ENVIRONMENT AND DEVELOPMENT I: DEFORESTATION · ENVIRONMENT AND DEVELOPMENT I: DEFORESTATION Session 1B1 CAN NEO-CLASSICAL ECONOMICS SAVE THE TROPICAL FORESTS? Room 6 R. K. Turner

1

ENVIRONMENT AND DEVELOPMENT I: DEFORESTATION

Session 1B1 CAN NEO-CLASSICAL ECONOMICS SAVE THE TROPICAL FORESTS?Room 6 R. K. Turner (University College London and University of East Anglia), David W.

Pearce (CSERGE, University College London)

This paper presents a state of the art review of both the economic values residing in tropical forestsand an assessment of the practical feasibility of their capture through emerging and created markets.The first section of the paper presents a review of use and non-use values and the empiricalevidence published so far on this scale. It will be argued that past studies contain both conceptualerrors and empirical inaccuracies. Too little attention has been paid to distinctions between stockand flow measures and valid aggregation procedures. Evidence from empirical work recentlycompleted in Sri Lanka, Malaysia and Guyana will also be utilised in order to demonstrate thatprevious studies have overestimated both potential and realisable economic values from rigid forestconservation policies. The second part of the analysis deals with possible and feasible foresteconomic value capture mechanisms. Opportunities covered include, the market prospects forecotourism and the extraction of non-timber forest products; carbon sequestration and jointimplementation measures; non-use value capture via debt for nature swaps, tradeable developmentrights and franchise agreements, environmental funds and biodiversity prospecting. The concludingsection draws out both the philosophical and practical policy implications for forest biodiversityconservation versus other economic development options in developing country social, economicand political contexts.


Session 1B1 THE GLOBAL POLITICAL ECONOMY OF BIOPROSPECTINGRoom 6 Douglas Southgate (Ohio State University), David Simpson (Resources for the

Future)

Nations of the developing South, which are economically poor but possess diverse biologicalresources, often express great hopes for bioprospecting, which is the search for natural organismsthat generate compounds of potential commercial value. By contrast, the customers forbioprospecting's output, which are concentrated in the industrial North, are much less enthusiastic.In this paper, the reasons for and consequences of this discrepancy are examined. A major point ofconflict has to do with the treatment of intellectual property rights (IPRs). The governments ofnorthern countries, in which well-articulated regimes for IPR protection have stimulated thedevelopment of knowledge-based industries (e.g., pharmaceuticals), are reluctant to ratify theinternational Convention on Biological Diversity (CBD), which is read by some to oblige thetransfer of technology to governments and other agents controlling access to biological resources.By contrast, southern governments may prefer to maintain some imprecision concerning CBDobligations, in the hopes of appropriating further gains from bioprospecting transactions.Disagreements concerning value can give rise to various inefficiencies. Overestimating the value ofdiverse biological resources may interfere with the exchange of bioprospecting rights, even whentrade is beneficial to source countries and potential partners alike. Alternatively, source countriesmay enter into agreements under terms that call for them to accept excessive risks, to incur greatermonitoring costs, or to invest excessivelyin processing capacity. A fundamental conclusion of thispaper is that, while bioprospecting ventures might in some cases provide some modest incentivesfor conservation and development, they often are ounterproductive. Unreasonable expectations ofearnings lead poor countries in the tropics to make unrealistic demands for compensation. At thesame time, efforts to capture more returns from bioprospecting by vertically integrating intopharmaceutical development may divert scarce resources from more valuable investments, ineducation and public health for example.


Session 1B1 DO TROPICAL FORESTS PROVIDE NATURAL INSURANCE?Room 6 Subhrendu Pattanayak (Duke University), Erin Sills (North Carolina State

University)

The economic importance of tropical forests to local people, in terms of non-timber plant andanimal products, has been widely accepted in policy circles. Researchers have questioned the role offorests in economic development, however, because of the high cost of collecting from widelyscattered members of a species and the possibility that the products are inferior goods, used only bythe poorest households or as a last resort in times of economic stress. To explore the role of forestsas suppliers of products to local people, we develop a conceptual model of tropical forests as naturalinsurance for households on the forest margin. The model hinges on the observation that theseforests are highly diverse, offering a wide range of products, some of which will be available tohouseholds when other income and subsistence sources fail. Forest production activities areexpected to have lower mean but also lower variance than agricultural production. Many tropicalforests are not privately owned and essentially open-access to local people, but in order to utilizeforests to mitigate negative shocks to agricultural production, households must have invested timein learning about the spatial and temporal distribution of forest products. Because forests are anessential input in this risk-reducing human capital formation, the time invested is an indicator of theforests’ value as natural insurance. Our conceptual approach to households economic relation withforests draws on models from the averting behavior theory of environmental economics and theportfolio diversification theory of development economics. We estimate the model with householdsurvey data from the Tapajos National Forest in the Brazilian Amazon. In the analysis, we first seekto identify evidence that the forest serves as insurance by mitigating risk, then to identify systematicdifferences in the importance of the forest as insurance across income classes or other categories ofhouseholds, and finally to estimate the value of the forest as insurance to local households. In ourconceptual model, households accumulate knowledge and skills, or human capital, about the forestand about agriculture by spending time in those activities, conditional on the quality of theresources. The human capital stock directly affects the mean and variance of profits, and indirectlyaffects household utility since profits affect the income constraint for consumption choices. In orderto maximize utility and achieve the best feasible distribution of consumption, households balancethe time spent in the forest and in agriculture. In our empirical analysis, we use several proxies forhuman capital including average household time allocated to forest collection or agriculturalproduction (an index of labor diversification accounting for time in various activities) and numberof forest collection trips. This proxy for human capital is our dependent variable in the estimatedequation, modeled as a function of consumption smoothing opportunities (asset holdings, number ofhouseholds members living off-farm and sending remittances, availability of transport to markets,and off-farm labor opportunities), household characteristics (stage in family life cycle education,origin, and number of years in the community and in the Amazon), biophysical factors (includingforest quality), and a measure of risk (the coefficient of variation of agricultural profits). Resultsfrom our preliminary analysis are encouraging. Based on negative binomial models of collectiontrips and to bit models of time spent in forest collection, we find evidence of positive correlationbetween investments in the human capital of knowledge about the forest and agricultural productionrisk, holding constant bio-physical factors, consumption smoothing and household categories.Ultimately, this study intends to demonstrate that the combination of micro-economic models fromenvironmental and development economics can provide a useful approach to a variety of questionsrelating to the role of environmental assets in the decision making of rural households exposed torisk. Further, our approach may illuminate the debate over non-timber forest products and identifyan important but under appreciated insurance role for forests in rural development.

ENVIRONMENT AND DEVELOPMENT I: DEFORESTATION I

Session 1B1 A MICROECONOMETRIC ANALYSIS OF CHOICE OF FUELWOODCOLLECTION SITES IN ZIMBAWE: VALUATION THROUGHBEHAVIOR AND CALORIC EXPENDITURE

Room 6 W. Adamowicz (University of Alberta), D Hatton MacDonald (University ofAlberta) and M. Luckert (University of Alberta)

Many methods have been employed to attempt to discover the value of non-market goods andservices in developing country contexts. In particular, the values associated with forests, rangingfrom values of wild fruits to values associated with spirituality, have been examined. However,these values are often assessed using either some form of hypothetical questioning (contingentvaluation) or they are assessed by finding market values for the goods or for similar goods. Theformer technique (contingent valuation) may have significant difficulties in developing countrycontexts, especially where markets play a limited role. The latter technique may also suffer whenmarkets for the goods are lacking and/or when the market for labour, which is often used to valuethe time involved in collecting and processing these ecosystem resources, is also imperfect. In thispaper we describe the collection of data on fuelwood collection in Zimbabwe and the estimation ofa microeconometric model of fuelwood collection and demand. A varying choice set random utilityeconometric model is estimated. This model allows us to examine the tradeoffs implicit in decisionsregarding fuelwood collection and the implied values of such decisions. The approach also allowsfor the valuation of fuelwood resources using metrics that are easily understood (e.g. caloricexpenditure). These metrics can then be translated into money measures if markets for foodproducts are well established. These methods provide a relevant and estimable measure of theeconomic consequences of changes in ecological service flows associated with forest resources in adeveloping country context.


Session 1B1 IMPLEMENTING FOREST INCENTIVES TO DETER NATURALRESOURCE DEGRADATION IN EL SALVADOR

Room 6 Gunars H. Platais (Abt Associates, Inc.), Raul Moreno (FUNDE)

El Salvador is recognized as one of the most environmentally degraded countries in the Americas,second only to Haiti. It has serious water, air, forest and soil related environmental problems. Itsresource base has been systematically depleted over the years. Recent studies indicate that watercontamination and poor air quality share the responsibility for the annual death of over 28,000children under the age of five. The original forest cover is less than two percent of the country'stotal area. The associated soil depletion is responsible for a number of malaise such as thesedimentation of the country's largest hydroelectric reservoir and a loss in agricultural productivity.As a consequence of deforestation and a lack of adequate soil conservation, agriculturalproductivity is declining. The economic impacts, as a result of these problems, will continue to taketheir toll on the national economy. This places the country at an interesting crossroad of having tobring to bear on policy analysis the necessary measures that will facilitate the country's revegetationand guarantee the conservation of soil and water resources. The forest sector has a very importantrole in reversing the trend of environmental degradation. The analysis and review of experiences inother countries provided valuable insight for the definition of a national incentive package. Theneed for the appropriate macroeconomic conditions necessary for implementation, solid technicalanalysis to substantiate the proposals, and ex-post evaluation were seen as critical. A financialanalysis of forest investments in El Salvador indicates favorable financial returns. Despite this treesare not being planted. This is due to market distorsions which need to be corrected in order for thesector to grow. The complexity and seriousness of resource degradation in El Salvador embraces amultiplicty of economic, political, cultural, social and demographic factors. This requires anintegrated and multifaceted solution which includes: investment incentives, legal and regulatoryframework, proactive support in the reforestation of critical areas from the public and privatesectors, a participatory agroforestry extension service, and finally the education andconscientization of the public at large on the necessity of paying for environmental servicesreceived. In this spirit new legislation is proposed that guarantees the producers the right to harvest,eliminates bureaucratic barriers, which reduces transaction costs. A new forestry law that iscoherent with a new social policy is called a natural incentive, whose key point is to eliminate theconditions that have secularly demotivated forestry. Incentives in the form of credit are especiallyimportant for investors in forestry and agroforestry. These are defined as special lines of credit withpreferential interest rates, favorable payback and grace periods which reflect the production cycle.Thus, the role of the Multisectorial Investment Bank, responsible for the administration of theEnvironmental Conservation Funds, is analyzed. In order to cover critical areas (e.g. steep slopes,water sources, and river banks) with vegetative cover a protective focus was adopted. To obtainresults, fiscal incentives were seen as the most appropriate instruments. Direct payments,environmental services payments and tax certificates were studied. Considering the inherentlimitation of most of the incentive programs, the main sources of alternative funding were reviewed.Amongst those considered were international donors, debt fornature swaps, joint implementation,ecotourism and environmental taxes. The need for the creation of an Environmental Fund becameevident so asto guarantee that monies collected would not evaporate in the public bureaucracy. Tocomplement natural incentives an institutional analysis concludes that there is a preeminent need tocreate a modern and efficient entity that will play a proactive role in the definition of the strategiesto operationalize the incentives package proposed and guide the development of the forest sector inEl Salvador. Education and participatory extension are highlighted as two important components.Finally, in the conclusions the main risks to the implementation of the forest incentives package andhow to overcome them are assessed.


Session 1B1 PROPERTY REGIMES AND DEFORESTATION: A QUANTITATIVESTUDY OF THE CENTRAL HIMALAYAS

Room 6 E. Somanathan (Emory University), R. Prabhakar (Institute of Rural Management)

The effects of property institutions are central to economics. Yet, quantitative work on the effects ofproperty institutions is rare in economics because property institutions generally covary withpolitical boundaries and, therefore, with other important variables. Thus, their impact tends to beconflated with that of other factors. This interdisciplinary study builds a database that givesmeasures of the extent of ecological degradation suffered by forests in the Central Himalayas, anduses it to perform a quantitative study that examines the importance of property regimes versusdemand-side factors, such as population, in causing such degradation. The central Himalayan regionof North India that constitutes the study area has three property regimes in forests within the sameecological, economic, and cultural milieu. In all three cases, the forests are a common resource, (asis typical in most tropical forests), so regulation or collective action is needed to overcome theresulting tendency for overexploitation. Reserved Forests, which are state-managed, rely mainly onregulation while Panchayat Forests, managed by village councils, rely on collective action. Thethird category, consisting of village forests not under formal management, also needs collectiveaction to survive. Data on forest quality in the region have been obtained by analysis of satelliteimages in conjunction with field work. The presence of thousands of Panchayat Forests adjacent toReserved Forests provides an exceptional natural experiment to examine the effect of propertyregimes on forest cover. By taking a sub sample of plots which lie across regime boundaries fromeach other, we control for the effects of all variables other than the legal regime. Multiple regressionanalysis is used to relate forest quality in a plot of forest to the property regime, the ecological type,demand-side variables such as accessibility, social characteristics of villages such as size and ethniccomposition, and controls. Endogeneity in the choice of property regime is ruled out for a subsample through the use of historical records maintained by the Forest Department. Preliminaryresults indicate that village councils are much more effective than state control in conservingbroadleaved (mainly oak) forests but this is not true for pine forests. The incentive structuregenerated by regulation and the differing uses of oak and pine appear to account for this. Nosignificant effect of accessibility , population density, or caste structure has been found in the datacollected so far, although this may change when the full data set is analyzed.

ENVIRONMENTAL POLICY AND INNOVATION

Session 1B2 INSTRUMENT CHOICE FOR ENVIRONMENTAL PROTECTION IN THEPRESENCE OF INDUCED TECHNOLOGICAL INNOVATION:ANALYTICAL AND EMPIRICAL ANALYSES

Room 1 Ian Parry (Resources for the Future), Carolyn Fisher (Resources for the Future),Michael Toman (Resources for the Future), William Pizer (Resources for theFuture)

This paper uses analytical and numerically solved models to compare the efficiency impacts ofalternative instruments for environmental protection in the presence of endogenous technologicalinnovation. We analyze emissions taxes, free tradable emissions permits and auctioned emissionspermits, assuming these policies are either fixed at the “Pigouvian” level or can be adjusted overtime following innovation. Our models incorporate the development of pollution abatementtechnologies from both deliberate R&D expenditures by firms, and learning by doing fromabatement activities. Our analytical models illustrate a variety of reasons why, in theory, efficiencyimpacts may differ under alternative policy instruments. Policies that are fixed produce lessincentive to innovate than policies that adjust over time to induce the optimal level of abatementfollowing the adoption of improved abatement technologies. If firms act collectively and take intoaccount changes in permit rents caused by innovation, this reduces the incentives to innovate underfree emissions permits, but can lead to excessive innovation under auctioned permits. Whentechnological innovation results from learning by doing, the socially optimal level of abatementexceeds the Pigouvian level. This implies additional inefficiency under permits that limit emissionsto the Pigouvian level. Our numerical model will investigate under what conditions, if any, theefficiency discrepancies under the different policy instruments are empirically important. Theseresults will enable us to gauge whether the efficiency benefits from using one policy instrumentover another, or using flexible as opposed to fixed policies over time, are likely to be of empiricalsignificance or not.


Session 1B2 R&D COOPERATION, INNOVATION SPILLOVERS AND FIRMSLOCATION IN A MODEL OF ENVIRONMENTAL POLICY

Room 1 Carlo Carraro (University of Venice and Fondazione Eni Enrico Mattei), AntoineSoubeyran (University of Aix-Marseille II)

In this paper, the reaction of firms to the introduction of environmental charges in a given industryis analysed. Firms may decide either to relocate their plants abroad or to adopt a newenvironmental-friendly technology. The latter can be either developed by investing in R&D orobtained by buying a licence. We show that, even if domestic firms share the same initialtechnology, at the equilibrium they make different choices in response to the same environmentalpolicy. Some firms decide to cooperate in carrying out environmental R&D, other firms re-locatetheir plants abroad, and a third group decides to innovate through imitation. The size of the threegroups can be affected by the government's industrial, trade and environmental policies. Conditionsunder which the three groups of firms are stable (i.e. the decision to join a given group is a Nashequilibrium) are provided.


Session 1B2 ENVIRONMENTAL POLICY AND TECHNOLOGICAL CHANGE: THEEFFECTS OF ECONOMIC INCENTIVES AND DIRECT REGULATIONON ENERGY-SAVING INNOVATION

Room 1 Richard Newell (Resources for the Future), Adam Jaffe (Brandeis University),Robert Stavins (Harvard University)

Over the long run, the impacts of environmental policies will be greatly affected by the influencethese policies have on the rate and direction of technological change. In particular, the roles playedby energy prices and product regulation in energy-saving technology innovation are exceptionallyimportant considerations in modeling climate change and evaluating alternative policy options. Weanalyze the effects of energy prices and energy-efficiency regulations on the menu of airconditioner and water heater models available on the market over a period of more than threedecades, measuring their innovation in terms of improvements in the products' underlyingcharacteristics. Through estimation of a series of "characteristics transformation surfaces," we findthat during less than four decades, substantial innovation in these products reduced the total capitaland operating costs of air conditioning by onehalf and water heating by more than one-fifth.Although the overall rate of innovation in these products appears to be independent of energy pricesand regulations, the evidence suggests that the direction of innovation may be responsive to energyprice changes. This would imply that energy price increases induced innovation in a direction thatlowered the capital cost tradeoffs inherent in producing more energy-efficient products. Theevidence supporting "regulation-induced" changes in these tradeoffs is much weaker. Our estimatesindicate that about one-quarter to one-half of the energy-efficiency improvements in these productsover the last two decades were associated with historical changes in energy prices. We also find thatthis responsiveness to price changes increased substantially after product labeling requirementscame into effect, and that minimum efficiency standards had a significant positive effect on averageefficiency levels. Nonetheless, a sizeable portion of historical efficiency improvements in thesetechnologies is associated with autonomous innovation.


