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Double Dipping in Environmental Markets

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  • Woodward, Richard T

Abstract

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 doubledipping. 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 singlemarket policy is preferred, or equivalently, where piecemeal policies are likely to yield particularly inefficient outcomes.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26185.

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Date of creation: Apr 2010
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Handle: RePEc:pra:mprapa:26185

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Keywords: Environmental policy; tradable discharge permits; numerical methods; stacking;

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  1. Donald N. Dewees, 2000. "Emissions Trading: ERCs or Allowances," Working Papers dewees-00-01, University of Toronto, Department of Economics.
  2. Beavis, Brian & Walker, Martin, 1979. "Interactive pollutants and joint abatement costs: Achieving water quality standards with effluent charges," Journal of Environmental Economics and Management, Elsevier, vol. 6(4), pages 275-286, December.
  3. Peter Michaelis, 1992. "Global warming: Efficient policies in the case of multiple pollutants," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(1), pages 61-77, January.
  4. Atkinson, Scott & Tietenberg, Tom, 1991. "Market failure in incentive-based regulation: The case of emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 17-31, July.
  5. Montero, Juan-Pablo, 2000. "Optimal design of a phase-in emissions trading program," Journal of Public Economics, Elsevier, vol. 75(2), pages 273-291, February.
  6. Helfand, Gloria E, 1991. "Standards versus Standards: The Effects of Different Pollution Restrictions," American Economic Review, American Economic Association, vol. 81(3), pages 622-34, June.
  7. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  8. Berry, David, 2002. "The market for tradable renewable energy credits," Ecological Economics, Elsevier, vol. 42(3), pages 369-379, September.
  9. Shabman, Leonard A. & Scodari, Paul F., 2005. "The Future of Wetlands Mitigation Banking," Choices, Agricultural and Applied Economics Association, vol. 20(1).
  10. Tracy R. Lewis, 1996. "Protecting the Environment When Costs and Benefits Are Privately Known," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 819-847, Winter.
  11. Horan, Richard D. & Shortle, James S. & Abler, David G., 2004. "The Coordination and Design of Point-Nonpoint Trading Programs and Agri-Environmental Policies," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 33(1), April.
  12. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  13. Virginia McConnell & Elizabeth Kopits & Margaret Walls, 2006. "Using markets for land preservation: Results of a TDR program," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 49(5), pages 631-651.
  14. Arthur Caplan, 2006. "A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(4), pages 471-492, August.
  15. Montero, Juan-Pablo, 2001. "Multipollutant Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 762-74, Winter.
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Cited by:
  1. Yeo, Boon-Ling & Anastasiadis, Simon & Kerr, Suzi & Browne, Oliver, 2012. "Synergies between Nutrient Trading Scheme and the New Zealand Greenhouse Gas (GHG) Emissions Trading Scheme (ETS) in the Lake Rotorua Catchment," 2012 Conference, August 31, 2012, Nelson, New Zealand 144270, New Zealand Agricultural and Resource Economics Society.
  2. Jimena González-Ramírez & Catherine L. Kling & Adriana Valcu, 2012. "An Overview of Carbon Offsets from Agriculture," Annual Review of Resource Economics, Annual Reviews, vol. 4(1), pages 145-160, 08.
  3. G. Cornelis van Kooten & Craig Johnston & Zhen Xu, 2012. "Economics of Forest Carbon Sequestration," Working Papers 2012-04, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
  4. James Shortle & Richard D. Horan, 2013. "Policy Instruments for Water Quality Protection," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 111-138, June.
  5. Karen Fisher-Vanden & Sheila Olmstead, 2013. "Moving Pollution Trading from Air to Water: Potential, Problems, and Prognosis," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 147-72, Winter.

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