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Experimental tests of water quality trading markets

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  • Jones, Luke R.
  • Vossler, Christian A.

Abstract

Many watersheds in the U.S. have established water quality trading programs to help realize cost-effective reductions in water pollution; however, the success of these programs has been limited. This study highlights some of the unique features of water-based credit trading markets that may explain the lack of success, and uses laboratory experiments to isolate their effects. In particular, we compare two forms of a baseline-and-credit institution, a Pigouvian tax/subsidy regulation, and – characteristic of air quality programs – a textbook cap-and-trade regulation. Across these institutions we examine the effects of abatement technology adoption. We find that a baseline-and-credit program, when it requires firms to make upfront investments to generate tradable credits, is less efficient than cap-and-trade and tax/subsidy institutions. Furthermore, we find that when efficient trading requires costly technology adoption, institutions that involve inter-firm trading, including cap-and-trade, are less efficient than the tax/subsidy.

Suggested Citation

  • Jones, Luke R. & Vossler, Christian A., 2014. "Experimental tests of water quality trading markets," Journal of Environmental Economics and Management, Elsevier, vol. 68(3), pages 449-462.
  • Handle: RePEc:eee:jeeman:v:68:y:2014:i:3:p:449-462
    DOI: 10.1016/j.jeem.2014.08.001
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    References listed on IDEAS

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    Cited by:

    1. Frans P. Vries & Nick Hanley, 2016. "Incentive-Based Policy Design for Pollution Control and Biodiversity Conservation: A Review," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(4), pages 687-702, April.

    More about this item

    Keywords

    Water quality trading; Baseline-and-credit; Cap-and-trade; Technology adoption; Laboratory experiments;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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