Session 1B2 ENERGY AND TECHNICAL CHANGE IN A PRAGMATIC CGE MODELRoom 1 Irene Peters (EAWAG), Aleksandr Rudkevich (Tellus Institute for Resources and

Environmental Strategies), Stephen Bernow (Tellus Institute for Resources andEnvironmental Strategies), Michael Ruth (Tellus Institute for Resources andEnvironmental Strategies)

We show the impact of policy induced technical change on the U.S. economy with anunconventional CGE model. The novel features of our model are (i) pragmatic microfoundationsthat allow for market power due to increasing returns to scale in production; (ii) linkage to anindustrial energy demand model that describes technical change in response to energy policies andprices. As to (i), by pragmatic microfoundations we mean formulations of micro-behavior notderived from neoclassical theory of profit and utility maximization, but embodying decision rulesmore typical for agents acting in a complex world. These have two advantages: they make forgreater realism, and they free the model from the normative content that burdens conventional CGEmodels. The latter rest on a vision of the world in which there exists a unique efficient resourceallocation. The resulting “optimality” of model solutions has strong normative implications,suggesting that intervention in the market inevitably causes distortions and thus carries a welfarecost. We employ more realistic formulations of micro-behavior, letting producers in increasingreturns industries follow pricing rules that are more general than the profit-maximizing marginalcost pricing which is typically assumed in conventional models. As to (ii), we use a semi-endogenous formulation of induced technical change by linking the CGE model to an industrialenergy demand model with a strong engineering component. This model employs a level ofaggregation of around 20 sectors and describes the diffusion of energy-efficient technologies as afunction of prices and a number of exogenous parameters. It is partly built up from engineeringknowledge and partly estimated from historical data, showing that the energy savings potentialgrows over time as technologies improve. We do not fully endogenize technical change in order tomaintain realistic technology detail.


Session 1B2 CUMULATIVE POLLUTION WITH A COSTLY BACKSTOPRoom 1 Franz Wirl (Otto Von Guericke University of Magdeburg), Michael Toman

(Resources for the Future), Cees Withagen (Tilburg University)

The present paper considers an economy using a product that leads to pollution which accumulates(e.g. SO2 in the soil, CO2 in the atmosphere) but the pollution stock is also subject to natural decay.In addition, a clean (or "backstop") technology is available that requires costly initial investment.The slow build up of the capacity of the backstop is a major extension of most existing modelswhich assume unrealistically that the backstop is instantaneously available. The present paperprovides a theoretical characterization of the socially optimal introduction of such a backstop,including a complete stability analysis. The paper discusses in particular the conditions under whichstable limit cycles may characterize the socially optimal outcome. Issues related to the design ofdecentralized Pareto-improving environmental policy that stimulates appropriate investment in thecostly backstop also are discussed.


Session 1B2 SPECIES LOSS THROUGH THE GENETIC MODIFICATION OF CROPS.A POLICY FRAMEWORK

Room 1 David Ulph (University College London), Barbara Sianesi (University CollegeLondon)

Genetic engineering offers the prospect of developing a whole range of radically new products andtechnologies. As always, however, the potential gains that such new developments offer, cansometimes be accompanied by undesirable side-effects. In particular, the UK Advisory Committeeon Releases to the Environment (ACRE) has recently expressed concern that in a few decades thetechnology for genetically modifying plants so as to become insect resistant, could be developedand extended so successfully that most crops could be resistant to a wide range of insect pests,which would lead to a sharp decline in the population of insect pests. This in turn could not onlylead to a decline in the number of non-pest insects but could also threaten he survival of most of ournative bird species. This raises important questions about what policies should be adopted inresponse to this potential problem. Should we be trying to discourage the development of thesetechnologies (and if so how)? Should we tax the use of these technologies? Should we subsidise theuse of conventional technologies? In this paper we provide an intellectual framework in which toaddress these questions. We develop a model in which there is a continuum of crops. Throughexpenditure on R&D technologies are successively developed which lead to the more and morecrops becoming completely insect resistant. We also model the decision about how much of eachcrop is to be gown. As a result we can determine the amount of food available for insects at eachmoment of time. This in determines the evolution of insect and hence bird numbers. Within thisframework we determine (i) the optimal time path of R&D expenditure on successively modifyingcrops, and (ii) the optimal amount of each type of crop to grow at each moment of time. We showthat the only policy required to obtain this optimum path is a subsidy on the growing on non-modified crops.

BIODIVERSITY

Session 1B3 BIODIVERSITY: A PORTFOLIO ANALYSIS MODEL FOR EFFICIENTCONSERVATION DECISIONS

Room 7 Melinda Acutt (Lancaster University)

Biodiversity is currently being reduced as a result of a range of pressures, such as over-harvestingand habitat destruction. In the absence of intervention, inefficient extinctions may be occurring dueto the existence of market failures. The social costs of using resources that lead to biodiversity lossdiverge from the private costs of resource use; and this problem is accentuated by both the publicgood and uncertainty characteristics of the benefits of biodiversity conservation. The majority ofliterature to date has focused either on the direct use value of individual species, or the global valueof biodiversity. However, it is likely that the major portion of the benefits of biodiversityconservation accrue via indirect use values, such as maintaining ecosystem resilience, at a locallevel. This paper presents a new approach to modelling biodiversity conservation decisions at alocal level, that explicitly takes account of the riskiness of returns to investment in biodiversity. Themodel is grounded in portfolio analysis, which has its roots in a large financial economics literature;and has been applied widely in agricultural economics to aid farm investment decisions. Given a setof assets, portfolio analysis provides a mathematical procedure that enables identification of anefficient set of portfolios. A model can be solved to provide relative weights for the proportion of aninvestment budget that should be invested in each asset to provide the maximum levels of returnsfor a given level of risk. In this paper we outline the portfolio analysis model applied to biodiversityconservation decisions in relation to cereal production in the UK. Assets (i.e. investmentopportunities) are defined in terms of three management regimes, each with a different level ofbiodiversity. Each regime entails a different structure of costs and returns both to the farm firm andto the rest of society. Returns are derived from production functions, the outputs being the privatelyvaluable cereal production and game bird populations. The levels of biodiversity indirectly affectproduction of both cereals and game bird populations and are defined in the production functions torepresent the relevant ecological relationships. Risk is defined in terms of the distribution of returnsaround the means; and depends largely on weather conditions, but also on the relevant level ofbiodiversity. This model is then solved to identify the proportion of investment in each of theregimes that provides the highest overall returns to society subject to a pre- determined acceptablelevel of risk. This paper provides an innovative new approach to modelling biodiversityconservation decisions reflecting the risk involved in investment in management regimes withdifferent levels of biodiversity. The model is applied to the case of cereal production in the UK.However, the approach has the capacity to be applied widely to biodiversity investment andconservation decisions in both developed and developing countries. The model is directly policyrelevant in aiding decisions relating to biodiversity conservation resulting from requirements tomaintain and enhance biodiversity under the Rio Biodiversity Convention.

BIODIVERSITY

Session 1B3 INTERACTION BETWEEN BIOLOGICAL AND ECONOMICPROCESSES: A GAME THEORY APPROACH

Room 7 John Tisdell (Griffith University)

Biological diversity on the planet is a result of billions of years of evolution and ecologists, such asJohn Maynard Smith, are using evolutionary game theory to explain the role of animal behaviour inthe evolution process. Game theory, following the work of von Neumann, Morgenstern, Nash andothers is gaining support as a methodology for modeling economic behaviour. As economic activityhas been recognized as one of the major factors in the decline in biological diversity, the nexusbetween the disciplines of economic and ecology needs to be explored. Recognizing the currentlevel of biological knowledge on the interaction of species and the natural environment witheconomic processes, the paper explores similarities between ecological and evolutionary gametheory and possible cooperative and non cooperative games which may form the basis fordeveloping Ecological Economics gaming models.

BIODIVERSITY

Session 1B3 INCREMENTAL COST IN THE CONVENTION ON BIOLOGICALDIVERSITY

Room 7 Raffaello Cervigni (CSERGE)

The Convention on Biological Diversity stipulates the principle of incremental cost for theinternational financing of biodiversity conservation. The international debate about the exactmeaning of the concept, and about its practical application focuses on the issues of baselinedetermination and treatment of incremental domestic benefits. This paper uses some standard toolsof partial equilibrium demand analysis to illustrate theoretical solutions to the indeterminacy of theConvention. The allocation of resources resulting from an incremental cost scheme is comparedwith a "domestic optimum", and with a hypothetical "global optimum". Regarding the behaviour ofthe country hosting biodiversity, a distinction is proposed between "quantity-" and "transfer-" takingbehaviour. The issue of price distortions in the baseline is also addressed. It is shown that both thehost country and the Rest of the World (ROW) will have incentives for agreeing on a transfer ofresources that entails only partial deduction of domestic incremental benefits. This transfers, despitefailing to reach the utilitarian global optimum, still represents a Pareto improvement over the pre-convention status quo. By imposing a particular multiplicative functional form on the utility of bothhost and ROW, additional results can be obtained. In particular, the optimal transfer implies aclawback factor decreasing with relative income differentials, and incremental cost financingdominates the domestic optimum even when price distortions are present in the host country. Ifremoval of price distortions is a precondition for incremental cost funding, the analysis illustratesthe magnitude of incentives necessary for the host to give up the distorted baseline.

BIODIVERSITY

Session 1B3 AN EVOLUTIONARY APPROACH TO STOCHASTIC BIOECONOMICMODELS

Room 7 Olvar Bergland (Agricultural University of Norway)

Bioeconomic modeling has tended to be deterministic although the stochastic nature of thebiological processes are widely acknowledged. Analysis of bioeconomic models under uncertaintyhave typically employed stochastic dynamic programming or stochastic optimal control theorybased on Ito stochastic calculus. This paper proposes an entirely different approach based onevolutionary programming and genetic algorithms for the analysis of management strategies forbiological resources with uncertainty. The starting point for the genetic algorithm is a population ofrandomly created "resource-managers" who are specified in terms of a set of parameters. Theseparameters describe the harvesting strategies of the "managers" - modeled as automata. The fitnessof the managers are assessed in terms of their performance, for example measured as the net presentvalue of their harvest over a number of seasons. The population of managers evolve over a numberof generations where the next generation of managers are generated as "offsprings" from the best fitmanagers while the less fit managers do not reproduce. The result is the evolution of much betteradapted managers, i.e. if there is convergence toward a single type of managers that will representan optimal harvesting strategy. This type of evolutionary programming is applied to a standardbioeconomic model of Norwegian Willow grouse hunting. The emerging harvest strategy shows thebang-bang solution in the determenistic case and a strong risk aversion in a stochastic environment.Different implementations of the genetic algorithm is discussed and the potential for this type ofmodelling in natural resource economics is discussed.

BIODIVERSITY

Session 1B3 A THEORETIC ANALYSIS OF BIODIVERSITY CONSERVATION ANDCOMPETITIVENESS

Room 7 Erkki Koskela (University of Helsinki), Markku Ollikainen (University of Helsinki)

This paper studies the relationship between conservation of biodiversity in Northern boreal forestsand its implications to the international competitiveness of the forest industry in an imperfectlycompetitive roundwood markets. The starting point of the analysis is that biodiversity conservationis promoted in the form of preserving the key biotopes in all publicly and privately managed forests,which leads to a decrease in the harvesting possibilities. The theoretical model is built on theassumptions that the firms in forest industry face monopolistic competition in the output market andthat timber prices are negotiated between the representatives of the forest owners' association andthe forest industry. Timber price negotiation is modeled as an asymmetric Nash bargaining. Ifintroducing biodiversity conservation requirements in the forestry management practices is binding,then it will increase the reservation price of timber for forest owners' association, which leads to arise in timber prices. The timber price increase in turn weakens the international competitiveness ofthe forest industry. Thus there is a trade-off between biodiversity conservation requirements andinternational competitiveness, which should be accounted for when setting the biodiversityrequirements for forest management. What happens to the amount of timber depends on whether theforest industry is ‘strong’ or ‘weak’. If the forest industry is ‘strong’ the timber price is below thecompetitive price so that that the amount of timber is determined by supply. Hence, a rise in timberprice increases the amount of timber. The amount of timber decreases, however, if the forestindustry is ‘weak’ in the sense that the timber price is above the competitive price.

BIODIVERSITY

Session 1B3 ROYALTIES, SUBSIDIES AND BIODIVERSITY PROSPECTINGRoom 7 Paul Missios (York University)

Biodiversity prospecting, or the investigation of biological samples for potential newpharmaceutical products or biotechnology, has drawn considerable attention as a source of revenuesfor governments concerned with the preservation of biodiversity. Recent agreements designed toextract some of the surplus associated with the marketing of successful products by firms haveemployed royalties on the revenues from these products. However, taxes on revenues will tend toreduce the number of species sampled and thereby decrease the potential benefits to society andsource governments. Further, the latest (or forthcoming) products provide information to other firmswhich is not accounted for in private decisions, so that private sampling choice will be suboptimaleven in the absence of distorting royalties. Subsidization of sampling and testing costs, combinedwith lump sum taxes, is shown to achieve both optimal sampling intensity and effective surplusexpropriation. Using pharmaceutical industry and biodiversity protection estimates as well as datafrom existing international agreements, the extent to which such surplus extraction can cover habitatprotection costs is assessed (including sensitivity analysis).

SPATIAL EXTERNALITIES

Session 1B4 THE CONTROL OF EXTERNALITIES IN THE TRANSPORT SECTOR:AN APPLIED GENERAL EQUILIBRIUM MODEL

Room 8 Inge Mayeres (Katholieke Universiteit Leuven)

The paper uses an applied equilibrium model to analyse the macro economic aspects of policyscenarios for the control of transport externalities in Belgium. Compared with the traditionaltransport models a general equilibrium model can provide two additional insights. Instead ofindividual policy measures, it evaluates the effects of policy packages for transport andenvironment: it evaluates not only the direct measures but also the way in which they are financedand the complementary measures. Secondly, the effects on government income, employment,involuntary unemployment and welfare distribution of the different household types are calculated.The applied general equilibrium model is a static model for a small open economy with rationing ofthe labour supply due to rigid consumer wages. It is applied to Belgium. It is used to simulate themedium term effects of different policy scenarios for transport and environment. It is assumed thatthe location of households and firms remains unchanged. A distinction is made between threedifferent road types: urban roads, highways and other roads. Transport goods are represented in avery detailed way. There are four categories of economic agents in the model: (non identical)households, the private production sector, the government and the foreign sector. The model takesinto account five categories of external costs caused by the transport sector: congestion, accidents,air pollution, noise and external road damage costs. Congestion is assumed to contribute in a non-separable way to the welfare of the households. It is also assumed to affect the productivity oflabour in the production sectors. The other external effects are assumed to provide a separablecontribution to the households’ welfare. The model is used to simulate the effects of different policypackages and to evaluate them. The policy measures which are studied include road pricing,taxation, environmental standards, regulation and the supply of transport infrastructure. Among themany questions that can be answered with the model, the simulations shed light on theinterrelationship between transport and environment instruments and other government instruments,they allow to analyse double dividend issues and give more information on the relationship betweeninfrastructure and tax policy. In addition, the simulations provide insights in the distributionalaspects of transport and environment policy.


Session 1B4 SOCIAL COST PRICING WHEN PUBLIC TRANSPORT IS AN OPTIONVALUE

Room 8 Roberto Roson (Università Ca' Foscari)

This paper reviews the main insights obtained from the development of two models (TRENEN Iand TRENEN II) aimed at simulating optimal price policies for transport activities in both urbanand regional contexts. Issues which have emerged during the practical implementation of thesemodels are also discussed in the paper. The TRENEN models formulate optimal prices (via taxes orsubsidies) through the maximisation of a social welfare function. When the shadow cost of publicfunds is set to zero, the model identifies Pigouvian taxes that internalise environmental, safety andcongestion externalities associated to transport consumption. External costs are non-constant anddepend in a complex way on the multi-market equilibrium simulated by the model. A typical resultfound during our early simulation experiments is a predicted change in demand patterns that oftenbenefit transport means having a worse environmental impact. This is simulated by the model whenprices are set equal to social marginal costs, and it can be easily explained in terms of existingmarket distortions. Distortions in the market for transport services may exist because of: politicalprocesses, economies of density and scale, income distribution objectives, and other reasons. Thispaper discusses how market distortions can be accommodated for in the model, what arguments aremore likely to lie behind these phenomena, and how environmental policies in this field interactwith other policy targets.


Session 1B4 LAND EXTERNALITIES WITH UNCERTAINTY ANDIRREVERSIBILITY: CONVERTING LAND TOO FAST OR TOO SLOW?

Room 8 Scott Farrow (Pennsylvania State University)

Many natural resource and environmental issues are driven by conversion in land use that affecthabitat, exposure, extraction, production, and pollution. Examples include: conversion from forestland to agricultural land and from agricultural land to resource extraction, residential or industrialuses. Recent advances in dynamic decision making involving uncertainty and irreversibility haveadded to our knowledge about some conversions and the implicit option to exploit oil and gas lands,to develop urban land, and to invest in industrial capital. In these new advances, only some attentionhas been paid to external impacts, the core of the environmental and natural resource concerns. Thispaper expands upon the initial work of Dixit regarding external impacts for dynamic decisions withirreversibility and uncertainty in which a model was developed involving external economies fromcapital use in a region. The proposed paper reformulates and extends the model by including landuse. Dixit's initial work indicted the possibility of jumps in investment and private investment thatlagged the socially optimal investment based on the external economy. It is expected that theconverse will be true with external diseconomies and with the input of focus being land instead ofcapital. In addition to a new theoretical structure, initial empirical estimates will be presented forexternal economies based on the placement of infrastructure improvements such as roads, sewers,and bridges in a large U.S. city. Data will be used at the census block level in a seemingly unrelatedregression framework.


