose such a subsidy to maximize efficiency. However, any actual policy needs to be individually rational for both the buying (industrialized) and selling (developing) country. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. The model leads to the following findings. First, extending the scale of voluntary programs both improves efficiency and reduces transfers. Second, the set of individually rational and Pareto efficient policies typically features a combination of credit discounting and stringent assigned baselines which reduce efficiency. Third, if the industrialized countries can be persuaded to be more generous, the feasible policy set can come close to the globally efficient policy to avoid deforestation.Voluntary opt-in, adverse selection, deforestation, offsets, emissions trading, REDD, Agricultural and Food Policy, Community/Rural/Urban Development, Environmental Economics and Policy, Land Economics/Use, Q54, Q56,

Bigger is Better: Avoided Deforestation Offsets in the Face of Adverse Selection

Voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines and participants will self-select into the program, adverse selection will reduce efficiency and possibly environmental integrity. In contrast, pure subsidies lead to full participation but require large financial transfers. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. We find that increasing the scale of voluntary programs both improves efficiency and reduces transfers. We show that discounting (paying less than full value for offsets) is inefficient and cannot be used to reduce the fraction of offsets that are spurious while setting stringent baselines generally can. Both approaches reduce the cost to the offsets buyer. The effects of two popular policy options are less favorable than many believe: Limiting the number of offsets that can be one-for-one exchanged with permits in a cap-and-trade system will lower the offset price but also quality. Trading ratios between offsets and allowances have ambiguous environmental effects if the cap is not properly adjusted. This paper frames the issues in terms of avoiding deforestation but the results are applicable to any voluntary offset program.Environmental Economics and Policy, deforestation, offsets, adverse selection, REDD, climate change policy, opt-in.,

Unintended Consequences from Nested State & Federal Regulations: The Case of the Pavley Greenhouse-Gas-per-Mile Limits

Fourteen U.S. states recently pledged to adopt limits on greenhouse gases (GHGs) per mile of light-duty automobiles. Previous analyses predicted this action would significantly reduce emissions from new cars in these states, but ignored possible offsetting emissions increases from policy-induced adjustments in new car markets in other (non-adopting) states and in the used car market. Such offsets (or “leakage”) reflect the fact that the state-level effort interacts with the national corporate average fuel economy (CAFE) standard: the state-level initiative effectively loosens the national standard and gives automakers scope to profitably increase sales of high-emissions automobiles in non-adopting states. In addition, although the state-level effort may well spur the invention of fuel- and emissions-saving technologies, interactions with the federal CAFE standard limit the nationwide emissions reductions from such advances. Using a multi-period numerical simulation model, we find that 70-80 percent of the emissions reductions from new cars in adopting states are offset by emissions leakage. This research examines a particular instance of a general issue of policy significance – namely, problems from “nested” federal and state environmental regulations. Such nesting implies that similar leakage difficulties are likely to arise under several newly proposed state-level initiatives.

Path dependence in energy systems and economic development

Energy systems are subject to strong and long-lived path dependence, owing to technological, infrastructural, institutional and behavioural lock-ins. Yet, with the prospect of providing accessible cheap energy to stimulate economic development and reduce poverty, governments often invest in large engineering projects and subsidy policies. Here, I argue that while these may achieve their objectives, they risk locking their economies onto energy-intensive pathways. Thus, particularly when economies are industrializing, and their energy systems are being transformed and are not yet fully locked-in, policymakers should take care before directing their economies onto energy-intensive pathways that are likely to be detrimental to their long-run prosperity

Pass-Through as a Test for Market Power: An Application to Solar Subsidies

We formalize pass-through over-shifting as a simple yet underutilized test for market power. We apply this test in the market for solar energy. Specifically, we estimate the pass-through of solar subsidies to solar system prices using rich micro-level transaction and subsidy data from California. Buyers of solar systems capture nearly the full subsidy, while there is more-than-complete pass-through to lessees. We conclude that solar markets are imperfectly competitive by ruling out alternative explanations for over-shifting and reinforce this conclusion with a test of solar demand curvature. This procedure can serve to detect market power beyond the solar market

Bigger is Better: Avoided Deforestation Offsets in the Face of Adverse Selection

Voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines and participants will self-select into the program, adverse selection will reduce efficiency and possibly environmental integrity. In contrast, pure subsidies lead to full participation but require large financial transfers. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. We find that increasing the scale of voluntary programs both improves efficiency and reduces transfers. We show that discounting (paying less than full value for offsets) is inefficient and cannot be used to reduce the fraction of offsets that are spurious while setting stringent baselines generally can. Both approaches reduce the cost to the offsets buyer. The effects of two popular policy options are less favorable than many believe: Limiting the number of offsets that can be one-for-one exchanged with permits in a cap-and-trade system will lower the offset price but also quality. Trading ratios between offsets and allowances have ambiguous environmental effects if the cap is not properly adjusted. This paper frames the issues in terms of avoiding deforestation but the results are applicable to any voluntary offset program

Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers

As part of international climate change policy, voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines, adverse selection will reduce efficiency since participants will self-select into the program. In contrast, pure subsidies lead to full participation but require large financial transfers; this is a particular challenge across countries. A global social planner facing costless transfers would choose such a subsidy to maximize efficiency. However, any actual policy needs to be individually rational for both the buying (industrialized) and selling (developing) country. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. The model leads to the following findings. First, extending the scale of voluntary programs both improves efficiency and reduces transfers. Second, the set of individually rational and Pareto efficient policies typically features a combination of credit discounting and stringent assigned baselines which reduce efficiency. Third, if the industrialized countries can be persuaded to be more generous, the feasible policy set can come close to the globally efficient policy to avoid deforestation

Consumer Myopia in vehicle purchases: Evidence from a natural experiment

A central question in the analysis of fuel-economy policy is whether consumers aremyopic with regards to future fuel costs. We provide the first evidence on consumer valuation of fuel economy from a natural experiment. We examine the short-run equilibrium effects of an exogenous restatement of fuel-economy ratings that affected 1.6 million vehicles. Using the implied changes in willingness-to-pay, we find that consumers act myopically: consumers are indifferent between $1 in discounted fuel costs and 15-38 cents in the vehicle purchase price when discounting at 4%. This myopia persists under a wide range of assumptions