IDEAS home Printed from https://ideas.repec.org/p/ags/aaea00/21792.html

Some searches may not work properly. We apologize for the inconvenience.

   My bibliography  Save this paper

The Failure Of Marketable Permit Systems And Uncertainty Of Environmental Policy: A Switching Regime Model Applied To The Dutch Phosphate Quota Program

Author

Listed:
  • Wossink, Ada

Abstract

A well-known feature of pollution control with tradable quota rights is that the benefits to ownership will capitalize into prices of the quota. Quota present a unique opportunity to examine the effect of risks introduced by governmental programs because all the return to quota is dependent upon these programs. The uncertainty of future regulatory action results from the probability that the stream of incomes could be reduced (portfolio risk) by policy variation or stopped (default risk) by a substantial switch or shock in policy regime. Eliminating the quota program is the extreme case of default risk, as it would terminate the quota benefits. The paper concentrates on the paradox that environmental regulation can provoke economic and environmental inefficiencies because of policy uncertainty. The theory on investment under uncertainty argues that when future returns are uncertain, an opportunity to wait and see has some (quasi) option value. Under uncertainty, investments and disinvestments will take place at respectively higher and lower levels of returns creating an inaction interval. This interval means that returns to quota can vary over a wide range before trade takes place and offers a new, theoretical explanation for the failure of marketable permit systems. The objectives of this paper are threefold. First, the option value theory is employed to forge a natural connection between political uncertainty and quota price volatility. Second, based on the option value theory, a switching regime model is developed for investing and disinvesting in quota. Third, the empirical evidence for the Dutch Phosphate Quota Program indicates that policy risks led to asset fixity. Consequently, the market of tradable phosphate quota was not effective with major negative implications for both economic and environmental efficiency.

