Trading has been introduced in environmental regulation to lower the costs of meeting the environmental requirements − by having actors with lower opportunity costs be paid by the regulated actors to provide eco-services on their behalf. Lowering costs raises net benefit and lessens pain for those who lose on net. Yet holding eco-services constant may be difficult without measurement and difficulties in measurement may, in turn, lead to a rejection of trading (also called 'offsets') until more accurate measurements exist; alternatively, savings may be limited by trading restrictions driven by services-substitutability concerns: rules to apply ‘apples for apples’ will vary in how much they bind but may lead to thin markets in offsets. An alternative program structure, ‘voluntary payments’, may also be used to incent eco-services supply: unconstrained governments, firms or individuals may offer payment conditional on increased services. Unlike offsets, payments increase eco-services, and the gains for those who pay are the eco-services. This difference means the set of voluntary demanders will differ across these two program structures, as those firms who are (or may be) regulated or who try to please customers by self-regulating may not value eco-services. In contrast, individuals or NGOs who are not regulated might gladly pay for eco-services.
Our focus is interactions between multiple such programs, e.g., between: two offsets programs aimed to lower costs for different eco-services; two payments programs to increase different eco-services; or one offsets program and one payments program that are each targeting a different eco-service. Such trading or compensation institutions for different services may have reason to interact when a single choice made by a farmer, e.g., or by any other eco-services supplier, can affect the supply of more than one eco-service. For example, using less nitrogen fertilizer raises water quality but it also lowers nitrous oxide emissions. If farmers who supply multiple services could sell each to some trading institution (e.g., greenhouse-gas emissions to GHG-offsets markets and nutrient abatement to water-quality-offsets markets), then fertilizer reduction would be more likely to be worthwhile for farmers, potentially raising supply for each service. In fact, socially efficient incentives for fertilizer reduction are provided by being able to sell both services. Yet despite the societal efficiency in the sense of private decisions which results from such farmers being able to sell all of the eco-services they generate, there are potential downsides to this approach as well.
Theme 3: Fairness and Distributional Issues in policy making.
