The social welfare implications of industry self-auditing

The Environmental Protection Agency's (EPA's) audit policy authorizes reduced penalties for firms that voluntarily undertake compliance audits and then correct and report any discovered violations to the agency. While the EPA claims the policy is a success, this paper joins a growing literature in questioning that claim. A game-theoretic model of the audit policy is developed where the goal of enforcement is remediation and the agency is unable to commit to a pre-announced inspection policy. Self-auditing is beneficial because it permits both self-reporting and self-policing to occur; however additional costs are imposed on firms. Self-auditing is more likely to be socially beneficial when the damages caused by violations are large. The current audit policy explicitly excludes violations that result in serious actual or potential harm. When violations are small, as most current disclosures under the audit policy are, firm self-auditing is likely to increase social costs.     

Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications

We consider a simulation of risk-averse producers when making investment decisions in a competitive energy market, who face uncertainty about future regulation of carbon dioxide emissions. Investments are made under regulatory uncertainty; then the regulatory state is revealed and producers realize returns. We consider anticipated taxes, grandfathered permits and auctioned permits and show that some anticipated policies increase investment in the relatively dirty technology. Beliefs about the policy instrument that will be used to price carbon may be as important as certainty that carbon will be priced. More generally, a failure to consider risk aversion may bias policy analysis for the power sector.     

Cost-effective environmental policy: implications of induced technological change

Cost-effective environmental policy generally requires that all emission sources are faced with the same tax. In this paper I discuss how the existence of induced technological change may alter this result, if at least some of the effect is external to the firm. Focusing on Learning by doing (LBD) effects in abatement activities, it is shown that emission sources with external learning effects should be faced with a higher tax than emission sources with only autonomous technological change. By using simple numerical simulations, it is further investigated to what degree a cost-effective climate policy differs from a free quota market, under various assumptions about learning effects, diffusion of technology and environmental targets. The results indicate that optimal taxes may be significantly higher in the industrial world than in the developing world. Moreover, the industrial world's share of global abatement may be much higher in a cost-effective solution than in a free quota market. The global cost savings of a fully flexible implementation of the Kyoto Protocol are further questioned, as potential spillover effects of technological growth in the industrial world are not internalised in the market.     

On comparing monopoly and competition in exhaustible resource exploitation

It is widely believed that exhaustible resource monopolies do not enjoy as much market power as standard non-resource monopolies, and may even produce in a socially optimal way. We argue that this paradoxical result arises from an inappropriate comparison methodology. When similar assumptions are applied to the resource, and the conventional cases, we show that the resource monopoly behaves as expected, i.e., restricts supply.     

Thin versus Thick CO2 Market

The idea that trading is more costly the thinner the market is is common in most studies of market exchange with frictions. Surprisingly, this element is lacking from previous attempts to allow for frictions in pollution permit markets. This paper considers a CO₂ cap-and-trade model where trading costs develop endogenously as a function of the market size. The pre-trade allocation of permits determines whether the market size can be strongly influenced by expectations that have a role because of adjustment costs. The pre-trade allocation also sets preconditions for endogenously vanishing trading costs and thus has nonstandard effects on long-run trading levels and market allocations.     

The higher price of cleaner fuels: Market power in the rail transport of fuel ethanol

This paper provides evidence of market power in the transportation of ethanol used in reformulated gasoline and alternative transportation fuels. I estimate a reduced form model for railroad route-level prices. My identification strategy instruments for railroad entry, controls for selection and explicitly models capacity constraints. A detailed understanding of this industry is important because U.S. environmental policies seek to substantially expand ethanol use. Evidence of market power may alter the types of policies pursued by lawmakers. I find that ethanol shipment prices are lower for more competitive routes. I also find evidence that railroads price discriminate based on environmental regulation at route destinations. Monopolist prices for shipments to carbon monoxide non-attainment areas are 3% higher than shipments to other destinations. This price premium falls sharply with increased competition. This suggests a perverse result where environmental regulation increases the price of a clean input.     

Do environmental right-to-know laws affect markets? Capitalization of information in the toxic release inventory

This paper investigates how information contained in the U.S. Environmental Protection Agency's Toxic Release Inventory (TRI) program, one of the largest environmental right-to-know programs, affects prices in the housing market. I use a strengthening of the reporting requirements for the chemical lead in 2001 as exogenous variation to test for housing price changes near existing firms who must now report. Using a difference-in-differences specification, I find that listing an existing firm in the Toxic Release Inventory lowers housing prices up to 11% within approximately 1 mile. The results suggest that housing market participants do capitalize into prices at least some information conveyed by the TRI program.     

