Equating Permanence of Emission Reductions and Carbon Sequestration: Scientific and Economic Foundations for Policy Options
December 2013 – by Brian C. Murray and Prasad S. Kasibhatia

Terrestrial (biological) carbon sequestration is the process by which carbon dioxide (CO2) is removed from the atmosphere through photosynthesis and stored in terrestrial stocks of biomass or soil organic carbon. A ton of carbon (or CO2 equivalent) sequestered in terrestrial systems can be used as an offset credit against emissions from sources such as power plants, factories, or automobiles. However, carbon stored in terrestrial carbon pools is particularly susceptible to re-release (reversal), raising the so-called permanence issue. When a reversal occurs, crediting adjustments are necessary to restore the integrity of the offset mechanism. This paper explores the permanence issue from both an atmospheric and an economic perspective, showing that adjustments for reversals can depend on a variety of factors, including the assumed decay rate of the initial emissions pulse, the timing of any stored carbon release, a policy-determined “equivalency period” reflecting the relevant policy time horizon, the time-dependent economic value of carbon mitigation units, and the relevant discount rate for comparing economic flows over time.

Behavioral Spillovers from Targeted Incentives: Losses from Excluded Individuals Can Counter Gains from Those Selected
October 2013 – by Francisco Alpízar, Anna Nordén, Alexander Pfaff, and Juan Robalino

Incentives conditioned on socially desired acts such as donating blood, departing conflict, or mitigating climate change have increased in popularity. Many incentives are targeted, excluding some of the potential participants on the basis of characteristics or prior actions. We hypothesize that pro-sociality is reduced by exclusion, in of itself (i.e., fixing prices and income) and that the rationale for exclusion influences such “behavioral spillovers.” To test this hypothesis, we use a laboratory experiment to study the effects of a subsidy for donations when participants are fully informed about why they are, or are not, selected for the subsidy. We study the effects of introducing different selection rules on changes in donations. Selecting for the subsidy those who initially acted less pro-social (i.e., those who gave little to start) increased donations, whereas providing random subsidies and rewarding greater pro-sociality did not increase donations. Yet a selection rule that targets lower prior pro-sociality also intentional excludes the people who donated more initially, and only that rule reduced donations by the excluded participants. This finding shows a tradeoff between losses from excluded participants and gains from selected participants.

Effects of Exclusion from a Conservation Policy: Negative Behavioral Spillovers from Targeted Incentives
October 2013 – by Francisco Alpízar, Anna Nordén, Alexander Pfaff, and Juan Robalino

A critical issue in the design of incentive mechanisms is the choice of whom to target. For forests, the leading rules are (1) target locations with high ecosystem-service density; (2) target additionality, i.e., locations where conservation would not occur without the incentive; and, (3) at least effectively reward previous private choices to conserve forest. We use a field experiment to examine the changes in contributions to forest conservation when we introduce each of these selection rules. For individuals who are selected, we find that targeting additionality (rule 2) is the only scheme to increase contributions. However, that selection rule intentionally excludes those who contributed most previously, and it is the only one to generate significant “behavioral leakage,” i.e., negative spillovers or a decrease in contributions by those who are excluded (and who face no price or income changes). Our results demonstrate a tradeoff in targeting and a challenge for optimal policy design.

Designing Cap and Trade to Correct for Non-Additional Offsets
September 2013-by Brian C. Murray, Jonah M. Busch, Richard T. Woodward, and W. Aaron Jenkins

Offsets lower the cost of cap-and-trade programs but must be considered imperfect if they cannot exclude “non-additional” emissions reductions or sequestration gains that would have occurred in their absence. Non-additionality can be addressed by requiring project-level additionality tests, by adjusting the mandatory emissions cap, or by imposing a trading ratio requirement on offset credits. Additionality tests most completely put the welfare impact on non-additional abaters but are challenging to implement. A cap adjustment is simple but places the entire welfare impact on the capped sector. A trading ratio, also simple, spreads the welfare impact across the capped and uncapped sectors. A trading ratio may either increase or decrease the welfare of the uncapped sector. When the quantity of non-additional abatement is uncertain, a cap adjustment has lower aggregate costs than a trading ratio, whereas a trading ratio has less variance with respect to quantity of emissions reduced.

Cost-Benefit Analysis and Distributional Weights: An Overview
August 2013-by Matt Adler

Cost-benefit analysis (CBA) is notoriously insensitive to distributional concerns, favoring a policy with a positive sum of monetary equivalents, even if better-off individuals are benefitted at the expense of worse-off ones. This problem is sometimes mitigated, in practice, by monetizing goods and bads using constant values that do not vary with individuals’ attributes. However, the use of population-average or otherwise constant values lacks any theoretical basis. Moreover, this practice can have unpleasant implications, for example, forcing people to spend more money on risk reduction than they would prefer. Arguably, equity considerations should be incorporated into CBA through so-called distributional weights. Specifically, CBA with distributional weights is a practicable method for operationalizing a social welfare function (SWF). Two SWFs and the functional form of weights matching them are discussed, and an example of how distributional weights might be brought to bear on environmental policy choice is given. Various objections to distributional weights are also discussed—including the traditional objection that redistribution is best handled through the tax system.

Nudging Energy Efficiency Behavior: Role of Information Labels
August 2013-by Richard Newell and Juha V. Siikamaki

This report evaluates the effectiveness of energy efficiency labels in guiding household decisions. Using a choice experiment with alternative labels, the authors find that simple information on the economic value of saving energy is the most important element guiding more cost-efficient investments in appliance energy efficiency; information on physical energy use and carbon emissions has no significant additional value. They also find that the degree to which the current EnergyGuide label guides cost-efficient decisions depends on the assumed discount rate. These results reinforce the importance of intertemporal choice and discounting for understanding individual behavior and guiding policy.

Pricing of Eco-Labels for Salmon in UK Supermarkets
May 2013 – by Frank Asche, Thomas A. Larsen, Martin D. Smith, Geir Sogn-Grundvag and James A. Young

Eco-labels are important features of many natural resource and food markets. They certify that a product has a desirable intrinsic quality, typically related to a public good such as being sustainably produced. In an increasing number of markets, consumers can choose between different labels that certify different attributes. Two issues that have received limited attention are whether pricing varies across different eco-labels and to what extent different retailers have adopted different pricing strategies for eco-labels. This paper investigates these issues by estimating a hedonic price model for salmon sold in Glasgow, U.K. for eight different retail chains, two eco-labels, and one label of origin. The results show substantial variation in the prices of the different eco-labels and that eco-label premiums vary across retail chains.

Carbon Markets: Past, Present, and Future
January 2013 – by Richard G. Newell, William A. Pizer, and Daniel Raimi

Carbon markets are substantial and they are expanding. There are many lessons from experiences over the past eight years: fewer free allowances, better management of market-sensitive information, and a recognition that trading systems require adjustments that have consequences for market participants and market confidence. Moreover, the emerging international architecture features separate emissions trading systems serving distinct jurisdictions. These programs are complemented by a variety of other types of policies alongside the carbon markets. This sits in sharp contrast to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol and raises a suite of new questions. In this new architecture, jurisdictions with emissions trading have to decide how, whether, and when to link with one another, and policymakers overseeing carbon markets must confront how to measure the comparability of efforts among markets and relative to a variety of other policy approaches.