Three essays on environmental incentives: dynamics, asymmetric information, and dual policy goals

Hongli Feng

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This dissertation has three essays. In the first essay, we develop a dynamic model to investigate the optimal time paths of carbon emissions, sequestration and the carbon stock. We show that carbon sinks should be utilized as early as possible, and carbon flow into sinks should last until the atmospheric carbon concentration is stabilized. We rule out any cyclical patterns of carbon sequestration and release. We propose and assess three mechanisms to efficiently introduce sequestration into a carbon permit trading market: a pay-as-you-go system, a variable-length-contract system and a carbon annuity account system. Although the three mechanisms may not be equally feasible to implement, they are all efficient.;In the second essay, it is shown that when there are a large number of firms, permit trading within one period tends to absorb firm-specific shocks in that period. In the presence of industry-wide shocks, however, allowing trade across time can attain a higher welfare level than a no-banking system. Bankable permit regimes with a 1-to-1 or non-unitary intertemporal trading ratios (ITRs) are examined. When banking is welfare improving, the optimal ITR is always less than 1+r, the ITR for monetary values. The more industry-wide shocks vary, and/or the more they are negatively correlated across time, the more efficient a bankable permit regime. Bankable permits with ITR=1 or ITR=1+r can both do better than a no banking regime. However, which one is better depends on the covariance structure of the shocks and the benefit and damage functions.;In the third essay, the efficient design of green payments is analyzed. Green payments may generate environmental benefits and support the income of small farmers. If the government intends to achieve both of these two goals, then the decoupling of green payments and farm size is not optimal when information is limited. Moreover, the effectiveness of green payments critically depends on the correlation between conservation efficiency and farm size.

Date: 2001-01-01
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