A model of exhaustible resource exploitation with ricardian rent

The question of the optimal rate of development of an exhaustible resource (such as a mine) has long been a concern of resource economists. However, with few exceptions in the literature, it has been implicitly assumed that orebodies are of uniform quality, readily distinguished from their surroundings, or else that the mining firm is able to choose the order of mining from sections of the mine which may vary in quality (e.g., grade of ore). While such simplifying assumptions have led to a rich array of conclusions, they stand in contrast to the varying conditions facing the mining engineer in making cut-off grade decisions. This paper models a situation where, because of orebody configurations, the firm cannot choose to mine in order of grade. An optimal cut-off grade is obtained for each point of time of the mine's life in the case of a socially optimizing firm. Then in a special case the effects of monopoly and various types of mineral taxation are considered for the cut-off grade decision and for ultimate recovery.     

Stochastic Pollution, Permits, and Merger Incentives

Pollution permit regulations introduce nonlinearities into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production. We also demonstrate that permit management incentives may motivate a merger of otherwise independent firms. Incentives to petition for “bubble” coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situations in the output and permit markets are also analyzed.     

Comparing policies to confront permit over-allocation

Instability in cap-and-trade markets, particularly with respect to permit price collapses, has been an area of concern for regulators. To that end, several policies, including hybrid price-quantity mechanisms and the newly introduced “market stability reserve” (MSR) systems, have been introduced and even implemented in some cases. I develop a stochastic dynamic model of a cap-and-trade system, parameterized to values relevant to the European Union׳s Emission Trading System (EU ETS) to analyze the performance of these policies aimed at adding stability to the system or at least at reducing perceived over-allocations of permits. Results suggest that adaptive-allocation mechanisms such as a price collar or MSR can reduce permit over-allocations and permit price volatility in a more cost-effective manner than simply reducing scheduled permit allocations. However, it is also found that the performance of these adaptive allocation policies, and in particular the MSR, are greatly affected by assumed discount rates and policy parameters.     

A Conceptual Analysis of the Application of Tradable Permits to Biodiversity Conservation

Abstract: Tradable permits have been applied in many areas of environmental policy and may be a response to increasing calls for flexible conservation instruments that successfully conserve biodiversity while allowing for economic development. The idea behind applying tradable permits to conservation is that developers wishing to turn land to economic purposes, thereby destroying valuable habitat, may only do so if they submit a permit to the conservation agency showing that habitat of at least the equivalent ecological value is restored elsewhere. The developer himself does not need to carry out the restoration, but may buy a permit from a third party, thus allowing a market to emerge. Nevertheless, the application of tradable permits to biodiversity conservation is a complex issue because destroyed and restored habitats are likely to differ. There may be various trade‐offs between the ecological requirements that destroyed and restored habitats be as similar as possible, and the need for a certain level of market activity to have a functioning trading system. The success of tradable permits as an instrument for reconciling the conflicts between economic development and conservation depends on the existence of certain economic, institutional, and ecological preconditions, for example, a functioning institutional framework, sufficient expert knowledge, and adequate monitoring and enforcement mechanisms.     

Relation between extinction and assisted colonization of plants in the arctic‐alpine and boreal regions

Assisted colonization of vascular plants is considered by many ecologists an important tool to preserve biodiversity threatened by climate change. I argue that assisted colonization may have negative consequences in arctic‐alpine and boreal regions. The observed slow movement of plants toward the north has been an argument for assisted colonization. However, these range shifts may be slow because for many plants microclimatic warming (ignored by advocates of assisted colonization) has been smaller than macroclimatic warming. Arctic‐alpine and boreal plants may have limited possibilities to disperse farther north or to higher elevations. I suggest that arctic‐alpine species are more likely to be driven to extinction because of competitive exclusion by southern species than by increasing temperatures. If so, the future existence of arctic‐alpine and boreal flora may depend on delaying or preventing the migration of plants toward the north to allow northern species to evolve to survive in a warmer climate. In the arctic‐alpine region, preventing the dispersal of trees and shrubs may be the most important method to mitigate the negative effects of climate change. The purported conservation benefits of assisted colonization should not be used to promote the migration of invasive species by forestry.     

