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Experimental tests of water quality trading markets

Listed author(s):
  • Jones, Luke R.
  • Vossler, Christian A.

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0095069614000746
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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 68 (2014)
Issue (Month): 3 ()
Pages: 449-462

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Handle: RePEc:eee:jeeman:v:68:y:2014:i:3:p:449-462
DOI: 10.1016/j.jeem.2014.08.001
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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