Session 1B4 TESTING FOR SPATIAL EXTERNALITIES IN THE EVOLUTION OFURBAN SPRAWL

Room 8 Elena Irwin (University of Maryland), Nancy Bockstael (University of Maryland)

It has become increasingly clear that nonpoint source pollution of ground and surface water isdriven by the amount and pattern of forest cover, agricultural activity, residential sprawl and urbandevelopment in the watershed. Contaminants reaching aquatic systems are all driven by the uses ofthe land that drains into these waters. Agriculture has been identified as a major nonpoint source ofnutrients, but the increasingly visible alternative to agriculture - development of one form oranother - may pose equal, if not more serious threats to the aquatic ecosystem through run-offduring construction, from the increase in impermeable surfaces, from suburban use of fertilizers andpesticides, and from dependence on septic systems, where sewer systems are not provided publicly.While the amount and type of human activity in a watershed is important, so is its spatialdistribution. This spatial pattern has been changing over the past few decades, as cities have becomeincreasingly decentralized. Many traditionally rural areas that are relatively far from urban andsuburban centers now contain scattered urban islands, comprised largely of low density, residentialdevelopment. Evolving patterns of land use in these "exurban" areas have received significantattention recently from the public and policy makers concerned with both the environmentalconsequences of such development and the increasing public service costs associated with a moredecentralized population. Traditional urban economic models based on mono- and poli-centrictheories of urban structure assume that accessibility to one or more exogenously located centralbusiness district(s) is the principal factor in determining land use patterns. As such, these modelsare limited in their ability to explain current land use patterns, especially those in exurban areas,where households clearly have preferences over a variety of landscape attributes in addition toaccessibility, e.g. open space, environmental amenities, lack of congestion. We analyze the spatialand temporal evolution of residential land use patterns with a dynamic model of land useconversion, in which the land use conversion decisions are influenced by the existing land usepattern which is a product of conversion decisions in previous time periods. Our analysis takes intoaccount the possibility of both positive and negative externalities generated by neighboring landuses which, on an aggregate scale, leads to either a clustering or checkerboard pattern ofdevelopment. We hypothesize that the highly fragmented pattern of residential land use in exurbanareas is in part a result of negative spatial externalities among residential land uses, negativeexternalities that households located in these areas associate with adjoining land in residential use,such as congestion, loss of open space, and reduced privacy. We test this hypothesis using highlydisaggregated spatial data on market transactions of individual land parcels, land use/land cover,zoning, and other features of the natural and built landscape from a central Maryland region overthe time period 1981-94. We make use of modeling techniques recently developed in a neweconomic literature on "social interaction effects," which borrows from statistical mechanics torepresent spatial processes in which the spatial location of agents relative to each other determinesthe outcome. In doing so, we also control both for spatially correlated effects from exogenousvariables, e.g. environmental attributes, zoning, roads, and other fixed features of the landscape, andpossible spatial autocorrelation of the error terms. Results show evidence of negative interactionamong neighboring parcels' probabilities of conversion to residential use over time. Thesignificance of such externalities in the evolution of land use suggests that changes in land use arepath dependent, which has important implications for environmental policy.


Session 1B4 SPATIAL DISCOUNTING VERSUS TRANSPORT: THE SPATIALDISTRIBUTION OF POLLUTION

Room 8 Karl Steininger (University of Graz), Birgit Friedl (University of Graz)

Increasing volumes in international trade indicate growing spatial specialization in production. Setsof new questions arise, one of them environmental. What forces do determine the spatialdistribution of production pollution sources? Is there an empirical basis to quantify these factors?This paper proceeds in three steps. First, a basic theoretical model is presented. Second, itsassumptions are modified in turn to evaluate the arising impact on overall pollution and its spatialdistribution. Third, we empirically quantify the key factors. Let us consider two locations, whereproduction and consumption occur, them being equal in any of the respects factor endowment,technology and preferences. (Intra-industry) trade comes in with increasing-returns-to-scale-technology. We further introduce inefficient environmental regulation in production, but we do soequally for both locations. Home consumers prefer clean environment at home over cleanenvironment abroad to a degree given by their (positive) rate of spatial discounting. Homeconsumers thus seek to shift production of dirty goods abroad, a tendency counteracted by transportcosts. Equality between the two parameters, spatial discount rate and transport cost share,establishes transport costs as a type of "optimal tax" for the presence of spatial discounting. Whenthe two parameters deviate, the home consumer´s marginal evaluation of {environmentalinputs/home good} differs from that of the foreign consumer. However, in all the three cases of thetransport cost share (a) dominating, (b) equating or (c) being dominated by the spatial discount rateoverall pollution and its spatial distribution are the same. Only the share of goods produced for theforeign market rises when moving from (a) to (c), but symmetrically in both locations. Wheninefficiency in environmental transport regulation is introduced, transport pollution externalities risewith the rate of spatial discounting. When the rates of spatial discounting differ across locations, alow spatial discount rate attracts pollution. Finally, the relation between transport cost share andspatial discount rate may differ with distance to production location. Transport cost shares,characterized by fixed costs plus unit variable costs, rise degressively with distance. In spatialdiscounting a progressive increase may be present. Three polls have been carried out to determinewhether this is true: One intra-country survey (CV, 1100 households, December 1996), giving alower bound of the spatial discount rate of 3.5% for a 40 km distance, and two across-the-borderevaluations (Austria-Slovenia, CV, 1200 households, May 1997), currently analysed. If spatialdiscounting does rise progressively, this implies that dirty production is shifted furthest away,representing an augmentation of trade to distant transport. If not, an augmentation to short distancesin trade occurs. The pattern of pollution from production is not affected, but with inefficiency intransport regulation its impacts differ with the (relative) curvature of spatial discounting.


Session 1B4 THE DYNAMICS OF SPATIONAL POLLUTION – THE CASE OFPHOSPHORUS RUNOFF FROM AGRICULTURAL LAND

Room 8 Renan Goetz (ETH-Zuerich), David Zilberman (University of California atBerkeley)

Based on a land classification system, which assesses the environmental vulnerability of a location,this paper analyzes, the optimal management of negative production externalities taking account ofthe intertemporal and spatial aspect of the problem. To incorporate both aspects simultaneously amodelling approach is proposed where we first determine the optimal spatial allocation ofproduction at the micro level. Second we solve for the optimal intertemporal allocation of theproduction at the macro level based upon the optimal spatial allocation. Hence, we can infer theoptimal spatial allocation of production from the optimal intertemporal allocation. As a result it ispossible to relate the mico level (production decision) and the macro level (aggregate supply andinput demand), in particular the long run and short run supply and input demand functions. Ourmodelling approach is based on optimal control. In the first stage we determine the value functionof the spatial problem. This value function is then optimized in the second stage over time. Specialattention is given to runoffs from agricultural land leading to the contamination of a water body - inparticular the one of Phosphorus and the eutrophication of lakes. The employment of a landclassification system and supports a full information approach and allows to address the optimalmanagement of mineral fertilizer and manure based on zonal taxes, zonal permits, zonal standardswhich all vary over time.

GLOBAL WARMING I

Session 1B5 THE IMPACT OF GLOBAL WARMING ON AGRICULTURE:RETHINKING THE RICARDIAN APPROACH

Room 5 Anthony Fisher (University of California), Michael Hanemann (University ofCalifornia, Berkeley)

Many studies of the impact of global warming focus on agriculture, no doubt because key climatevariables such as temperature and precipitation directly enter the production function foragricultural commodities, and in an empirically important way. These studies typically developcarefully calibrated crop-yield models to determine the impacts on yields of changes in temperatureand precipitation predicted by climate models. As some recent work suggests, however, thisapproach will tend to overestimate the damage from an impact since it does not allow foradjustment of the mix of inputs or outputs in response to the climate change. Instead, what issuggested is an alternative, Ricardian approach, that allows for appropriate substitution responsesby farmers. This is certainly an improvement, in principle, but in this paper we point out difficultiesthat can, if not adequately considered, lead to a substantial underestimate of damages. TheRicardian approach involves estimating a hedonic property value equation relating agricultural landvalues to climate, soil and socioeconomic variables, from which the derivative of property valuewith respect to climate is used to measure the economic impact of climate change. The propertyvalue equation is essentially the reduced form of a system that combines physical relationships,such as production functions, with behavioral relationships, such as demand functions for crops.The effect of climate variables may be confounded with other variables in the system, includingsome not explicitly specified, since the data are typically observational rather than experimental.Further, property values arise in a policy environment that is more prone to change over time thanthe production function. To explore these issues more formally, we develop an explicit theoreticalmodel of the property value function underlying the Ricardian approach. This provides a frameworkfor assessing the implications of confounding in an under-specified hedonic value estimationequation. Specifically, with reference to the impact on land value of a change in the climate variableprecipitation, we show that introduction of another variable -- irrigation -- can explain theanomalous result in some recent empirical work of a negative relationship between precipitationand agricultural land value. By the envelope theorem, with optimal investment in irrigation, thederivative of the value function correctly measures the economic impact of a change inprecipitation. However, as we show, the policy environment in the past, when existing irrigationprojects were undertaken and water delivery contracts determined, distorted irrigation investmentand water use in such a way that the envelope theorem does not apply. This has two implications.First, it explains the anomalous sign of the derivative. Second, it means the estimate based onapplying the Ricardian approach to past observation understates the economic impact of climatechange in the current policy environment, where irrigation is no longer subsidized and consequentlythe envelope theorem does now apply.

GLOBAL WARMING I

Session 1B5 SINKS AND THE KYOTO PROTOCOLRoom 5 Sally Kane (US Senate), Jason Shogren (University of Wyoming)

Under the specified conditions described in the Kyoto Protocol, participating nations can use sinksto meet their commitments to reduce greenhouse gas emissions. Activities relating to sinks will beconsidered explicitly for international emissions trading and for projects under the new cleandevelopment mechanism, i.e. the international program in joint implementation with credit forbilateral development of projects that would reduce greenhouse gas emissions. Sinks could have farreaching impacts on the costs of reaching a specific target. Sinks will reduce the economicstringency of the overall target of the Protocol. Many countries could find that including sinks(particularly terrestrial) in the Protocol leads to a less economically stringent goal of emissionreductions depending on their particular economic conditions. Inclusion of sinks leads to increasedflexibility for meeting a target. More flexibility to buy and sell emission reductions from sinks willreduce costs. In the first commitment period 2008-2012, sinks from activities relating to forestry,including afforestation, reforestation, and deforestation, are considered. Sinks from activities thatmore broadly address agricultural soils, land-use, and forestry will be considered for the secondcommitment period. But while sinks may play a meaningful part in the environmental andeconomic outcome of the Protocol, scientific discord muddies the actual role sinks will play.Experts in atmospheric science and terrestrial ecology, for instance, disagree about which continentsare actually net sinks, where human generated emissions are offset by the sequestration of sinks.They do not understand which underlying process(es) is most responsible for changes in thesequestration rate in the large sinks in North America and around the world. Measurementtechniques are also not well agreed upon and this has been given to the IPCC to resolve over thecourse of the next several years. This paper presents an overview of the role of sinks given thescientific uncertainty, and explores the implications for the political economy of climate changepolicy.

GLOBAL WARMING I

Session 1B5 THE AMENITY VALUE OF CLIMATE: THE HOUSEHOLDPRODUCTION FUNCTION APPROACH

Room 5 David Maddison (University College London)

The amenity value of climate variables has typically been analysed using the hedonic technique.But a key assumption underlying the use of the hedonic technique is that of geographical mobility.And yet climate variables are undeviating over large distances at which point the perfect mobilityassumption breaks down. An alternative approach to estimating the amenity value of climate is toargue that households respond in part to differing levels of climate amenities by altering theirpattern of consumption. This phenomenon can be given a 'Household Production Function'interpretation. A model of demand is presented incorporating climate variables as 'translating' and'scaling' parameters. This model is estimated on cross country consumption data for 60 countriesand the estimated parameters used to infer the amenity value of the climate variables. The results ofthe analysis point unambiguously to the existence of a 'climatic optimum' and highlight thepossibility of large reductions in the cost of living for residents of Northern European countriesresulting from warmer climates.

GLOBAL WARMING I

Session 1B5 THE MARGINAL COST OF CARBON SEQUESTRATION IN GLOBALFOREST

Room 5 Brent Sohngen (The Ohio State University), Robert Mendelsohn (Yale FESS), RogerSedjo (Resources for the Future)

Storing carbon in forests is one option for offsetting the carbon released by fossil fuel burning, andmitigating the potential impacts of global warming. Existing forested ecosystems store vastquantities of carbon, and young forests can sequester additional carbon quickly as they grow. In thecontext of global warming policy, however, the costs of strategies to increase forest carbonsequestration should be compared to other alternatives, such as command and control or tax policiesthat focus on fossil fuel emissions. While estimates of the costs of carbon sequestration in forestsrange from $1 to $187 per ton of carbon, most previous studies have been regionally focused, orthey have considered a set of strategies that are limited in geographic scope. This paper presents theresults of a study that examines a set of global strategies aimed at increasing carbon sequestration inforests. These strategies range from establishing carbon reserves by eliminating harvests inparticular regions or age classes, to establishing new carbon plantations. The costs of such strategiesinclude land rental, establishment, and management costs, as well as any changes in net marketsurplus. Because timber grows slowly and markets are dynamic, these costs will vary over time.They are captured with a dynamic optimization model of global timber markets which incorporatestimber management and harvests endogenously in temperate, tropical and boreal natural forests andplantations. Marginal cost functions for 6 particular strategies are estimated and presented. Annualcarbon sequestration pathways for these scenarios are presented, and compared to a baseline.

GLOBAL WARMING I

Session 1B5 THE SOCIAL SURPLUS OF A POWER INVESTMENT IN ANINTERNATIONALLY INTEGRATED ELECTRICITY MARKET

Room 5 Haakon Vennemo (ECON), Arve Halseth (ECON)

The paper examines conditions for a second best regulation of the Norwegian power market. Absenttariffs it is not optimal for one country to exclusively internalise externalities from domestic powerproduction if externalities elsewhere are not regulated optimally and reflected in market (import)prices. Instead regulation should take into account leakage through foreign trade, crediting domesticpower projects the non-internalised part of reduced emissions abroad. We examine how to regulateexternalities in three Norwegian cases, Demand Side Management (short-term effects), natural gasfired CCGT (medium-term) and a new hydro project (long-term). The results indicate that allprojects lead to reduced emissions elsewhere in the Nordic region. Further, since the costs of theseemissions generally are not fully reflected in market prices, it can be argued that Norwegianregulations should take the value of emission reduction into account. The potential credit is verysensitive to the value of reduced C02 emissions and whether the current Norwegian excise tax

should be interpreted as an environmental or a fiscal tax.

GLOBAL WARMING I

Session 1B5 AN ECONOMIC MEASURE OF NATIONAL ENVIRONMENTALSTRINGENCY

Room 5 Ariaster Chimeli (University of Illinois), John Braden (University of Illinois), Ki-JuHan (Hyundai Institute of Eco-Management)

Environmental regulation is thought to impose costs on domestic producers, and erode theirinternational competitiveness, allowing less strict countries to capture economic rents and a biggerworld market share. This is a typical argument used by some countries to limit their imports fromless vigilant countries and to propose standards, such as green stamps, to grant access to specificmarkets. However, few empirical studies that seriously address trade effects have been produced sofar, due in great part to the lack of data on comparative stringency of environmental regulation.Tobey (1990) and Diaskosavvas (1994) are among the few studies along these lines, but they had torely on old qualitative data on environmental stringency produced by Walter and Ugelow (1979).Han (1996) took initial steps toward the calculation of a rigorous quantitative index. This paperextends the development of a quantitative index of relative environmental stringency using data for23 countries, based on SO2 emissions. SO2 emissions are a good barometer of national pollution inmost industrial and industrializing economies because they reflect industrial and energy-consumingactivities. The index is calculated using the instrumental variables approach to panel data analysisas proposed by Hausman and Taylor (1981). Panel data analysis is appropriate for our purposesgiven its ability to estimate country specific unobservable characteristics (environmentalstringency). Furthermore, the Hausman-Taylor approach produces efficient and consistentparameter estimates when relevant variables that are correlated with the country specific effects areincluded in the panel regression. Emissions data are adjusted for the energy structure of theeconomy and per capita income. The result is a rigorously-derived internationally comparable indexof environmental protection. The index indicates plausibly that the U.S. and Western Europeannations are more advanced in environmental protection than newly industrializing nations, and thatcontinental countries generally are more advanced than “island nations”. We also find evidence of a"neighborhood effect" on SO2 emissions per GNP, i.e. emissions per GNP are partially determinedby a regional dummy variable. The resulting index is the first rigorous quantitative measure of therelative strength of national environmental regulations and lays the groundwork for more carefulresearch on the effects of regulation on international competitiveness.

CONTINGENT VALUATION: METHODOLOGICAL ISSUES I

Session 1B6 CONTINGENT VALUATION: CONTROVERSIES AND EVIDENCERoom 2 Richard T. Carson (University of California, San Diego), Nicholas E. Flores

(University of Colorado), Norman F. Meade (U.S. Department of Commerce)

Contingent valuation ( CV ) has become one of the most w idely us ed non- mar ket valuation techniques.CV s prominence is due to its flexibility and ability to estimate total value, including pass ive use value.Its use and the inclus ion of pas sive us e value in benefit-cost analys es and environmental litigation arethe subject of a contentious debate. This paper discus ses key ar eas of the debate over CV and thevalidity of passive us e value. We conclude that r ecent cr iticisms of CV and pas sive use value havepr oduced few new theor etical or methodological insights and that many ar guments pertain generally toapplied w elf ar e economics r ather than CV s pecif ically. Careful s tudy des ign and implementation canresolve many of the alleged problems with CV . Claims that empirical CV f indings ar e theor eticallyinconsistent are not s uppor ted by the literatur e taken as a whole.


