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Experimental tests of water quality trading markets

Luke Jones and Christian Vossler

Journal of Environmental Economics and Management, 2014, vol. 68, issue 3, 449-462

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.

Keywords: Water quality trading; Baseline-and-credit; Cap-and-trade; Technology adoption; Laboratory experiments (search for similar items in EconPapers)
JEL-codes: C91 C92 D80 L50 Q58 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jeem.2014.08.001

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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