Addressing social attitudes toward lethal control of wildlife in national parks

The extraordinary population growth of certain ungulate species is increasingly a concern in agroforestry areas because overabundance may negatively affect natural environments and human livelihoods. However, society may have negative perceptions of killing wildlife to reduce their numbers and mitigate damage. We used an online survey that included a choice experiment to determine Spanish citizens’ (n = 190) preferences toward wildlife population control measures related to negative effects of ungulate overabundance (negative impacts on vegetation and other wildlife species and disease transmission to livestock) in 2 agroforestry national parks in Spain. We used latent-class and willingness-to-pay in space models to analyze survey results. Two percent of respondents thought a national park should have no human intervention even if lack of management may cause environmental degradation, whereas 95% of respondents favored efforts to reduce damage caused by overabundant ungulate species. We estimated human well-being losses of survey respondents when sustainable effects of deer overabundance on the environment became unsustainable effects and well-being gains when sustainable effects transitioned to no visible effects. We found that the type of wildlife-control program was a very relevant issue for the respondents; indirect control in which killing was avoided was the preferred action. Sixty-six percent of respondents agreed with the option of hunters paying for culling animals to reduce ungulate impacts rather than management cost coming out of taxes, whereas 19% of respondents were against this option and willing to pay for other solutions in national parks. Our results suggest that killing wildlife in national parks could be a socially acceptable tool to manage overabundance problems in certain contexts, but it could also generate social conflicts.     

Use of Market Data to Assess Bushmeat Hunting Sustainability in Equatorial Guinea

Abstract: Finding an adequate measure of hunting sustainability for tropical forests has proved difficult. Many researchers have used urban bushmeat market surveys as indicators of hunting volumes and composition, but no analysis has been done of the reliability of market data in reflecting village offtake. We used data from urban markets and the villages that supply these markets to examine changes in the volume and composition of traded bushmeat between the village and the market (trade filters) in Equatorial Guinea. We collected data with market surveys and hunter offtake diaries. The trade filters varied depending on village remoteness and the monopoly power of traders. In a village with limited market access, species that maximized trader profits were most likely to be traded. In a village with greater market access, species for which hunters gained the greatest income per carcass were more likely to be traded. The probability of particular species being sold to market also depended on the capture method and season. Larger, more vulnerable species were more likely to be supplied from less‐accessible catchments, whereas there was no effect of forest cover or human population density on probability of being sold. This suggests that the composition of bushmeat offtake in an area may be driven more by urban demand than the geographic characteristics of that area. In one market, traders may have reached the limit of their geographical exploitation range, and hunting pressure within that range may be increasing. Our results demonstrate that it is possible to model the trade filters that bias market data, which opens the way to developing more robust market‐based sustainability indices for the bushmeat trade.     

Tax versus emissions trading scheme in the long run

In this paper we compare the performance of emission taxes and tradable permits under free market entry when firms face idiosyncratic ex ante cost uncertainty. We show that under auctioned permits insufficient entry occurs, while under a linear emission tax scheme, depending on parameters, market entry can be either excessive or insufficient. Our long-run analysis thus contrasts with Spulber׳s (1985) equivalence result and also modifies Weitzman׳s result in favor of an ETS in that the superiority of a tax over an ETS is not guaranteed, even when the Weitzman condition favors a tax. We also show that an ETS is superior to a tax scheme when the entry cost is low and the magnitude of uncertainty/asymmetric information and the size of the output market are large.     

Tell the truth or not? The montero mechanism for emissions control at work

We experimentally test the truth-telling mechanism proposed by Montero (2008) for eliciting firms' abatement costs. We compare this mechanism with two well-known alternative allocation mechanisms, free and costly allocation of permits at the Pigouvian price. Controlling for the number of firms and the firms' maximal emissions, we find that, in line with the theoretical predictions, firms over-report their maximal emissions under free allocation of permits and under-report these under costly allocation of permits. Under Montero's mechanism, by contrast, firms almost always report their maximal emissions truthfully. However, in terms of efficiency, the difference between Montero's mechanism and costly allocation disappears with industries including more than one firm.     

