MARKET-BASED SOLUTIONS TO ENVIRONMENTAL PROBLEMS: DISCUSSION

There is rapidly growing interest in the use of market-based (MB) instruments in environmental policy. The papers in this session discuss three relatively new areas for such policies: groundwater contamination, nonpoint source surface-water pollution and carbon sequestration. The papers point out the potential for MB policies in these areas, but significant challenges remain. This comment highlights challenges related to five issues: monitoring and enforcement, trading ratios, baselines, transaction costs, and risk and uncertainty. All these issues must be addressed before MB policies can take the full step from economic theory to regulatory reality.global warming, carbon sequestration, groundwater contamination, nonpoint pollution, effluent trading, tradable emissions permits, Environmental Economics and Policy, Q2, Q28, Q25,

Markets for the Environment

Environmental Economics and Policy,

THE ENVIRONMENTALLY OPTIMAL TRADING RATIO

In the standard economic model of cap and trade policies, the regulator is assumed to place zero value on pollution reductions below the cap. This paper considers an alternative case, where the policy makers can manipulate the rules of the program to achieve improved environmental performance. This is achieved by manipulating the trading ratio, the units of pollution credits that are obtained for each unit of pollution reduction. Using a parsimonious model of a transferable discharge permits program, we identify the environmentally optimal trading ratio that maximizes the environmental gains of trading. The model suggests an alternative explanation why non-unitary trading ratios are common and is a counterpoint to the cost-minimizing model that predominates in economics. We conclude by recommending that a middle-ground should be sought, where both environmental gains and cost efficiencies are given weight.Environmental Economics and Policy,

SUSTAINABILITY AS INTERGENERATIONAL FAIRNESS

This paper presents an economic model of sustainability defined as intergenerational fairness. Assuming that intergenerational fairness is an obligation of each generation, a recursive optimization problem is obtained. The problem has the advantage that uncertainty can readily be incorporated in the model and it can be solved numerically for a wide range of specifications. The possibility of tradeoffs between efficiency and sustainability are discussed. Under plausible conditions, it is show that a sustainability obligation is met only if there is the expectations of economic growth.Agribusiness,

SHOULD AGRICULTURAL AND RESOURCE ECONOMISTS CARE THAT THE SUBJECTIVE EXPECTED UTILITY HYPOTHESIS IS FALSE?

This paper argues that the subjective expected utility (SEU) hypothesis has serious limitations in both positive and normative analysis. In addition to experimental evidence, we discuss examples where alternatives to the SEU model provide a richer framework for the study problems of choice under uncertainty.Research Methods/ Statistical Methods,

User Financing in a National Payments for Environmental Services Program: Costa Rican Hydropower

National government-funded payments for environmental services (PES) programs often lack sustainable financing and fail to target payments to providers of important environmental services. In principle, these problems can be mitigated by supplementing government financing with contributions from leading environmental service users. We use original survey data and official statistics to analyze user financing in Costa Rica’s renowned national PES program, focusing on the amounts and sources of user financing, the drivers of contributions, and contributors’ perceptions of the PES program. We find that user financing has supported less than three percent of the acres enrolled in the program and that hydroelectric plants are the largest private sector contributors. Large hydroelectric plants tend to contribute while small ones do not. The weight of evidence suggests that in addition to ensuring the provision of forest environmental services, hydroelectric plants’ motives for contributing to the PES program include improving relations with local communities and government regulators—common drivers of participation in all manner of voluntary environmental programs. These findings raise questions about the potential of user financing to improve the efficiency and financial sustainability of national PES programs.payments for environmental services, voluntary regulation, hydroelectricity, Costa Rica

Meta-Functional Benefit Transfer for Wetland Valuation: Making the Most of Small Samples

This study applies functional Benefit Transfer via Meta-Regression Modeling to derive valuation estimates for wetlands in an actual policy setting of proposed groundwater transfers in Eastern Nevada. We illustrate how Bayesian estimation techniques can be used to overcome small sample problems notoriously present in Meta-functional Benefit Transfer. The highlights of our methodology are (i) The hierarchical modeling of heteroskedasticity, (ii) The ability to incorporate additional information via refined priors, and (ii) The derivation of measures of model performance with the corresponding option of model-averaged Benefit Transfer predictions. Our results indicate that economic losses associated with the disappearance of these wetlands can be substantial and that primary valuation studies are warranted.Bayesian Model Averaging; t-Error Regression Model; Meta-Analysis; Benefit Transfer; Wetland Valuation

Sequential License Buyback Auctions: An Experimental Analysis

Fisheries managers use licenses as a method of capping the size of a fishing industry, but as management goals change and the size of fishery stocks fluctuate, managers may be faced with the decision to buy back licenses. The vast majority of economic literature on license buyback programs focuses on the changes to economic efficiency of the fleet, often citing changes to the composition of fleet size. However, managers have little guidance in deciding how to structure a buyback auction, despite the fact that the auction structure plays a key role in determining which licenses are retired and in the composition of the remaining fleet. With the Texas Park and Wildlife Department’s Inshore Shrimp License Buyback Program as a basis for auction design, this research uses three experimental treatments to analyze how individuals respond to various reverse auction structures. In terms of the quickest license expiration, our experiments suggest that fisheries managers should select a binding auction with no sequential quality. However, we find that managers would see higher average bids from fishers in comparison to the two sequential auctions. The results are also relevant to other environmental programs in which environmental services are purchased over time in a sequential reverse auction.Fisheries management, license buyback, reverse auction, Institutional and Behavioral Economics, Research and Development/Tech Change/Emerging Technologies, Research Methods/ Statistical Methods, Q22, Q28, C9,

SIZE AND BAG LIMITS IN RECREATIONAL FISHERIES: THEORETICAL AND EMPIRICAL ANALYSIS

Size and bag limits are among the most common forms of regulations for recreational fisheries. In this paper, we theoretically study and compare the short- and long-term impacts of these policies on individual anglers and fish stocks. Particular attention is paid to the issue of release mortality, which can have important consequences for policy effectiveness. Theoretically, we show the conditions under which these policies will be successful in achieving biological objectives. Implications for recreation demand analysis are discussed. We also study these policies using a simulation model of various policy combinations for the Gulf of Mexico red snapper fishery.Resource /Energy Economics and Policy,

ADDITIONALITY AND THE ADOPTION OF FARM CONSERVATION PRACTICES

Replaced with revised version of paper 07/20/11.Conservation programs, matching estimators, additionality, average treatment effects, Environmental Economics and Policy, Land Economics/Use,