Session 1B6 CALIBRATION OF WILLINGNESS-TO-ACCEPTRoom 2 John A. List (University of Central Florida), Jason F. Shogren (University of

Wyoming)

This paper examines the role of experimental auction markets to elicit actual values that can used tocalibrate hypothetical values. Since calibration will depend on robust and well-understood auctioninstitutions, there is a basic need to understand how the design features of alternative auctionenvironments affect both hypothetical and actual values for different goods and services. Weexplore three issues: (1) how the choice of auction institution affects the measurement ofhypothetical and actual values for nonmarket; (2) how different levels of experience with alternativeauction institutions, and auctioned goods, affects revealed values; and (3) the feasibility of using labauctions to calibrate large-scale public goods. The paper improves our understanding of howexperimental auction markets can be used to improve the accuracy and reliability of nonmarketvaluation.


Session 1B6 CATEGORICAL NESTING AND TEMPORAL RELIABILITY OFESTIMATES FOR COMPLEX HISTORIC GOODS

Room 2 Patrizia Riganti (University of Newcastle), Riccardo Scarpa (University of Tucsia)

This paper addresses the issue of embedding in the specific case of categorical nested goods and ofthe consistency of willingness to pay (WTP) estimates over time. It presents the results of twocontingent valuation (CV) studies implemented administrating a multiple Dichotomous Choice(DC) referendum format questionnaire over a 2 year interval time. The good being valued is theconservation program for an archaeological park near Naples, Italy: Campi Flegrei, which is one ofthe most important parks in the world in terms of preserving archaeological remains. Thecharacteristics of the site enable the object of valuation to be broken down into individualscomponents or subsets which function as complements to each other. Sometimes in other nestedgood studies the relative orders of magnitude of the estimates are not consistent with theoreticalexpectations. In this paper the possibility of disentangling the values attached to different subsets ofthis nested good is investigated. In particular, the objective of this study is to separate the benefitsassociated with bequest value and with option value from a larger set of total economic benefits.The study addressed a total of 5 different WTP questions to each respondent, ordered in thefollowing sequence:1. WTP 1, total economic benefit for the conservation of the whole archaeological park;2. WTP 2, benefits from option value;3. WTP 3, economic benefits from bequest value;4. WTP 4 is the value attached to the conservation of a smaller area, Bagnoli inside Campi Flegrei;5. WTP 5 is the bequest value associated with Bagnoli.The results have been checked for consistency with economic theory according to “within subjecttests” across WTP from the same samples of respondents as indicated by Mitchell and Carson(1995). In addition a test for the consistency of the estimates over time has been implementedfollowing the work of Downing and Ozma (1996). The issue of whether or not a similar multipleformat is able to deal with sequency effects and if this is a property stable over time is alsodiscussed.


Session 1B6 A QUALITATIVE EXAMINATION OF PREFERENCE REVERSALSRoom 2 Sue Chilton (University of Newcastle), Tony Burton (University of Newcastle),

Martin Jones (University of Newcastle), Graham Loomes (University of Newcastle)

The principle most fundamental to economic rationality is consistent preferences. When askingrespondents to provide valuations of environmental goods, we essentially assume this principleholds. In practice preference reversals are one of a number of observed violations of these axioms.The best known preference reversals occur when respondents are presented with two lotteries: one(A) offers a small chance of winning a large sum of money, while the other (B) offers a largerchance to win a smaller sum. They are then asked (not necessarily in this order) to place values oneach lottery, and to make a direct choice between the two. Many experiments have observed apronounced tendency for respondents to place a higher value on A than on B, but to choose B ratherthan A in a direct choice between the two. Despite many ingenious attempts to make thisphenomenon go away, it seems to be very robust - and appears to seriously undermine standardnotions about the consistency and coherence of peoples preferences. This paper reports anexperiment which generated qualitative data using a combination of grounded theory and contentanalysis in order to gain a deeper insight into the ways respondents generate their value and choiceresponses. The qualitative data allowed us to explore why those different response modes mightproduce different orderings, how far respondents are aware of the apparent contradictions, and - incases when they ARE aware, how any conflicts are resolved. Essentially, respondents wereorganised into teams and these teams were presented with a series of problems displayed on splitscreens. In one half, they were asked to value two lotteries; in the other half, to choose between apair of lotteries. Here, instead of hiding the similarities between problems of choosing betweenoptions and evaluating them, the subjects were given every opportunity to compare the problems.Decisions were tape recorded to obtain the qualitative data. In each case, respondents were asked tosay whether or not they thought there should be some relationship between their answer(s) in onehalf of the screen and their answer(s) in the other half. In an earlier experiment involvingINDIVIDUAL decision makers, it was noted that in 8 out of 9 cases where there WAS arelationship, respondents seemed to acknowledge this - but still responded in ways which producedpreference reversals. It was also noted that even in cases where there was not intended to be anyrelationship, almost half of the respondents thought there WAS one. However, that earlierexperiment did not elicit any REASONS for the responses given. The purpose of the presentexperiment was to try to identify the nature and variety of the reasons given for the responsesobserved, and thereby to supplement some standard quantitative data with novel qualitative datacapable of producing insights which might be of assistance - and/or sound warnings - to thosetrying to elicit and interpret responses valuation responses in other contexts.


Session 1B6 A COMPARISON OF REAL AND HYPOTHETICAL DONATIONS WHENINCENTIVES TO FREE-RIDE AND OVER-BID ARE EQUIVALENTACROSS SURVEYS

Room 2 Douglas Macmillan (Macaulay Land Use Research Institute), Trevor S. Smart(Biomathematics and Statistics Scotland), Andrew P. Thorburn (Macaulay LandUse Research Institute)

An important focus for concern about Contingent Valuation (CV) is that hypothetical payments fornon-market goods are biased upwards. This bias has been observed in a number of comparisonswhere CV donations to charity have exceeded cash donations by a factor of between two and ten. Inthis paper it is argued that this discrepancy may have arisen because typically, the surveyinstruments adopted a neutral and therefore unrealistic format. If the respondent considers themarket context to be unrealistic then CV donations will be biased upwards because the incentive tofree-ride will be suppressed and the incentive to over-state donations enhanced. On the other hand,cash donations will be biased downwards because some respondents may not believe that the fundis real or that donations will be used effectively. This study describes a test of the ContingentValuation (CV) method involving real and hypothetical payments to a charitable fund whereincentives to free-ride and over-bid are equivalent across both surveys. This is achieved by adoptinga survey design which closely resembles in style, information content and implementation an actualcampaign mailing used by a real charitable trust. In contrast to previous studies, the mean cashdonation was slightly higher (=A33.71 per person) than the mean CV donation (=A33.41 perperson). However, the means were not significantly different at P < 0.05. Evidence that the realisticcampaign style reduced the upward hypothetical bias arose from a third survey which used a moretypical neutral CV instrument. In this case the mean CV donation was =A36.21, almost twice themean cash donation. This value was influenced by a single bid which suggests that strategic over-stating of individual donations may be restricted to a small proportion of people. Although apositive campaign style instrument is appropriate for charitable donations it is less suitable for otherpayment contexts. For example, a neutral CV may be more appropriate for referenda on taxation forenvironmental improvements, where the public will expect a more balanced account of theproposed policy from the government. This study has shown that for charitable donations, at least,the CV method can generate valid estimates of actual cash donations.


Session 1B6 MORE ON THE DIVERGENCE BETWEEN WILLINGNESS TO PAY ANDWILLINGNESS TO ACCEPT IN CONTINGENT VALUATION METHOD

Room 2 Jean-Pierre Amigues (ERNA-INRA), Catherine Broadhead (Utah State University),Brigitte Desaigues (Université Paris I), John Keith (Utah State University)

Preservation programs for biodiversity, or natural habitat, often require evaluating benefitsincurring to the general public. However it is important to be able to measure the costs, both directand indirect, of such preservation programs. This paper presents the results of a ContingentValuation study done in 1996 in South of France to evaluate the costs to land owners of preservinghabitat along the Garonne river. We set up a simple model with utility maximizing agents. Resultssuggest that interviewees give 'reasonable' willingness to accept responses. Moreover, we were ableto ask respondents both their willingness to pay and their willingness to accept, and find nosignificant difference. This is very important in that it contributes to the literature on the divergencebetween the two measures. To our knowledge, it is the first time respondents have been asked bothestimates in any applied test. To test Hanneman's hypothesis on the matter, we also includedquestions to measure income and substitution effects. Finally we used a model where agents face acompetition situation to test if the minimum compensation demanded differs greatly from the 'no-competition' case.

CONTINGENT VALUATION: APPLICATIONS I

Session 1B7 TESTS OF SCOPE IN CONTINGENT VALUATION STUDIES: ARE THENUMBERS FOR THE BIRDS?

Room 3 Mary C. Ahearn (Economic Research Service, U.S. Department of Agriculture),Kevin J. Boyle (University of Maine), Richard C. Bishop (University of Wisconsin),Daniel Hellerstein (USDA), Andrew Laughland, John Charboneau

In a well-known study of scope, Boyle et al. (JEEM 1994) reported that contingent-valuationestimates of Hicksian surplus for preventing deaths of migratory birds were insensitive to thenumbers of birds killed. This study, among others funded for the Exxon Valdez oil spill litigation,prompted the National Oceanic and Atmospheric Administration Blue Ribbon Panel on ContingentValuation to recommend the inclusion of scope tests in-contingent valuation studies to establishwhether welfare estimates are sensitive to the extent of damage incurred. The Boyle et al. study hasbeen criticized from a number of perspectives. The research reported here is a contingent valuationstudy where the application is again migratory birds, but design issues raised in the previous studyhave been addressed to provided a stronger test of scope. The key changes in the design of thescope experiment are:• Small, medium and large changes are used where the small changes increase the populations of

affected species by less than 10% and the large changes increase affected species by over 100%.The small, medium and large changes in bird populations in the Boyle et al. Study were all lessthan 2% of the populations.

• Only the large change restores grassland bird populations to their original numbers in thecurrent study, where as all three changes in the Boyle et al. study removed all bird deaths.

• The affected bird species are identified and the affects on each bird species are specified; thiswas not done by Boyle et al.

• The survey was conducted by mail with random samples of adults; not intercepts in shoppingmalls as in the Boyle et al. study.

The current study was administered in surveys sent to random samples of adults in the United Statesand in Iowa. The objectives of the research are:• Determine if contingent valuation estimates are affected by the magnitude of change in bird

populations for the national and Iowa samples.• Determine if the contingent-valuation estimates are affected by the presence of an endangered

species on the list of affected species in the national and Iowa samples.• Determine if the contingent-valuation estimates are affected by the absence of game species on

the list of affected species in the Iowa sample.Thus, two tests of scope are conducted in terms of bird numbers. The national sample is likely to belargely composed of people who hold nonuse values for the birds, while Iowa residents who live inthe affected area are more likely to hold use values for at least some of the species. The endangeredspecies and game bird treatments examine whether scope occurs for the inclusion/exclusion of aendangered species that people would likely hold nonuse values and the game birds conduct thesame test except for a species with know use values.


Session 1B7 VALUING UNDISCOVERED ATTRIBUTES: A COMBINED REVEALED-STATED PREFERENCE ANALYSIS OF NORTH AMERICANABORIGINAL ARTIFACTS

Room 3 P.C. Boxall (Canadian Forest Service), Jeffrey Englin (Univeristy of Nevada-Reno),Wiktor Adamowicz (University of Alberta)

A number of researchers have examined the introduction of a new element in the choice set in arandom utility model. However, the effect of a new attribute introduced into the choice model asopposed to a choice item, has not been examined. This paper addresses this issue in the context ofthe discovery of a previously unknown attribute in recreation site choice modelling. The issueinvolves the potential discovery of aboriginal rock paintings along wilderness canoe routes in theCanadian Shield. A 4 year study of wilderness recreationists in eastern Manitoba provided theopportunity to carefully design a stated preference experiment. Since the actual site choices of therecreationists were known over the 4 years, the survey was designed such that each respondent wasoffered the chance to change their trip to see a rock painting at a site they had not visited. Thesurvey also offered two types of rock paintings, one a "pristine" painting and the other spoiled byhuman vandals. The resulting stated site preferences with the two new attributes were combinedwith the revealed site preferences without the attributes in the econometric analysis. The resultssuggest that the preferences over the two SP models and the RP model are not statistically different.Welfare measures for the presence of "pristine" paintings range from $4.79 - $6.81 per trip, and areabout 12-13 times greater than those for defaced paintings. The reduced value associated withdefaced paintings represents a dilemma for managers in that the discovery of rock paintingsincreases recreation values, but the resulting increase in visits promotes the chances of defacement.


Session 1B7 TREASURES AND TAONGA: NON-MARKET VALUATION STUDIESAND NEW ZEALAND MAORI

Room 3 Frank Scrimgeour (University of Waikato), Shaun Awatere (University of Waikato)

Contingent valuation studies have been conducted in New Zealand for more than a decade. Thisraises important issues for Maori citizens who have treaty rights which Government must recognize.This paper examines critical issues for both researchers and respondents when seeking to obtainestimates of Maori valuations of environmental and natural resources. The paper reports andanalyses the different responses from Maori and non-Maori in a 1996 CVM study relating to waterpollution control. The issues and the empirical results have important implications for future CVMstudies where diverse cultural perspectives are important because of statute and/or populationdiversity.


Session 1B7 THE RIGHT GARBAGE COLLECTION SERVICE CHARGE ESTIMATEDTHROUGH CONTINGENT VALUATION METHOD

Room 3 Katalin Kovary Zaim (Bilkent University)

Sustainable urban development depends on clean water, air and land for municipal solid waste(MSW) disposal. About 61 thousand tons of MSW is generated per day in Turkey. 66% of thegarbage collected is disposed in established municipality dumps. The remaining 24% is disposed inlakes, sea, rivers, agricultural field or burned in open arias. 10% of MSW is recycled by themunicipalities. In the last two years, the municipalities introduced garbage collection charges in themajor towns in Turkey. The decision regarding the correct price is not well established, since themunicipalities do not have a clear account on their expenses regarding: collection, disposal etc.Hence, it is of great importance to identify the value the society would be willing to allocate for abetter garbage collection service. The objectives of this research is to identify the monetary value ofan improved garbage collection service. First, the composition of household solid waste; collectionmethod and the composition of recyclable materials originating from households; and thehouseholds’ evaluation of solid waste collection services are analyzed. Second, the households’willingness to pay (WTP) to improve solid waste collection service is identified. The WTP isassessed through a contingent valuation method (CVM). In a CVM, respondents preferences aresolicited through a survey technique to state their WTP for : (I) to secure a benefit from animprovement in environmental quality or (II) prevent efforts which would degrade environmentalquality. The result of CVM identifies the consumer surplus of the local community for the improvedservice. Such research can assist the local municipalities in formulating their policies as whether todevelop or to preserve the current system and whether to increase or unchange the current chargesfor garbage collection services.


Session 1B7 DETERMINANTS AND VALUE OF OUTDOOR RECREATION INITALIAN PROTECTED AREAS: A RUM APPROACH

Room 3 Donato Romano (University of Florence), Fiorenza Spalatro (University ofFlorence), Laura Viganò (National Institute for Agricultural Economics)

The paper reports the main results of a research carried out in 1995-96, aiming at: (i) modelling thedemand for outdoor recreation (OR) in protected areas, and (ii) estimating the monetary value ofOR in protected areas. The exercise is based on the analysis of a nation-wide data-set, containingmore than 5,500 telephone questionnaires administered to a random sample of the whole populationof Italian residents. The information gathered in the sample are: socio-economic characteristics ofrespondents and recreation choice behaviour. We linked this information to a second data-setcontaining information on Italian protected areas (size, distances from cities, ecological features,facilities, etc.) in order to have a complete description of different choice alternatives. The two datasets were then used to model the OR choice in a Random Utility framework, and a comparisonbetween different models has been carried out, pointing out pros and cons of each models (expectedsigns, statistical tests, etc.). First a binomial model has been estimated to analyze the choice ofbeing or not-to-be involved in any OR experience, using a vector of socio-economic characteristicsas explanatory variables: different functional forms (logit and probit) has been tested and marginaleffects on (probabilistic) participation rates from variations in income, age, and educational levelhave been estimated. Second, a conditional logit model on the choice among different protectedareas has been estimated. Several specifications have been tested according to different restrictionson the data-set (i.e. all protected areas, only national parks, only regional parks), using a vector ofcharacteristics of alternatives (i.e. protected areas) as explanatory variables. Again marginal effectson the probability of choice a given alternative, according to changes in some independent variables(e.g. increasing of entrance fees) have been estimated. Finally, a multinomial nested logitspecification has been tested and a monetary value for the welfare change due to some likelypolicies in the Italian context (i.e., increase of the total protected acreage and increase of entrancefees) has been estimated.