Suggested Citation

  • Wossink, Ada, 2000. "The Failure Of Marketable Permit Systems And Uncertainty Of Environmental Policy: A Switching Regime Model Applied To The Dutch Phosphate Quota Program," 2000 Annual meeting, July 30-August 2, Tampa, FL 21792, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea00:21792
    DOI: 10.22004/ag.econ.21792
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/21792/files/sp00wo01.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.21792?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Boots, Maroeska & Oude Lansink, Alfons & Peerlings, Jack, 1997. "Efficiency Loss Due to Distortions in Dutch Milk Quota Trade," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 24(1), pages 31-46.
    2. Dana L. Hoag & Jennie S. Hughes-Popp, 1997. "Theory and Practice of Pollution Credit Trading in Water Quality Management," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 19(2), pages 252-262.
    3. George Lermer & W. T. Stanbury, 1985. "Measuring the Cost of Redistributing Income by Means of Direct Regulation," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 190-207, February.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Richards, Timothy J., 1996. "Economic Hysteresis And The Effects Of Output Regulation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(1), pages 1-17, July.
    6. Breembroek, J. A. & Koole, B. & Poppe, K. J. & Wossink, G. A. A., 1996. "Environmental farm accounting: The case of the dutch nutrients accounting system," Agricultural Systems, Elsevier, vol. 51(1), pages 29-40.
    7. Bob Baulch, 1997. "Transfer Costs, Spatial Arbitrage, and Testing for Food Market Integration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 477-487.
    8. Rucker, Randal R & Thurman, Walter N, 1990. "The Economic Effects of Supply Controls: The Simple Analytics of the U.S. Peanut Program," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 483-515, October.
    9. Timothy J. Richards & Paul M. Patterson, 1998. "Hysteresis and the Shortage of Agricultural Labor," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 683-695.
    10. Bryant, Amy & Richards, Timothy J., 1998. "Hysteresis And The Shortage Of Agricultural Labor," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20858, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jan Hinrichs & Oliver Musshoff & Martin Odening, 2008. "Economic hysteresis in hog production," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 333-340.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Calum G. Turvey, 2010. "Biography," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 5-20, May.
    2. Twine, Edgar E. & Omore, Amos & Githinji, Julius, 2018. "Uncertainty in milk production by smallholders in Tanzania and its implications for investment," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 21(1).
    3. Turvey, Calum G., 2002. "Can Hysteresis And Real Options Explain The Farmland Valuation Puzzle?," Working Papers 34131, University of Guelph, Department of Food, Agricultural and Resource Economics.
    4. Gardebroek, Cornelis & Oude Lansink, Alfons G.J.M., 2008. "Dynamic Microeconometric Approaches To Analysing Agricultural Policy," 107th Seminar, January 30-February 1, 2008, Sevilla, Spain 6592, European Association of Agricultural Economists.
    5. Wheatley, W. Parker & Liu, Donald J. & del Ninno, Carlo, 2001. "Empirical Analysis Of Hysteresis In Rural Labor Markets In A Developing Country: The Case Of Bangladesh," 2001 Annual meeting, August 5-8, Chicago, IL 20594, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Feil, Jan-Henning & Musshoff, Oliver, 2013. "Investment, disinvestment and policy impact analysis in the dairy sector: a real options approach," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 159229, Humboldt University Berlin, Department of Agricultural Economics.
    7. Tauer, Loren W., 2006. "When to Get In and Out of Dairy Farming: A Real Option Analysis," Agricultural and Resource Economics Review, Cambridge University Press, vol. 35(2), pages 339-347, October.
    8. Quoc V. Luong & Loren W. Tauer, 2006. "A real options analysis of coffee planting in Vietnam," Agricultural Economics, International Association of Agricultural Economists, vol. 35(1), pages 49-57, July.
    9. Ritter, Matthias & Yang, Xinyue & Odening, Martin, 2017. "Spatial integration of agricultural land markets," 2017 International Congress, August 28-September 1, 2017, Parma, Italy 261430, European Association of Agricultural Economists.
    10. Huang, Kuan-Ming & Guan, Zhengfei, 2022. "Increasing minimum wages and farmers’ hiring decisions," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322556, Agricultural and Applied Economics Association.
    11. Musshoff, Oliver & Odening, Martin, 2005. "Switching from Conventional to Organic Farming – a Real Options Perspective," 89th Seminar, February 2-5, 2005, Parma, Italy 234633, European Association of Agricultural Economists.
    12. Karunagoda, Kamal, 2004. "Changes in Labour Market and Domestic Agriculture," Sri Lankan Journal of Agricultural Economics, Sri Lanka Agricultural Economics Association (SAEA), vol. 6, pages 1-17.
    13. Brady, Michael P. & Gallardo, R. Karina & Badruddozza, Syed & Jiang, Xiaojiao, 2016. "Regional Equilibrium Wage Rate for Hired Farm Workers in the Tree Fruit Industry," Western Economics Forum, Western Agricultural Economics Association, vol. 15(1), pages 1-12.
    14. A. Ford Ramsey & Tadashi Sonoda & Minkyong Ko, 2023. "Intersectoral labor migration and agriculture in the United States and Japan," Agricultural Economics, International Association of Agricultural Economists, vol. 54(3), pages 364-381, May.
    15. Richards, Timothy J., 2018. "Immigration Reform and Farm Labor Markets," 2018 Annual Meeting, August 5-7, Washington, D.C. 274165, Agricultural and Applied Economics Association.
    16. Alicia L. Rihn & Margarita Velandia & Laura A. Warner & Amy Fulcher & Susan Schexnayder & Anthony LeBude, 2023. "Factors correlated with the propensity to use automation and mechanization by the US nursery industry," Agribusiness, John Wiley & Sons, Ltd., vol. 39(1), pages 110-130, January.
    17. Odening, Martin & Musshoff, Oliver, 2001. "Reale Optionen und Landwirtschaftliche Betriebslehre – oder: Kann man mit der Optionspreistheorie arbitrieren?," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 50(08), pages 1-10.
    18. Andrew J. Cassey & Kwanyoung Lee & Jeremy Sage & Peter R. Tozer, 2018. "Assessing post-harvest labor shortages, wages, and welfare," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-24, December.
    19. Feil, Jan-Henning & Mußhoff, Oliver, 2016. "Analysing investment and disinvestment decisions under uncertainty, firm heterogeneity and tradable output permits," DARE Discussion Papers 1602, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    20. Diane Charlton & Marcelo Castillo, 2021. "Potential Impacts of a Pandemic on the US Farm Labor Market," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(1), pages 39-57, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea00:21792. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.