Double-dipping in environmental markets

There is an increasing tendency to use markets to induce the provision of environmental services. As such markets increase in scope, potential market participants might sell multiple environmental services. The question we consider here is whether participants in such markets should be allowed to sell credits in more than one market simultaneously. Some have argued in favor of such “double-dipping”, because it would make the provision of environmental services more profitable. In practice however, most programs do not allow double-dipping. We show that if the optimal level of pollution abatement is sought, then double-dipping maximizes societal net benefits. However, if pollution policies are set in a piecemeal fashion, then the caps for each market are unlikely to be optimal and, in this second-best setting, a policy prohibiting double-dipping can lead to greater social net benefits. We explore conditions under which a single-market policy is preferred, or equivalently, where piecemeal policies are likely to yield particularly inefficient outcomes.     

The adaptive value of remnant native plants in invaded communities: an example from the Great Basin

Changes in the species composition of biotic communities may alter patterns of natural selection occurring within them. Native perennial grass species in the Intermountain West are experiencing a shift in the composition of interspecific competitors from primarily perennial species to an exotic, annual grass. Thus traits that confer an advantage to perennial grasses in the presence of novel annual competitors may evolve in invaded communities. Here I show that such traits are apparent in populations of a native perennial grass, big squirreltail (Elymus multisetus M.E. Jones), exposed to cheatgrass (Bromus tectorum L.) competitors. Dormant big squirreltail plants were collected from cheatgrass-invaded and uninvaded sites near Bordertown, California, USA, a mid-elevation (1600 m) sagebrush community, and transplanted into pots in a greenhouse. Individual plants were split into equal halves. One half was grown with competition from cheatgrass, and the other half was grown without competition. Plants collected from invaded sites responded more quickly to watering, growing more leaves in the first 10 days after transplanting. In addition, big squirreltail plants collected from invaded areas experienced a smaller decrease in plant size when grown with competition than did plants collected from uninvaded areas. Accordingly, while there were fewer big squirreltail individuals in the invaded sites, they were more competitive with cheatgrass than were the more abundant conspecifics in nearby uninvaded areas. It is possible that annual grasses were the selective force that caused these population differences, which may contribute to the long-term persistence of the native populations. While it is tempting to restore degraded areas to higher densities of natives (usually done by bringing in outside seed material), such actions may impede long-term adaptation to new conditions by arresting or reversing the direction of ongoing natural selection in the resident population. If hot spots of rapid evolutionary change can be identified within invaded systems, these areas should be managed to promote desirable change and could serve as possible sources of restoration material or reveal traits that should be prioritized during the development of restoration seed material.     

Green markets, eco-certification, and equilibrium fraud

Consumers voluntarily pay significant price premiums to acquire unobservable environmental attributes in green markets. This paper considers the performance of eco-certification policy under circumstances where consumers cannot discern environmental attributes in goods, but are able to form rational expectations regarding the extent of illicit activities in the green market. The main results are: (i) fraud is less prevalent in green markets when entry barriers limit the number of firms; (ii) conventional environmental policies on polluting techniques increase the incidence of fraud, and can even preclude the use of non-polluting techniques which would otherwise emerge in green markets; (iii) voluntary eco-certification policies can decrease fraud, increase output, and raise profits per firm; and (iv) in cases where the socially optimal resource allocation can be supported, the optimal policy involves negative unit certification fees, positive fixed certification fees and is revenue-generating for the certifying agent.     

Spatial economic theory of pollution control

In February 1972 the Nixon Administration proposed a tax on sulfur oxide emissions, beyond the Federal standards, of electric power plants. It was hoped that such a tax would discourage power plant locations in heavily polluted areas like urban areas. Assuming that such a tax varies over space because pollution is not invariant over space, the spatial theory of the firm is presented in this paper cast doubt on the efficacy of such a polltuion tax to achieve the desired goal of the administration. In particular it is shown that the cost-minimizing spatial firm would abate its pollution in response to a tax by either changing its location or by reducing waste through process change or by using a transportable abatement good if the tax savings due to the change in marginal abatement through location change per unit change in abatement is greater than or equal to transport rate on the abatement good. If the goal of the firm is to maximize profits, the desired outcome would follow if in addition to the fulfillment of the above condition the percentage change in the delivered price of raw material (situated at one end of the linear location space) per unit distance is greater than or equal to the percentage change in net marginal revenue, i.e., marginal revenue net of transport cost per unit of output. In simple terms, the conclusions of this paper raise doubts regarding the effectiveness of a pollution tax in curtailing pollution of a firm which is operating in a space economy. This outcome is peculiar to a spatial firm. Sufficient conditions also have been obtained when land input is included in the production function of the firm.