Session 1B7 USE OF CONTINGENT VALUATION TO VALUE ENVIRONMENTALIMPROVEMENTS IN A TRANSITION ECONOMY: WATER QUALITYIMPROVEMENT IN LATVIA

Room 3 Richard Ready (Agricultural University of Norway), Janis Malzubris (University ofLatvia), Silva Senkane (Latvian Academy of Culture)

An important class of transboundary environmental issues involves air and water emissionsoriginating in eastern Europe that impact countries in western and northern Europe. The receivingcountries have invested substantial sums to improve the environmental infrastructure in the emittingcountries, but are understandably eager to see the emitting countries fund some of the neededimprovements themselves. Whether an emitting country will be willing or able to invest in its ownenvironmental infrastructure will depend on the local benefits it perceives it will receive from thoseinvestments, and will be limited by its financial resources, and those of its citizens. It is thereforeimportant to be able to assess how much eastern European citizens are willing and able to pay forenvironmental improvements. The purpose of this study was to assess the performance ofcontingent valuation (CV) as a method to estimate willingness to pay for a local environmentalimprovement in a transition economy. The environmental good in question was a improvement inwater quality in the Gauja River, Latvia resulting from proposed improvements in sewage handlingand treatment. If financed locally, such an investment decision will hinge largely on the perceivedbenefits to Latvians from the local improvement in river water quality, but would have externalbenefits in the form of reduce nutrient loadings to the Baltic Sea, an issue of great concern to theNordic countries and Germany. Two parallel CV surveys were conducted, one using personalinterviews and the other administered through the mail. The elicitation method was dichotomouschoice, with one follow-up to measure respondent's certainty of preference, and a second follow-upmeasuring open-ended willingness to pay. The personal interview completion rate was 89.6%(measured out of total contacts made). The mail survey return rate after two follow-up mailings was43.6%. This is a little lower than might be expected in the US, given a comparable level of effort,but that may be due to the length of the questionnaire, which included almost 50 questions. Thesurvey results strongly suggest that a single dichotomous choice question did not work well in thiscontext, but that asking a series of questions worked much better. There appeared to be high rates ofyea-saying to the initial dichotomous choice question. However, the follow-up questions appearedto induce respondents to consider the money amount involved more carefully, and give morereasoned responses. With that adjustment to the elicitation format, the contingent valuationmethodology performed about as well as would be expected in the US or western Europe, given acomparable level of resources to conduct the study. The survey responses show that localwillingness to pay for this water quality improvement is small. Mean WTP for the proposedimprovement was 0.25 Lats (US$ 0.50) per person per month. Some respondents did report concernover the condition of the Baltic Sea, but that concern contributed little to the total value of theproject. This result suggests that to improve the condition of the Baltic Sea, the Nordic countriesmay need to continue direct investment in the environmental infrastructure of the eastern Europeancountries that drain into it.

INFORMATION ASYMMETRIES I

Session 1B8 EXTERNALITIES, FIXED COSTS AND INFORMATIONRoom 4 Jan Horst Keppler (Université de Cergy-Pontoise)

The well-known theoretical solutions to the problem of externalities developed by Pigou and Coasetaxation according to measured preferences, bargaining under low transaction costs have restatedthe problem of social cost', rather than addressed it: externalities exist where preferences aredifficult to measure and transaction costs are high. Proceeding from Arrow's insight that theexistence of externalities is equivalent to the non-existence of markets for the goods concerned, thisarticle analyses externalities as being due to high informational complexity and the absence ofwell-defined preferences which both lead to insurmountable transaction costs. On the basis of thisapproach new policy solutions to the problem of externalities are developed. (JEL classification:D62, H4).


Session 1B8 ENVIRONMENTAL QUALITY ENFORCEMENT AND CONTINUOUSMONITORING: THE CASE OF WATER POLLUCTION IN FRANCE

Room 4 Katrin Millock (University of California at Berkeley), Alban Thomas (INRAToulouse)

There do not exist many empirical studies of monitoring and enforcement regimes and their impacton polluter behaviour. Yet, there is a crucial link between information on polluter behaviour andincentives for pollution reduction. The objective of this analysis is to test empirically the relationbetween adoption of equipment for continuous monitoring of emissions and polluter behaviour.Traditionally, the enforcement of quality standards has relied upon random inspections linked withfines for noncompliance. However, other alternatives may be envisaged for monitoring andenforcement of environmental quality standards. French Water Law, for instance, introduced theoption for polluters to invest in continuous monitoring equipment and pay pollution charges onmeasured individual emissions rather than a pre-calculated tax based on production-pollutioncoefficients. Based upon a theoretical model of the individual polluter’s incentives we use data fromFrench water agencies to test such incentives for the individual polluter to invest in individualmonitoring equipment. Our original data consist of 151 contracts concluded in 1992 and 1993between the Rhin-Meuse Water Agency and polluters in that water basin for subsidising variousforms of pollution abatement, including the installation of continuous monitoring equipment. Foreach polluter, the data include the industrial branch of the firm, the type of investment (whetherdirect abatement, installation of monitoring equipment, accidental pollution control, investments in“clean technology”), total cost of the investment, the amount of the subsidy, pollution levels bydifferent type, estimated reduction in pollution, as well as unit pollution charges and total pollutioncharges paid by each firm. With this panel data, we analyse two questions: First, what determinesthe choice of investment in emissions monitoring technology? By estimation of a discrete choicemodel we assess the impact of different parameters on the probability to adopt monitoringtechnology. The results show how adoption of individual emissions monitoring technology varieswith the level of emission taxes, the cost of monitoring technology, output price, input price, as wellas the individual characteristics. Second, we assess the efficiency of the incentive: did delegatedmonitoring lead to control of the “right” sources, for which the net marginal benefits frominvestment in monitoring are the largest? By an analysis of the discharge behaviour of a source bothbefore and after the investment in continuous monitoring technology we are able to test theconnection between environmental quality enforcement and polluter behaviour.


Session 1B8 ENVIRONMENTAL PRESSURE GROUPS AND INDUSTRY LOBBYISTS-AGENTS FOR DISTORTING EFFICIENCY OR USEFUL POLICY TOOLS?

Room 4 Eric Naevdal (Agricultural University of Norway)

It is often the case that environmental pressure groups (EPGs) and industrial lobbyists (ILs) possessinformation on an environmental issue that is potentially valuable to policy makers. However, EPGsand ILs are often considered by economists to be rent seekers and have a distortionary effect onenvironmental policy. It is shown in the present paper that, on the contrary, EPGs and ILs can beused by regulating authorities to improve the informational basis for policy decisions. A new aspectof the analysis in the paper is that this is done without contracts or side payments, thus bringing theanalysis closer to the real-world interaction between EPGs, ILs and governments. In the absence ofside payments, the incentives for the EPGs and ILs to reveal their private information lies in howthe policy maker responds to the information that the policy maker receives. The problem for thepolicy maker is to determine optimal policy responses to the information revealed by the EPGs andILs. It is also shown that if regulating authorities can commit to an initial policy announcementcontingent on receiving no signals from EPGs and ILs, then the policy maker can ex ante improvethe informational value of the signals sent by the EPGs and ILs.


Session 1B8 ENVIRONMENTAL AND COST IMPACTS OF THE US AUDITPRIVILEGE AND IMMUNITY LAW

Room 4 Alan Randall (Institut für Wirtschafts - und Sozialwissenschaften), Eva Hentschel(Technical University of Munich)

The audit confidentiality and immunity (ACI) law was recently implemented in several states of theUS and has caused heated discussion between environmental activists and the industry. The newlaw has two elements. Audit confidentiality gives the polluter the information privilege about thecontent of self-audits and implies that the results cannot be used against him in a criminal, civil, oradministrative procedure. To get immunity from civil or administrative penalties the firm has tovoluntarily disclose the results of an audit to the regulator through a self-report. Being granted auditconfidentiality or immunity also requires the firm to make a good faith effort to fix the problem anddemonstrate compliance. Proponents of the ACI law argue, first, that because in reality often it isthe internal audit that makes a firm aware of its pollution problems it is essential that firms areencouraged to do self-audits. Only if the firm knows about its environmental performance, it canundertake steps to improve it. Second, regarding immunity from prosecution in case a firm self-reports to the regulator, proponents state that by disclosing information to the regulator the firmcommits to fixing the problem. Then, less inspections by the regulator are necessary to achieve agiven level of environmental quality, at a lower cost to the regulator. Arguments against the ACIlaw are that it would make pollution control laws more difficult to enforce. If not all informationavailable about a firm's violation of a pollution regulation can be used to prosecute it, for example,the audits a firm performed internally, there might be the danger that firms abuse this possibility topollute carelessly. In addition, if a firm knows that it earns immunity from civil and administrativeprosecution when it reports a violation to the regulator, the firm might be tempted to abate with lessdiligent effort than if the law was not in place. The questions dealt with in this paper are whether theACI law undermines the regulator’s enforcement or whether confidential audits and immunity cansubstitute for costly inspections done by the regulating agency. We show the conditions underwhich the ACI law leads to more diligent abatement and therefore less pollution, and the conditionsunder which this happens at a lower cost to the agency and society. We employ a model in whichthe firm has three choices to make: The firm decides, 1., how much effort to incur for abatement, 2.,whether to self-audit, 3., whether to self-report, and, 4., after finding out that pollution levels werehigher than allowed, whether to clean-up or not. So far a sound theoretical study of the implicationsof the ACI law is missing. In this paper we demonstrate within a theoretical model for severaldistinct scenarios environmental and cost impacts of the law in the form it is implemented now. Inaddition, a theoretical model analyzing the interplay between abatement effort, self-audits, self-reports and clean-up effort does not yet exist in the literature.


Session 1B8 FISHING AND VOTINGRoom 4 Matthew A. Turner (University of Toronto), Martin J. Osborne (Mcmaster

University) , Jeffrey S. Rosenthal (University of Toronto)

The fact that New England's fisheries are over-exploited is puzzling. The New England FisheryManagement Council has extensive authority to close or restrict access to fishing grounds, alongwith a well developed program for assessing stock sizes and enforcing regulations. That is, theCouncil appears to have the information and the authority to avoid the stock collapses that plaguethe fisheries for which it is responsible. Given this fact, why does the council allow the fisheries tobe over-exploited? This paper considers the hypothesis that fisheries are over-exploited because theCouncil chooses to over-exploit them. More specifically, this paper is an effort to understand theway the regulatory process operates and to explain why it has performed so poorly. Regulation isdetermined by a vote of the Management Council. This council is constituted so that it representscommercial fishers, recreational fishers and conservationists. Before the council may vote on aregulation, it is required to hold a public hearing. The public hearing provides a forum in whichinterested parties (1) propose bona fide improvements in the regulation, and (2) lobby for changeswith distributive implications. It is not uncommon for the council to reverse its position on a pieceof regulation in the face of vociferous opposition at a hearing. Thus many regulations are notselected by the council members' well considered voting, but rather by the preponderance of voicesat a public hearing. A careful investigation of the history of the council suggests that the followingstylized facts are important to any effort to understand the behaviour of the council: (1) Absentpublic hearings, the council is constituted so as to represent the fishery. (2) The return to lobbyingat public hearings is positive and may be large. (3) The cost of attending public hearings isnon-trivial. (4) Lobbying provides the council with information about the fishery and the impacts ofregulation. Two other features of the council also seem important. First, the council does not appearto have accomplished its mandate to exploit the stocks in an economically rational way. Second, thecouncil is "indecisive" in that it often takes a number of iterations to settle on a regulatory responseto a particular problem, and occasionally reverses itself. We describe the operations of the fisherymanagement council as a "median voting game with costly participation", a model that is notconsidered in the literature. Fishers line up along the unit interval and prefer policies that are"close" to their own position. Fishers may attend a public hearing to vote on, or lobby for theirfavorite policy, provided that they are willing to bear the necessary opportunity and travel costs.The outcome of the hearing reflects the preferences of the median attendee. Since attendance iscostly and the median fisher's participation does not affect the outcome, this fisher never attends ahearing. More generally, fishers with preferences close to the median do not attend the publichearing. This simple model reflects the stylized facts listed above and we use it to analyse thecouncil's behavior. We are interested in the following three questions. First, under what conditionsdoes this type of institution result in efficient regulation? Second, what has caused this institution toperform so poorly. Third, what can be done to improve it? Although this research is ostensiblyabout a particular institution for managing particular fisheries, the model that we use applies to amuch larger class of institutions. Particular examples to which our analysis may be easily extendedinclude: (1) the "town meetings" which continue to be held in many New England towns, (2)shareholder meetings of publicly held firms, and (3) many US regulatory proceedings. If we areprepared to be somewhat less literal in the interpretation of our analysis, it is also a model oflobbying. As such, it predicts that lobbying will be conducted by radical factions, and that outcomeswill fluctuate between outcomes preferred by as one faction or the other. This is consistent with theobserved history of logging regulation in the Pacific Northwest, and is not predicted by othertheories of lobbying. In short, this research contributes not only to our understanding of fisheriesregulation, but also to our understanding of meetings with costly participation and lobbying.


Session 1B8 COORDINATION OF ENVIRONMENTAL POLICY IN A FEDERALSYSTEM

Room 4 Per Andersen (Odense University), Tim Jeppesen (Odense University)

The paper shows how incentives can be created to enforce the use of central authority informationin the local authority decision process. One of the main purposes of the theory of fiscal federalism isto analyse how the central authority can select incentive systems in such a way that the localauthorities choose values of their decision variables so that the welfare function of the centralauthority is maximized. This kind of problem is normally analysed within the framework ofprincipal-agent theory with asymmetric information and with different goals for the principal andthe agents. In the present model, we basically assume that the two levels of authorities have thesame goal, maximizing consumers’ surplus, but that they have different levels of information. Thelocal authority better knows the local demand for changes in environmental policy, whereas thecentral authority is better informed about many scientific aspects related to changes inenvironmental quality. Local authorities may be better informed about, say the willingness to payfor increases in drinking water quality, whereas the central authority knows more about potentialhealth risks of drinking water with given levels of pesticides. The paper describes how the centralauthority can provide incentives for the local authority to take central authority information intoaccount and combine it with the use of local information. The proposed instrument is a tax/subsidyscheme. It is possible for the central authority to design the tax subsidy scheme in such a way thatthe local authority takes the central information into account in different ways. In one extreme, thecentral authority is highly uncertain of the environmental and health effects of a specific pollutant.In this case, the tax subsidy scheme is designed to allow local information to play an essential rolein the environmental policy. This leaves much room for the local authority to regulate theenvironment. In the other extreme, the central authority is quite certain that a specific pollutant mustnot exceed a certain limit. In this case, the tax subsidy scheme is designed to allow localinformation little influence on the environmental policy. In this case, little room is left for the localauthority to regulate the environment. The result of our model is that in a federal systemenvironmental policy is not a matter of either central or local environmental competence. It is acontinuum of different degrees of central or local environmental competence. It is our belief thatthis model can improve our understanding of what may be seen as a contradictory development ofthe environmental policy in the EU. On one hand, the range of the environmental policy in the EUhas rapidly increased in the last ten years. On the other hand, the principle of subsidiarity says thatthe environmental competences should be placed at the lowest possible level of decision-making.Our model allows for both central and local competence. But it is possible to emphasize central orlocal authority depending on for instance the environmental problem in question, or how muchweight policy-makers attach to the principle of subsidiarity.

TRADABLE PERMITS: CASE STUDIES

Session 1C1 ESTABLISHING MARKETS FOR UNLIKE POLLUTANTS: THE ORPHANMINE STUDY

Room 1 Charles Howe (University of Colorado), Jean M. Boyer (Hydrosphere ResourceConsultants, Inc.), Lee Rozaklis (Hydrosphere Resource Consultants, Inc.), RobertWeaver (Hydrosphere Resource Consultants, Inc.)

Many regions suffer water pollution from mining and industrial sites that have long been abandonedand have no identifiable owners. In the western United States, thousands of old mines, drainagetunnels and tailings piles contaminate streams. Some of these sites can be improved or cleaned up at(relatively) reasonable costs. The idea of pollution - trading markets is to motivate clean-up of suchsites by trading such clean-ups for an expanded allowance of pollution elsewhere in the same riversystem. Such clean-ups involve the reduction of multiple pollutants (e.g. nutrients, heavy metals,acid drainage, BOD, etc.), usually at sites and with time patterns (e.g. daily, seasonal) quitedifferent from those of the added pollutants desired by the initiator. Since a minimum requirementof such trading is that "stream health" be improved by the trade, there are profound problems ofdefining "stream health" and allowable trades. This paper lays out some of these difficulties usingdata from actual cases and then describes the "target zone trading process" that has been designedfor application in a trial watershed in Colorado. The process involves the determination of "credits"for use elsewhere in the basin that are earned through the orphan clean-up. Scientific knowledge isinadequate to define "stream health" as a function of all pollutants, but the "target zone" approachprovides a conservative way of guaranteeing improved stream quality.


Session 1C1 SO2 REDUCTION BY ELECTRIC UTILITIES: WHAT ARE THE GAINSFROM TRADE?

Room 1 Curtis Carlson (NOAA), Dallas Burtraw (Resources for the Future), MaureenCropper (World Bank), Karen Palmer (Resources for the Future)

When advising governments on pollution control, economists have traditionally argued in favour ofusing economic incentives--especially effluent taxes and marketable pollution permits. The mostsignificant experiment in the use of economic incentives is the market for sulfur dioxide allowances(pollution permits) in the United States. This research examines the gains from the trading of theseallowances among electric power plants. Specifically, we ask how large the potential cost savingsfrom allowance trading are and how much of these gains were realized during the first year of theallowance market's operation. To answer these questions requires estimates of the marginal cost ofabating sulfur dioxide emissions for all electricity-generating units. To provide econometricestimates of marginal abatement costs and the potential gains from trade, we assembled a databasecovering more than 800 coal-fired generating units for 1985-94. The database includes annualobservations on labor, generating capital, abatement capital, and inputs of high- and low-sulfur coal.It also includes information on the emissions standard faced by each generator, its output, meanannual emissions rate and input prices. The study uses these data to answer two questions: Howlarge are the potential gains from allowance trading that stem from the difference betweenabatement costs at current emissions levels and the least-cost solution? Are these gains beingrealized? Of particular interest is how the scope of trading affects the potential gains from trade.According to regulation, reductions in sulfur dioxide emissions are to be achieved in two phases. Inthe first phase, which began in 1995, the 110 dirtiest plants (phase I plants) are to reduce theiraverage emissions. Beginning in 2000 all fossil fuel power plants larger than 25 megawatts mustreduce their average emissions. The study's most important finding is that the gains from tradesamong phase I firms are modest, especially relative to the gains when all firms participate in themarket. One reason that phase I gains are so modest, especially in comparison with earlierpredictions, is the fall in low-sulfur coal prices. If plants can attain the phase I emissions target bysubstituting low-sulfur for high-sulfur coal, the marginal cost of abating a ton of sulfur dioxide is afunction of the price difference between low- and high-sulfur coal. As this difference declines, sodoes the marginal cost of abatement. As locational price differences disappear, marginal abatementcosts tend to be equalized, lowering the gains from trade. This phenomenon becomes less importantwhen all firms enter the market, since more firms entering the market after 2000 will rely onabatement capital to meet the still tighter emissions target.


Session 1C1 TRADEABLE EMISSION PERMITS VERSUS FLEXIBILISATION OFREGULATION - A CASE STUDY

Room 1 Heddeke Nentjes (Univerisity of Groningen), Andries Heijnes (Univerisity ofGroningen)

In The Netherlands it is generally accepted that tradeable So2 and Nox emission permits for largestationary sources are administratively feasible. The discussion concentrates on the questionwhether the cost savings of such a system are sufficient compared with flexibilisation of directregulation. This paper makes the comparison. It calculates the cost of a scheme of tradeable permitsfor SO2 emissions and for Nox emissions for stationary sources (combustion and process emissions)in four fuel intensive sectors: basic metals, chemical industry, oil refineries and electricitygeneration. The costs are confronted with the cost of three forms of direct regulation: performancestandards per source, emission ceilings per firm and optimal covenants per sector. The base ofabatement cost functions have been constructed on firm specific information provided by 42 firmswith 452 sources, covering 89 percent of So2 and 96 percent of Nox emissions in the four sectors.The paper discusses the major results:- costs and cost savings in 2010 - see table 1;- extent of equalisation of marginal cost - see table 2;- auction or grandfathering - see table 3;- trade under grandfathering - see table 4;- concentration indexes and market power in the permit market;- impact of the study on political discussion and decision making in The Netherlands.


Session 1C1 FLEXIBLE INSTRUMENTS FOR THE REGULATION OF TOXICSUBSTANCES: CASE STUDY FOR ARSENIC IN CHILE

Room 1 Raul O'Ryan (University of Chile), M. Diaz (University of Chile)

Flexible instruments are preferred over command and control to regulate environmental problemssince they allow sources to reduce the costs of compliance. Usually, flexibility is synonym tomarket based incentives (MBI’s): tradeable permits or emission fees. However, when regulatingmany different facilities that emit a toxic substance, each impacting different localities, flexibility -and consequently cost reductions- can be obtained through emission standards. Additionally if risksare imposed through other media, risk management can be an interesting policy instrument. In thiscontext, where MBI’s are not applicable, these instruments can be more cost effective than anambient standard or technology imposition. Just how much is gained through increased flexibilitydepends on the specific conditions of the problem. Chile has serious problems with arsenicconcentrations associated to emissions from its seven copper smelters, located in different parts ofthe country. In one locality -where one of the most polluting facilities is located- arsenic intakefrom water is an important health hazard. To regulate airborne emissions, an ambient concentrationstandard, applicable to the whole country, is being proposed. However, the costs of inefficientregulation, resulting from inflexible policies or not considering risk management among media, canbe very high. In this context, this paper evaluates the risks and costs of four alternative policyinstruments -uniform quality standard, flexible emission standard, uniform emission standard andrisk management- to determine (i) the costs of compliance under each policy; and (ii) propose acost-effective policy for regulating arsenic in Chile. The results are based on information generatedby a three year project that included the participation of the affected facilities. Very significantdifferences among each policy instrument are obtained, consequently the results of this researchwill allow regulators to incorporate key information for the development of an arsenic regulationappropriate for Chile.


Session 1C1 COMPENSATION FOR AND INSURANCE AGAINST PRICE RISK INTRADABLE CO2 PERMIT MARKETS: AN EXPERIMENTALEVALUATION

Room 1 Morten Soeberg (Statistics Norway)

A game is outlined in which a coalition of "rich" countries offer both an aggregate CO2 emissionstarget and an initial allocation of permits yielding zero net costs ex-post permit trade under pricecertainty to a coalition of "non-rich" states. However, the prospect for permit market price riskrenders uncertain both the expected level and the variance of the "non-rich" coalition's net costs,and hence adversely influences their incentives to participate in the CO2 emissions reductionsagreement. Thus the coalition of "rich" states include in their offer a set of compensation/insurancemechanisms for the "non-rich" coalition to choose amongst. The set of mechanisms is comprised ofa compensatory initial permit allocation scheme and a permit price minimum mechanism. Thesecompensation/insurance mechanisms are tested experimentally using PhD-students from StockholmSchool of Economics and involving monetary incentives. The reported results indicate that thecompensatory initial permit allocation mechanism is preferable on grounds of efficiency and theeffectiveness of provided permit price forecasts in realising the "non-rich" coalition's expectedterms of trade. The price minimum scheme provides lower variability of both permit price and netcosts ex-post permit trade, whereas neither mechanism is preferable solely by reference toefficiency in start-up periods of trading. A Borda ranking of the mechanisms therefore implies the"non-rich" coalition's preference for the compensatory initial permit allocation mechanism.


Session 1C1 APPLICATION OF MARKETABLE EMISSIONS PERMITS SYSTEM INDEVELOPING COUNTRIES: ECONOMIC AND POLICY ISSUES

Room 1 Marcelo Villena (University of Cambridge), Mauricio G. Villena (University ofCambridge)

The problem: There are not many studies of pollution control in developing countries. This can beexplained in part by the fact that the main concern of these countries is to promote economic growthand reduce poverty, and sometimes the design and enforcement of environmental policies does notreceive the attention required. In this context, during the last decades, due to this lack of regulationcoupled with poor urban development policies, enormous air pollution problems have beengenerated in some big cities of developing countries. Santiago, Chile's capital city, is no exception.It has very serious problems of air pollution, which affect about 5 million people, over one third ofthe country's population. Currently, Santiago has about 1500 stationary sources of pollution, (suchas boilers, industrial furnaces and heaters) 600,000 automobiles and 10,000 buses. This situation,the geographical characteristics of the city (surrounded by mountains) and its climatologicalconditions raise complicated questions for the policy-makers. The regulatory authority, recognizingthe fact that air pollution in Santiago could carry grave health risks for the population, is trying toimprove air quality in the city. Now with a higher governmental priority, the regulatory authority isdeveloping an aggressive policy against the sources of pollution: the stationary sources (firms) asmuch as the mobile sources (automobiles). As a result, some studies have already been carried outto design and to implement Marketable Permit System (MPS) in Santiago. Hence, the main aim ofthis research is to analyse the economic strategies for controlling air pollution in the City ofSantiago in a context of a wider set of evaluation criteria, which consider the real cost-effectivenessof these kinds of methods. Aims and Objectives of the Research.: The main aim of this research is toanalyse the applicability of MPS in developing country context, with Santiago as the case study. Inthis sense, the estimation of the compliance costs of improving air quality (NO2) in the City ofSantiago using Marketable Permit Systems (MPS) and Command-and-Control (CAC) policies is animportant issue, however the paper is focused on the real cost-effectiveness of the method in adeveloping country context. Additionally, a second aim is to evaluate the real applicability of thiskind of instrument in a context of a wider array of evaluation criteria. In order to achieve these twomain aims certain objectives must be accomplished: i. To identify additional elements forcomparing and evaluating control strategies . ii. To identify the possible causes, levels and effects ofthe air pollution problem in Santiago. iii. To determine what policy is the most cost-effective (inreal terms) and how large the cost savings of the market instruments are. iv. To analyse theperformance of MPS under different evaluation criteria in a developing country context. v. Todetermine how the performance of second best alternatives (EPS) compares with direct regulation.

ENVIRONMENT AND DEVELOPMENT II: SUSTAINABLEDEVELOPMENT

Session 1C2 INDICATORS OF SOCIAL AND ECONOMIC VULNERABILITY TOCLIMATE CHANGE IN VIETNAM

Room 4 Neil Adger (CSERGE and School of Environmental Sciences)

This paper outlines a fr amework for analys ing s ocial vulner ability to the impacts of global warming-induced climate change in the context of a developing country in transition to a market economy.Integrated assessment of the impacts of climate change have previously attempted to incorporateconcepts of social and economic vulnerability. However, economic and social aspects ofvulnerability tend to be ignored in these assessments, partially as a consequence of the scale ofanalysis. An approach to defining and observing social vulnerability is proposed and an illustrationof the approach is outlined for the impacts of climate extremes in coastal Vietnam. V ulner ability is the expos ure of individuals or collective gr oups to livelihood s tress as a result of the impacts of climateextr emes and climate change. The f ramew ork ther ef ore s ugges ts that social vulnerability to climatechange is made up of individual and collective as pects which can be disaggr egated, but are linkedthrough the political economy of markets and institutions . The indicators of individual vulnerabilityare the incidence of poverty and the riskiness of income sources to extreme events. Changes incollective vulnerability are indicated through changes, in distribution of resources within apopulation, and by institutional changes which can either enhance security or exacerbatevulnerability. F ield based r esear ch in coas tal northern Vietnam gives an empir ical example of theimplementation of this theoretical fr amework. Res ults show that bas eline s ocial vulnerability isenhanced by some institutional and economic factors as sociated w ith V ietnam’s economic tr ans itionfr om central planning, know n as Doi Moi or renovation, namely the br eakdown of collective action onpr otection f rom extreme events, and an increasingly skewed income. Pover ty, as measured throughpoverty s everity and other composite indices , is falling in the cas e study ar ea, and hence economicgr ow th is show n to be enhancing secur ity thr ough reducing individual ris k. A simulation model ofchanges in inequality parameters , Gini and Atkinson’s coef ficients , and decomposition of thes e byincome source, show s that increasing reliance on aquaculture in coas tal V ietnam is both drivingincome inequality and increas ing livelihood ris k. Of fs etting these tr ends are other ins titutional changesas sociated w ith the dynamic nature of the economic r es tructuring and evolution of the mar ket transitionin V ietnam, which enhance s ecurity and decrease baseline vulnerability. The paper concludes that theeconomic str uctur al caus es of vulnerability can be determined within such a f ramew or k w hich expands on the pr esent analysis of vulnerability w ithin climate impact analys is. I t f ur ther suggests policyless ons f or economies in tr ansition in the areas of public policy f or poverty alleviation andenvironmental management.


Session 1C2 DYNAMICS OF CONSUMPTION AND SUSTAINABLE DEVELOPMENTIN DEVELOPING COUNTRIES

Room 4 Satyanarayana Murthy (Indira Gandhi Institute of Development Research)

Material and energy consumption levels are important indicators of sustainable development (SD).So are the levels of pollutants emitted into various environmental media-air, water and soil. Risingtrends are indicated for all of them in developing countries, now, and in the medium term in thefuture. Hypotheses about an Environmental Kuznet's Curve (EKC) suggest that environmentaldegradation may worsen over the initial course of development before environmental qualityimproves to safe levels at higher incomes. A part of the explanation lies with an increasing size ofpopulation, but among other reasons are changes in consumption and production patterns at anaggregate level. Income levels and urbanization increase with economic development, and trigger ademographic transition: people "migrate" from lower income lifestyles to a higher income one, andfrom a rural lifestyle to an urban one. Here, lifestyles typify a consumption pattern, which is adescription of the basket of products consumed by a household type. They also change over time, asthe population is able to choose from an increasing product variety made available by technologicalprogress, and due to exposure to developed country lifestyles. Consumption patterns and their levelsdrive the pattern and scale of production and trade in the economy, and the resultant demands onnatural resources and pollution. These linkages are best seen in an input-output (I-O) model of theeconomy, and are illustrated in the case of India. Alternative consumption patterns may have lowerimpacts on the natural environment, and thus augur well for SD, so policies that promote them(including non-economic factors such as advertising) are discussed in turn. Given the lowconsumption levels currently prevailing in low-income countries, and their urgent needs foreconomic development, it is important to take recourse to technological options to modifyproduction patterns and reduce the environmental impacts of production. There will be anincreasing need for technology transfers, besides financial aid, from developed countries ifdeveloping countries are to meet their obligations towards their future generations and theenvironment. These requirements were foreseen in the Agenda 21 signed at the United NationsConference on Environment and Development (UNCED) in 1992. The present paper includes amethodological framework to quantify the requirements in a consistent fashion.


Session 1C2 POPULATION GROWTH, FOOD PRODUCTION AND THEENVIRONMENTAL RESOURCE BASE IN POOR COUNTRIES

Room 4 Nadia Cuffaro (University of Cassino), Frank Heins (Istituto di Ricerche sullaPopolazione, CNR)

Abstract of paper: In part I the paper examines the theories and empirical evidence concerning theeconomic and institutional responses of agriculture to population growth in poor countries. Themain conclusion is that, although population growth induces adjustments in agriculture, in terms oftechnical progress and definition of property rights, optimism may not be justified in the context ofvery fast population growth and/or already high densities, especially when the environmentalresource base is taken into account. If population densities are already high and population growthis associated with increasing landlesness, income inequality and unemployment, large groups areexposed to hunger or starvation and, also, the stimulus to intensify may be reduced because of theslow growth of effective demand. Furthermore, agricultural intensification requires an adequateresponse of the research system but, in difficult natural environments, with fast population growth,this response may not be rapid enough. In addition, although communities try to adapt to changingunderlying economic conditions by intensifying land use, very rapid demographic growth may leadto a decline in long-term land productivity, especially when it is coupled with constraints such aslimited use of man-made inputs because of poverty, or inadequate research responses. Finally,although theory and empirical evidence suggest that balanced management of common property ispossible and that property rights on land evolve, in some circumstances -most often includingalready high population densities, and/or fast population growth and poverty- the process may notgo from balanced management of communal property to a complete definition of property rights,but rather may result in a breakdown of traditional systems into de facto open access. Part II of thepaper discusses the issue of the relationship between population pressure and land degradationthrough: (i) a survey of case studies (ii) a statistical analysis using data from the Global Assessmentof Soil Degradation (GLASOD) project (implemented by the International Soil Reference andInformation Centre -ISRIC- for the United Nations Environment Programme) in combination withdata on population and climate.


Session 1C2 EXAMINING THE "CRITICAL TRIANGLE" OF PRODUCTIVITYGROWTH, POVERTY ALLEVIATION AND ENVIRONMENTALSUSTAINABILITY IN WEST ASIA AND NORTH AFRICA DRY LANDS: ACOMMUNITY MODELLING APPROACH

Room 4 Nabil Chaherli (International Food Policy Research Institute)

Previous studies done on the low rainfall areas of West Asia and North Africa (WANA) showedthat while agricultural output from these areas has increased, growth has been achieved essentiallyby means that have favored large farmers and herders, and at the expense of environmental integrity(e.g. Pinstrup-Andersen, Hazell and Oram). These means have included national and sectoralpolicies (feed subsidies, crop and livestock support prices etc...) which have generated perverseincentives to exploit the natural resources of these areas (mainly the barley based systems andrangelands). Research and extension policies have given low priority to the low rainfall areas andfailed to come up with solutions to equitable and environmentally sustainable growth. Theobjectives of the paper are: 1) To evaluate the effects of market liberalization and structuraladjustment programs on selected communities in low rainfall areas of WANA ; 2) To analyzeeffects on total community income, income distribution land degradation; 3) To identify, compareand evaluate impacts of feed subsidy removal on the adjustments of the livestock feed mix; 4) Toanalyze the effects of those adjustments on technology adoption, resource use and crop mix. Inorder to achieve the objectives of this research, we used farming communities located in Ait Ammar(Morocco), Nawayel (Tunisia) , Falha (Jordan) and Job Jomaa (Syria). These study areas are knownfor a very high spatial and temporal variability of crop and livestock outputs and input usesignificantly related to rainfall annual irregularity. They are also characterized by the diversity oftheir farm structures and the complexity of their farm systems. They differ however by the levels ofland degradation in the marginal arable areas and the extent of overgrazing and loss of vegetation inthe surrounding rangelands. In the low rainfall areas of WANA, many activities are imposed by thestrategy of diversification and the variability of the agro-ecological condition related to the split ofthe farms in many small plots and the property rights situation on the rangeland. The case of thecommon resource managed at the community level and used by the individuals calls for acommunity focus. The models used are mathematical programming models, including the mostsignificant features of a profit-maximizing behavior model, and also season uncertainty and farmerresponse to such uncertainty. The models represent (a) rainfall variability and its effects on yields;(b) farmers' decision-making flexibility; (c) different levels of farmers' aversion to risk; (d) impactof land degradation on crop land and rangeland productivity. Results obtained show that whilemarket liberalization has a different impact on the communities selected with respect to efficiencyand equity, environmental degradation is driven more by the policy environment than by poverty. Itis also found that the introduction of new barley technologies has a positive impact on theenvironment by relieving the pressure on the rangeland.


Session 1C2 PRODUCTION TECHNOLOGY AND NATURAL RESOURCESUSTAINABILITY: THE CASE OF KENYA’S LAKE VICTORIAFISHERIES

Room 4 Moses M. Ikiara (Moi University)

The nature of technology used in a fishery has serious implications for its sustainable exploitationand therefore its management. Some of the technologies currently used in the exploitation ofKenya’s Lake Victoria fisheries, notably beach seining, trawling, use of mosquito nets for seiningand use of gillnets of small mesh sizes, guarantee some catches in the short run but are costly in thelong run as they compromise resource sustainability. By destroying fish breeding surfaces and/orharvesting fish before attaining reproduction age, these technologies have resulted into seriousoverfishing. This paper specifies and estimates production functions and models relating differenttechnologies to the amount of immature fish harvested (used as measure of sustainability). Theobjective is to assess the relative impact of different technologies on the health of the fisheries. Thepaper also evaluates the motivations behind the choice, by fishing firms, of technologies that areobviously deleterious to their only source of livelihood. These are found to be, principally,economic. Management of these fisheries will only succeed through the creation of economicincentives that induce change in behaviour.


Session 1C2 ECONOMIC DEVELOPMENT, PROPERTY RIGHTS, & ECOLOGICALOUTCOMES - WESTERN GHATS INDIA

Room 4 Sarachandra Lele (Institute for social and economic change)

The nature of technology used in a fishery has serious implications for its sustainable exploitationand therefore its management. Some of the technologies currently used in the exploitation ofKenya’s Lake Victoria fisheries, notably beach seining, trawling, use of mosquito nets for seiningand use of gillnets of small mesh sizes, guarantee some catches in the short run but are costly in thelong run as they compromise resource sustainability. By destroying fish breeding surfaces and/orharvesting fish before attaining reproduction age, these technologies have resulted into seriousoverfishing. This paper specifies and estimates production functions and models relating differenttechnologies to the amount of immature fish harvested (used as measure of sustainability). Theobjective is to assess the relative impact of different technologies on the health of the fisheries. Thepaper also evaluates the motivations behind the choice, by fishing firms, of technologies that areobviously deleterious to their only source of livelihood. These are found to be, principally,economic. Management of these fisheries will only succeed through the creation of economicincentives that induce change in behaviour.

THE DOUBLE DIVIDEND ISSUE I

Session 1C3 ENVIRONMENTAL TAX SUBSTITUTION: A DYNAMIC GENERALEQUILIBRIUM ANALYSIS

Room 5 Kerry Krutilla (Indiana University), Roy Boyd (Ohio University), Genny Lightart(IMF)

The economic consequences of revenue-neutral environmental taxation has generated great interestin the past several years, and a rapidly growing theoretical literature. There is far less empiricalresearch on the subject and, in particular, study within an explicitly dynamic context within whichactual policies will be implemented. This study employs a computable general equilibrium model ofthe United States to explore the economic consequences of a variety of tax substitution schemeswhich involve the replacement of existing revenue taxes, including labor and capital taxes, withbroad-based energy taxes. Different degrees of tax substitution will yield different effects on carbonemissions -- the reference pollutant in this study. Consequently, a range of scenarios are explored todemonstrate the welfare effects associated with different levels of carbon control. Since the baselinelevel of output growth will influence the economic impact of tax replacement schemes, all taxreplacement simulations are conducted against the backdrop of alternative growth paths driven bydifferent technical change scenarios. This modeling approach provides a better assessment of thepotential range of carbon control costs than found in previously published work. The CGE modelused in this study is of the perfect foresight type; it can be run for 40 periods with the terminalconstraints assuring that capital formation will be consistent with the infinite horizon formulation.The model has five producer and five consumer sectors which have been benchmarked to a 1994base year. Data for the associated Social Accounting Matrix (SAM) has been obtained fromIMPLAN, the national income and product accounts (NIPA) from the Bureau of Economic Analysis(BEA), the internal revenue service (IRS), the US Treasury, the IMF, and the bureau of laborstatistics (BLS). The model is written in the MPSGE language developed by Tom Rutherford and issolved as a mixed complemintarity problem using the PATH solver (in GAMS) with LUSOLupdating.


Session 1C3 ONE SOLUTION FOR A BUNCH OF PROBLEMS? EUROPEANENVIRONMENTAL TAX REFORMS AND THE DOUBLE DIVIDENDHYPOTHESIS - AN APPLIED GENERAL EQUILIBRIUM ANALYSIS FORTHE EUROPEAN UNION WITH THE GEM-E3 MODEL

Room 5 Tobias F.N. Schmidt (ZEW Mannheim), Klaus Conrad (Mannheim University)

While there is some hope that the ongoing climate change negotiations come up soon with concrete,time scheduled and binding emission reduction commitments, the question of how to achieve thesetargets is still unsolved. This irresolution holds for both, the type and/or mix of instruments and thedegree of international cooperation with respect to joint or unilateral implementation. In the pre-Kyoto period the European Commission claimed for all industrialized countries a 15 % reduction ofgreenhouse gases by 2010 based on the emissions of 1990; not knowing exactly how such apromise can be achieved. Unfortunately many EU member states share currently the same economicproblems: high unemployment, high taxes that are hardly to reduce because of the public deficitcriterions given by the Maastricht Treaty and the Monetary Union and increasing social securityrates because of increasing unemplyoment and the aging of societies. One promising escape fromthis dilemma is revealed by environmental tax reforms. The hope that advocats have in mind is twoobtain a so called double dividend (one for the environment and one for employment and/oreconomic welfare) by generating a revenue neutral tax reform that is more efficient than a givenpre-existing one. The objective of this paper is to analyse such a tax reform and its impact on theEU. For this purpose we first present an analytical integrated assessment framework that enables theanalysis of alternative policy instruments on the national and the EU-wide level. The first part of thepaper deals with the description of a computable general equilibrium model GEM-E3 for fifteen EUmember states. A brief outline of the model will explain the general scope, the assumptions made,the underlying behaviour of agents and the representation of the environment. Subsequently weapply this framework to identify and assess the economic and environmental impacts of alternativetax reforms. The emphasis of the analysis lies on the institutional setting of a carbon dioxidereduction policy and on the role of the specification of the labour market. Both aspects seem to berather crucial for the economic impact of environmental tax proposals. The institutional settingsanalysed are related to the degree of environmental policy coordination. A standard criticism to theneo-classical framework of CGE-modelling is that it neglects the problem of unemployment. Tograsp this criticism the assumption of a market clearing wage rate is relaxed during the course of theanalysis. Imposing the same policy under alternative wage rules enables a comparison of impactswith respect to alternative labour market regimes.


Session 1C3 ON THE QUANTITATIVE EFFECTS OF IMPERFECT COMPETITION ONTHE DOUBLE DIVIDEND

Room 5 Laura Marsiliani (London Business School)

It is argued that a double dividend effect following an environmental tax reform is more likely if thegoods markets are imperfectly competitive and if the power of the unions is strong. However a clearcut answer to the double dividend issue can only be provided by empirical investigations. Thispaper presents a dynamic general equilibrium model of environmental tax reform. First theoptimality conditions for the producer's decisions and the Euler equations for consumption andwages are derived. Second the production elasticities and the wage equation coefficients areestimated using cointegration technique and the parameters denoting market and union power arerecovered for Italy using quarterly data for the period 1980-1992. Next we calibrate the dynamicgeneral equilibrium model and we simulate the EU carbon/energy tax reform. Finally by changingthe values of the parameters denoting imperfect competition we are able to assess the impact ofmarket and union power on the double dividend outcome in terms of macroeconomics effects andwelfare. We also found that a double dividend in Italy can be driven by a low level of marketcompetition more than by a strong union power.


Session 1C3 TAX REFORM AND THE ENVIRONMENT IN DEVELOPINGCOUNTRIES: IS A DOUBLE DIVIDEND POSSIBLE?

Room 5 Ian Coxhead (University of Wisconsin-Madison)

In recent years environmental economists have been engaged by the possibility of a “doubledividend” (DD) from environmental taxes. The DD argument asserts that in an economy withexisting distortionary taxes, a tax on some polluting activities or goods will generate two kinds ofbenefit: it will discourage pollution, and also improve the efficiency of the tax system by enablingthe revenue-neutral reduction of distortionary taxes. Recently, however, the robustness of the casefor DD has been questioned by economists who assert that the imposition of an environmental taxin a tax-distorted economy is likely to result in welfare gains that are at best much smaller thananticipated, and which may even be negative. According to these analyses, the additional revenuegained by raising an environmental tax on one good or a small range of goods may, under a broadset of conditions, be more than offset by its distortionary effects. The latter are both direct (a tax-induced change in the price of one good relative to others reduces efficiency by distortingconsumption and intermediate input use patterns), and indirect, such as when the environmental taxreduces real wages and thus causes the base of the income tax to contract. In this paper I reviewaspects of the DD debate with particular reference to environmental and market conditionscommonly faced in developing countries, and present an analytical general equilibrium model inwhich relevant tax policy and environmental issues can be explored. The analysis indicates thatbecause of fundamental differences in industrial structure and the tax base, the case against the DDmay be overstated where developing economies are concerned. By contrast with industrializedeconomies, the tax base in many developing countries relies heavily on trade taxes (especiallytariffs), which are highly distortionary. Moreover, in many cases industries protected by tariffs areleading sources of emissions. Similarly, accumulated evidence suggests that in many cases thestructure of agricultural protection distorts producer incentives towards crops and technologies thatcontribute disproportionately to soil erosion, land quality degradation and water pollution. Insummary, the case for environmental taxes in developing countries seems strong. I argue, however,that a more effective strategy for addressing environmental issues through the tax system indeveloping countries might be based on reforming existing taxes, rather than focusing on the raisingof environmental taxes per se.


Session 1C3 CO2 TAX RECYCLING AND THE OLD-AGE PENSION SYSTEM. ANAPPLIED INTERTEMPORAL GENERAL EQUILIBRIUM ANALYSIS FORAUSTRIA

Room 5 Ronald Wendner (University of Graz)

Anthropogenic CO2 emissions and the associated threat of global climate change on the one handand the financial requirements of the old-age pension system in face of an increasing portion ofolder people to the total population on the other hand are often perceived as two of the mostdominant problems of our future. Both problems are addressed in this paper. By means of anintertemporal applied general equilibrium model it is shown that CO2 reduction and financing theold-age pension system may be mutual compliant rather than opposed policy objectives. Thesimulations of three policies illustrate this point. They aim at lowering CO2 emissions and clarifythat the development of the wages play a key role in determining the impacts of an emission tax.Wages generally decrease because lower production (as a result from introducing the tax) lessensthe demand of labor. This effect usually exceeds the tax-induced substitution effect unless thedemand of labor is further stimulated. Lifetime income of (some) households therefore decreasesand so does private consumption and saving. These points are accounted for by the "CO2 cum old-age pension" policy. The revenues from CO2-taxation are partly used to subsidize labor costs; theremaining portion is employed to finance (subsidize) the "pay-as-you-go" pension system. WhileCO2 emissions are reduced, two effects follow. Firstly, firms are more greatly stimulated tosubstitute labor for fossil fuels. Secondly, since the increase of social security tax rates is lessenednet labor income increases and so do private consumption demand and savings.


Session 1C3 ENVIRONMENTAL TAXES AND THE DOUBLE DIVIDEND INDEVELOPING COUNTRIES: THE CASE OF INDIA

Room 5 Shreekant Gupta (University of Delhi)

This paper estimates the revenue potential of environmental taxes for India and re-examines thedouble dividend hypothesis by incorporating stylised features of the tax system in less developedcountries (LDCs). With respective to the first objective, the paper focuses on taxes on industrialwater and air pollution. In the absence of (aggregate or spatial) data on water and air emissions byfirms, the paper uses regional output data in conjunction with pollution coefficients from the WorldBank's Industrial Pollution Projection System, to estimate the amount of water and air pollutiongenerated. This provides the tax base which is used to estimate (spatially differentiated) pollutioncharges and the total revenue associated with them. It is claimed that these estimates togetherprovide a realistic description of the amount of tax revenue available for revenue recycling (i.e., forreducing other distortionary taxes) discussed below. Next, the paper re-examines the literature ondouble dividend by modifying existing models by incorporating stylised features of the tax systemin LDCs such as the low share of direct taxes (particularly taxes on labour income), excessivereliance on commodity taxes, and widespread subsidies on inputs such as energy and fertilisers.This is in contrast to most theoretical and empirical studies on the double dividend hypothesiswhich examine revenue recycling of environmental taxes in the context of pre-existing distortionarytaxes on labour. In addition, the motivation for several studies has been features of the Europeanlabour market, namely, high levels of unemployment and rigid wages. Thus, a lot of attention hasfocused on the potential effects of using revenues from environmental taxes to reduce payroll labourtaxes and thus stimulate employment. Most of these features, however, do not apply to LDCs wheredistortions in the tax system arise from taxes on final and intermediate goods whose marginalwelfare costs are high. Another aspect generally ignored in the literature is the case where therevenue from environmental taxes is not recycled but used to reduce the fiscal deficit. This isparticularly important in LDCs where these deficits are a threat to macro stability. The paperdevelops a simple general equilibrium model where pollution taxes are used to reduce distortionarytaxes on final and intermediate inputs, and/or the fiscal deficit. Implications for the double dividendhypothesis are derived. It is shown that the results do not depend on the elasticity of substitutionbetween leisure and polluting goods, but on the substitution elasticities between various final andintermediate goods. Realistic simulations of the revenue recycling effect for India are conducted onthe basis of the revenue potential estimated earlier in the paper.

WATER MANAGEMENT

Session 1C4 HOW MIGHT FUTURE WATER MARKETS LOOK LIKE - THE USE OFEXPERIMENTAL ECONOMICS TO DESIGN MARKETS FOR WATER

Room 8 Ariel Dinar (The World Bank), Richard Howitt (University of California, Davis),Steven Rassenti (University of Arizona, Tucson), Vernon Smith (University ofArizona, Tucson)

Large, complex water systems throughout the world traditionally required a centralized authorityboth to solve the fundamental coordination problems and to dictate solutions to allocation issues.These problems are often exacerbated by factors such as the public good nature of water,externalities associated with transporting and consuming water, and the economies of scale inshared production facilities. One of the problems with proposals for substantial institutional changein water systems is that modification and irreversibility make the process slow, cautious and costlyto society. Experimental economics yields a formal and replicable system for analyzing alternativemarket structures, such as the ‘smart’ market, before they are actually implemented. For example, a‘smart’ water market can be developed and tested in the laboratory during years of sufficient waterto simulate drought conditions. If the results are positive, such a market could be implementedduring years of water scarcity. In this chapter, we will discuss the role that experimental economicscan play in evaluating proposed institutional changes to help facilitate a more rapid and smoothadoption of changes in the water system, and demonstrate it using an experiment under Californiaconditions. First, a prototype of the California water transfer model and results from its testing inthe laboratory, using trained student subjects, will be presented. Then a model that was tested withparticipants who are actual water managers and water agents of relevant water-related agencies, willbe presented. Results include levels of price efficiency achieved by the smart market playerscompared with a hypothetical set of perfectly competitive trades, and the rate of price discovery bythe players. The paper will conclude that establishment of water networks using a computercoordinated smart allocation mechanism will yield substantially competitive outcomes. The paperalso will discuss the implications of applying this approach to various developing countries, and tomarkets for other natural resources.

WATER MANAGEMENT

Session 1C4 INCORPORATING ENVIRONMENTAL DEMANDS INTO A WATERMARKET: A QUANTITATIVE ANALYSIS OF ALTERNATIVEINSTITUTIONS USING EXPERIMENTAL ECONOMICS

Room 8 James J. Murphy (University of California Davis), Richard Howitt (University ofCalifornia, Davis)

The success of water markets in California, and throughout most of the western United States,critically depends upon the ability to reduce transaction costs and delays associated with watertransfers. In an inter-regional water market, environmental concerns are a major component of thesecosts and delays. Traditionally, environmental protection has been provided primarily throughpolitical and legal channels, which typically results in a complex web of standards and constraintsimposed on private actions. This is certainly the case with water allocation in California. Foragricultural and urban water users, such a command-and-control approach to water managementfosters uncertainty regarding future property rights and water supplies. From an environmentalperspective, achieving environmental goals through standards mitigates damages; it rarely providesthe appropriate incentives necessary to improve environmental quality. This paper explores variousmarket-oriented solutions to the challenges associated with balancing the competing demands forwater. In particular, it focuses on alternative institutional structures which facilitate environmentalparticipation in a water market. It uses experimental economics to explore critical policy questionssuch as: What impact will environmental participation have on the efficiency of a water market andthe level of environmental quality? To what extent do different institutional rules affect the marketcharacteristics (i.e. efficiency, price stability, price discovery, etc.)? Given the public good nature ofenvironmental water use, what impact do various financing mechanisms for environmentalacquisition of water have on the properties of the market? The advantage of studying alternativewater market institutions in an experimental setting is that we can observe behavior in a controlledenvironment, and can modify the institutions in various ways to test specific hypotheses. Byanalyzing water markets in an experimental context, we are able to explore complex allocationproblems without imposing any assumptions about the behavior of the agents. We develop astochastic, dynamic model of the anadromous fish population in the Sacramento-San Joaquin Delta,and combine this with empirical models of agricultural production and urban water use, to derivethe demand and supply functions utilized in the experimental water markets. Similar to an actualwater market, these agents maximize their profits by purchasing (or selling) water at prices lower(higher) than their willingness-to-pay, as defined by the empirically derived demand (supply)functions. Preliminary results indicate that the computer-assisted uniform price double auction usedin this market produces highly efficient allocations, and is able to track dynamic changes in watersupplies, even though agents typically do not reveal.

WATER MANAGEMENT

Session 1C4 WATER DEMAND ELASTICITY: IMPLICATIONS FOR WATERMANAGEMENT AND WATER PRICING POLICIES

Room 8 Alberto Garrido (Universidad Politécnica de Madrid) Eva Iglesias (UniversidadPolitécnica de Madrid), José Sumpsi (Universidad Politécnica de Madrid),Consuelo Varela-Ortega (Universidad Politécnica de Madrid)

Water resources are becoming increasingly scarce around the globe. The rapid development ofirrigated agriculture, which actually consumes 80% of the whole world water resources, constitutesone of the main challenges for a sustainable water use. Water agricultural uses compete withenvironmental uses, domestic needs and industrial development, and have been often reported tocause serious impacts on the environment. Water pricing policies are one of the most discussedways to signal water scarcity and achieve a higher water-use efficiency. In this paper we analyse therole of natural, structural and institutional factors in determining water demand elasticity and howthese factors may influence the scope for pricing policies to enhance water use. In doing so, weattempt to anticipate which are the potential water savings that can be obtained through waterpricing policies, which water management strategies are likely to be adopted by farmers, and howthese policies may affect regional economic activity. This paper is based on a comprehensive fieldresearch conducted in different Spanish regions. Data were collected throughout seventeen irrigatorcommunities which covered over 150,000 hectares. In order to simulate the impact of water pricingpolicies, a dynamic mathematical programming model has been developed and 45 farming systemshave been modelled. The organisation of the paper is as follows. In the first section, we review theexisting literature and assemble a state-of-the-art knowledge of water pricing policies in theagricultural sector. The second section contains a brief description of the field research work. In thethird section we develop a dynamic mathematical model to simulate farmers behaviour and obtainwater demand curves. In the fourth section, we present our main results and identify which are themain factors influencing water demand elasticity. Finally, we present main implications for watermanagement and water pricing policies.

WATER MANAGEMENT

Session 1C4 USING SIMULTANEOUS DECISIONS IN DOMESTIC WATER DEMANDANALYSIS TO VALUE AN ENVIRONMENTAL FUNCTION

Room 8 Gayatri Acharya (University of York), Nancy E. Bockstael (University of Maryland)

This study develops and applies a methodology to value an ecosystem function of a specificwetland. The wetlands of the Hadejia-Jama'are floodplain in Northern Nigeria are under threat byplanned water resource schemes which would drastically reduce the flooding of the wetlands.Hydrological studies show that the annual recharge of the underlying aquifer is an importantenvironmental function performed by the regular flooding of the wetlands. The aim of this paper isto value this recharge function through an analysis of domestic consumption of groundwaterresources. We carry out a demand analysis of water consumption by rural households which rely ongroundwater resources for their domestic needs. The results of the analysis are used to calculatewelfare changes due to hypothetical reductions in groundwater levels, resulting from reducedflooding within the wetlands. Three types of households are defined by their water procurementpreferences as: (i) households which collect all their water; (ii) those which purchase all their water;and (iii) those which both purchase and collect their water. Water purchased and collected derivesfrom the same source and households do not collect and sell water. It is assumed that less rechargeto the groundwater would result in higher collection times and possibly higher prices charged byvendors, and would therefore have an impact on social welfare. Water is sold by one or more watervendors who temporarily reside in the village and provide this service for a fee. Water demands aremodelled using a modified household production function approach and expressions are derived forthe interior solution where households both purchase and collect water and for the corner solutionswhere a household may choose to collect only or purchase only. Data on observed prices andquantities, and time taken to collect water, as well as other relevant socio-economic informationwas collected for each household within the sample. A contingent behaviour survey was carried out,using the same households, to collect hypothetical demand data with varying prices and collectiontimes. The survey altered collection times or price of vended water for the household, allowing eachhousehold to compare the relative prices of collected or vended water and then to state whether thehousehold would change its present water procurement method. The survey attempted to capture theprice or time at which the household indicated a switch in behaviour. These switching prices arereached by most respondents as the collection times or prices are changed during the exercise. Afollow up question asked respondents to consider how many units of water their household wouldbuy/collect given their change in behaviour (as a response to changes in the relative prices). A panelwas formed by pooling both hypothetical and observed data to augment the information on demandfor purchased and/or collected water. Preliminary results show that household characteristics areimportant in determining the category they place themselves in. The switching behaviour of thehouseholds, as is evident from the data set, suggests that the demand function for each 'type' ofwater demanded by each household is potentially kinked. The study suggests that the kink isdetermined by the relative prices of collected and purchased water and by household characteristics.Water demands are therefore estimated as simultaneous decisions. Welfare effects associated withchanges in groundwater levels are calculated using the estimated demand functions. Changes inwetland flood extent affect groundwater levels in village wells. As a result, collection times and/orthe price of vended water is also likely to be affected. The estimated demand functions are used tocalculate the welfare effect of hypothetical changes in collection time or price. These estimates ofwelfare change due to price or collection time changes are related to well water levels, and tohydrological data on flood extent, to obtain a value for the groundwater recharge function providedby the wet lands.

WATER MANAGEMENT

Session 1C4 PRIVATELY-OPERATED WATER UTILITIES, MUNICIPAL PRICENEGOTIATION, AND ESTIMATION OF RESIDENTIAL WATERDEMAND: THE CASE OF FRANCE

Room 8 Céline Nauges (Université des Sciences Sociales de Toulouse), Alban Thomas(ERNA-INRA Toulouse)

It is well recognized that estimating household demand for residential water is a prerequisite for anyresource policy design. In cases where water resources are scarce and conflicting uses areconsequently more acute, it is important for the environmental regulator to assess properly theexpected changes in water consumption, following price or quota policy schemes. Even thoughresidential water demand may not appear the most important element in the breaking down of totalwater consumption, public opinion is becoming very sensitive to possible periods of restriction inuse, as well as trends of increasing water prices through Europe. Many empirical papers are dealingwith estimation of residential water demand, most of them in the U.S. Unfortunately, in ouropinion, empirical results on important figures such as price and income elasticities are veryheterogeneous and remain often sensitive to econometric specification. Three problems are notcompletely resolved yet in most cases. First, accurate data on prices paid (both average andmarginal) are not always available, hence making it difficult to draw relevant inference onconsumers’ behaviour. Second, demand shifters such as climatic and sociodemographic variablesshould be included in these models. Third, when panel data are available, it is not always the casethat the additional information provided by successive cross sections is fully exploited by empiricalresearchers. In particular, it is important when using panel data to assess the exact nature of priceendogeneity in the consumption equation. As it stands, endogeneity of water price may be causedby either instantaneous consumption entering average price, or correlation between price andunobserved heterogeneity (individual effects), or both. Incorrect model specification often leads tosevere biases in demand elasticities. When average or marginal price is correlated with individualeffects in panel data, it can be the case that private water utilities charge residential water pricesdepending on local communities’ characteristics such as average revenue, debt or populationdensity. We propose in this paper a consistent and efficient estimation procedure for residentialwater demand models, in the static and dynamic cases, applied to a French panel data sample. Theemphasis is set on implications of alternative forms of endogeneity in the price, and importantvariables for assessing consumer behaviour such as climatic and sociodemographic variables areincorporated in the model. Econometric methods specially designed for endogeneity in panel datamodels are employed to estimate three alternative specifications: marginal price, average price anda combination of the two. Estimation results indicate that both average and marginal prices arecorrelated with the community’s individual effect, this being interpreted as a strategic price policyfrom the water supply industry. We find evidence that consumers significantly respond to acombination of marginal and average prices (short-run elasticity of -0.21), rather than to a singleprice measure (-0.22 for average price and -0.18 for marginal price). Furthermore, an interestingresult concerns the water consumption savings occurring when individual housing is dominant. Thisclearly indicates that individually charging households for actual consumption, using meterrecording, significantly reduces residential water use.

WATER MANAGEMENT

Session 1C4 WATER PRICING OPTIONS IN KENIA: FOCUS ON URBAN AND RURALWATER SCHEMES

Room 8 Joseph O. Onjala (University of Nairobi)

The price system can be used to provide incentives to conserve water and improve the naturalenvironment. The use of pricing to fight resource misallocation is one of the major policyinventions in economics. Theoretically and experimentally, the price has been shown to be anefficient instrument, far superior to its main alternative, quantitative regulations. In view of thiswide acceptance of environmental pricing in economics it must come as a surprise, and should be acause for concern, that water pricing, charges or rates and the question of cost recovery to achieveefficient water allocation continues to pose problems for many governments in Africa. Because ofthe policies pursued in the past, there has been the tendency to treat water as a free commoditywhich the people should not be called upon to pay for directly. changes to these policies are onlybeing forced on governments by the magnitude of the investment, operation and maintenance costsinvolved in supplying clean water. Nevertheless, putting the right price tag on water remains auseful means for achieving efficiency though, the issue of how and who should pay is still underdebate. In a recent policy framework paper (1996), the Government of Kenya has committed itselfto progressively implement a policy of charging water consumers tariffs sufficient to cover capitaland O&M costs in urban areas, while setting rural tariffs to cover O&M costs only. In consequence,this paper discusses water pricing options for urban and rural water schemes. The paper highlightsthe implications for introducing marginal cost pricing, scarcity pricing and the more pervasivemethods of water pricing such as average cost pricing in Kenya. Environmental aspects of waterprice formation are also considered. Because of growing water scarcity in Kenya, the contributionof this paper to policy, especially in supporting measures for efficient water allocation and the needfor the government to reduce subsidies to water schemes in Kenya is seen to be immense.Furthermore, effective water pricing is likely to encourage the environmentally desirable andsustainable use of water resources in Kenya.

NATURAL RESOURCE MANAGEMENT: CASE STUDIES

Session 1C5 THE IMPACT OF OIL PRICE ON ADDITIONS TO PROVEN RESERVES:THE CASE OF THE UNITED STATES

Room 7 Y. Hossein Farzin (University of California, Davis)

The stagnation of oil prices since mid 1980's has been associated with declining oil drilling activity,historically a key factor in the growth of U.S. oil reserves. This has naturally raised concern aboutresumption of U.S. domestic oil supply in the future, and its dependence on imported oil, should oilprices fail to make a vigorous and timely recovery. In this paper, I develop a model to estimate,among other things, the impact of oil price changes on growth of proven oil reserves. Oil reserveestimation techniques used in the industry often rely only on past engineering and geological dataand do not adequately and systematically incorporate economic factors. While allowing for themain geological and technological factors, the model in this paper emphasizes the economic factors,such as expected future oil prices, drilling costs, and technological change, that influence theprocess of oil reserves additions. The growth of oil reserves derives basically from two broadsources: the discovery of new fields and additions to reserves in known fields. The model developedhere is concerned with the second source; additions to reserves resulting from extensions andrevisions of the reserves in known fields. The model views additions to reserves as analogous to aproduction process in which drilling wells is the primary input and additions to reserves is theoutput. It considers a competitive oil producer who decides to drill and add to the existing provenreserves as long as the cost of the incremental barrel of oil added to reserves does not exceed theexpected oil price for that period. Using this principle, the model derives explicitly an estimatingequation for additions to reserves. Following Farzin (1992), the marginal cost of reserves additionsis postulated to rise both with current and cumulative additions, where the latter reflects the reservesdepletion effect, but to decline with time as technology improves. The model allows for the partialadjustment of actual additions to the desired level of additions. It assumes adoptive priceexpectations formation for future oil prices. The derived estimating equation is linear in sevenreduced-form coefficients but nonlinear in the six structural parameters of the model. It is estimatedfor the U.S. aggregate data over the 1951-1995 period, yielding the estimates of the short-run andlong-run price elasticities and of the contribution of technological progress to reserve additions. Theimplications of the quantitative results for policies designed to enhance U.S. domestic oil reservesare discussed.


Session 1C5 A GAME THEORETIC ANALYSIS OF NUTRIENT EMISSIONREDUCTION STRATEGIES IN THE RHINE RIVER BASIN

Room 7 Rob Van der Veeren (Vrije Universiteit)

In transboundary river basins, the natural flow of water from the upstream source to the downstreammouth may result in conflicts of interests with a strong spatial, unidirectional character, e.g.,polluting activities taking place in the upstream region may adversely affect the downstream areas,whereas activities in the downstream areas do not interfere with the opportunities for the upstreamregion to use the river any way they want. Within the Rhine river basin a 50% flat rate emissionreduction policy has been proposed for a large number of substances, in order to reduce thepollution of the North Sea and to enhance the ecological conditions of the Rhine. In the case ofnutrients, these objectives could be achieved at almost 50% lower costs when emission reductionsare allocated differently, especially between sectors; e.g. arable farms on sandy soils should berequested to reduce more than 50%, and dairy farms on clay soils to reduce less than 50%. Thelatter farms will find it in their interest to shift from the flat rate emission reduction policy to thecost-effective allocation of nutrient emission abatement strategy, whereas the former will tend toapply the flat rate policy. This paper applies game theoretic analysis to find the side paymentsnecessary to make the cost effective allocation of emission reduction strategies beneficiary to allsectors involved.


Session 1C5 INTEGRATING ECOLOGICAL COMPLEXITY INTO ECONOMICINCENTIVES FOR SUSTAINABLE USE OF AMAZONIAN RAINFOREST

Room 7 James R. Kahn (University of Tennessee and Oak Ridge National Laboratory),Frank McCormick (University of Tennessee), Vicente Nogueira (Instituto deProtecao Ambiental-Amazonas and Universidade do Amazonas)

Over the last decade, much scientific research has taken place which examines the ecologicalcharacteristics of both the forest and exploitation activities which are necessary to ensure itsresilience and ability to regenerate. However, less work has been done on how to translate theknowledge of these ecological parameters into practical and enforceable policy instruments whichcan constrain economic activity in a fashion which ensures the viability of the forest and thus thesustainability of the activity. This paper addresses this problem by examining alternative policiesfor integrating the ecological information into policy instruments. The first section reviews thescientific research in sustainable tropical forestry, with emphasis on the ecological factors whichhave been shown to be important in maintaining forest productivity, resilience and sustainability,while the second section contains a case study of “Precious Woods,” a European firm which hasestablished a “sustainable forestry” operation near the city of Itacotiara, state of Amazonas, Brazil.In this section, we examine the extent to which it was in the private interest of this firm toincorporate this ecological knowledge into their decision making process, and the extent to whichthis operation is actually sustainable. The third section looks at the problem of forestry in Amazonasin general, and based on the first two sections develops modifications of simple economicincentives, which create an economic incentive for harvesting firms to maintain the regenerationcapacity of the forest. Pigouvian taxes, marketable permits, deposit/refund systems andbonding/insurance systems are examined with respect to several criteria, including theenforceability of the systems and their ability to explicitly incorporate the important ecologicalinformation into the firm’s decision making process. This section also looks at recently developedeconomic incentives for sustainability in the state of Amazonas, deviations from the conceptuallyideal instruments, and implementation issues that arose during their development. The fourthsection of the paper looks at problem of incorporating ecological information on sustainability intoprivate decision making at the level of subsistence economic activity, rather than in the formalsector of the economy. The Mamiraua Project, which looks at the coexistence of ecologicalpreservation and traditional subsistence activities is used as a case study. In the conclusion to thepaper, the information which has been developed in these specific applications is generalized.Suggestions are made as to general methods for incorporating ecological information into policyinstruments in both the formal and informal sectors of developing countries.


Session 1C5 ECONOMIC VALUE COMPARISION BETWEEN PRESERVATION ANDAGRICULTURAL USE OF WETLANDS

Room 7 Heung-Dong Lee (Korea Maritime Institute)

Coastal wetlands in Korea provide important and valuable goods and services to the public. Thereare some conflicts in their usage between protectionists and developers because of heavy demandsfor them. We are experiencing a lot of reclamation along the west coast of the Korean peninsula foragricultural, industrial and urban purposes. The purpose of the study is to value these services andgoods for each alternative of utilizing coastal wetlands. The valuation of resources for the optimalwetland management is complicated with the difficulties of different management options. Thestudy is applied to the case of the west coast where the reclamation program is very active. Itdescribes the rapid evolution of national program on coastal wetland utilization. Domestic wetlandsprovide the public with the functions of fishery production, habitation, waste assimilation, andaesthetics. These values are 20 million won in total per hectare. The benefit from their conversion toagricultural use would be compared with the value from the preservation of wetlands. The analysisshows value from the preservation is more than 3 times higher than the value from the agriculturaluse of wetlands.


Session 1C5 BIOECONOMICS OF SPATIAL EXPLOITATION IN A PATCHYENVIRONMENT

Room 7 Jim Sanchirico (University of California, Davis), James E. Wilen (University ofCalifornia, Davis)

How do economic and biological factors interact to determine spatial patterns of resource use?What is the nature of these spatial patterns, and how do theories of rational economic behavior helpus structure hypotheses? To answer these questions, we introduce a general theoretical model ofharvesting behavior coupled with a model of population dynamics, both defined over a patchyenvironment. The paper integrates two strands of literature that are as yet imperfectly connected -one regarding the economic motivation for harvesters' behavior and another explicitly modelingbiomass in a patchy environment. The model of harvester behavior is grounded in the literature onspatial resource exploitation in two ways: (i) in the short-run, the harvesters behave in a Ricardianmanner under which areas of highest profitability are exploited first; (ii) in the long-run, theharvesters' behavior collapses to the H.S. Gordon theory of equalizing net rents. The biologicalmodel is consistent with modern biological ideas that stress patchiness, heterogeneity, and linkagesamong and between patches. The biological interconnections between patches may be of manyvarieties and we develop a general model which nests several cases and then explore theimplications of several of the most common from the biological literature (i.e. fully-integrated, sink-source, multiple-source and limited-distance). Generally, we find the equilibrium patterns ofbiomass and effort across the system to be dependent upon bioeconomic conditions within eachpatch and the nature of the biological dispersal mechanism between patches. We use simpleexamples to illustrate how the distribution of effort throughout the system reflects the spatialbiological linkages. We show that the structural links in the system, the dispersal mechanismshypothesized, and the rates of dispersal all determine the direction and magnitude of the "spatialstock effects" which in turn determine the levels of harvest, effort and biomass in each patch. Wealso illustrate that the directional flow of biomass could stem from special economic circumstancesrather than special biological characteristics. An implication of this last point is that the designationof patches as being either sources and sinks is as much an economic issue as it is a biologicalcharacteristic of the population dynamics in an exploited system. This seems to be an importantpoint missed by biologists who have recently begun to promote spatial management measures suchas refugia (closed zones) and/or rotating harvest zones. There are a number of general implicationsthat can be drawn from this analysis suggesting that paying attention to spatial patterns can tell ussomething about fundamental biological and economic processes. First, if spatial processes areindeed operating in bioeconomic systems, a complete understanding will be inhibited by ignoringthese. For example, an aggregate analysis would miss interesting economic behavior unfolding asvessels moved spatially to equalize rents. Secondly, whereas most empirical analysis ofbioeconomic systems have utilized a lumped parameter representation of whole systems, ifpatchiness and spatial interaction are important, we may be able to understand biological andeconomic mechanisms better by utilizing cross sectional information as well as the typicallyaggregated time series data.


Session 1C5 THE CONFLICT BETWEEN SUSTAINABILITY AND OPTIMALITY INFOREST MANAGEMENT: THE CASE OF FINLAND

Room 7 Pamela Mason (University of York)

Sustainable management of forestry often entails a financial sacrifice to the owner. If it does, apolicy of sustainable forestry involves an implicit “sustainability subsidy”. Finland has followedsuch a management policy for most of the post-war period, and recently has explicitly undertaken tofollow the Helsinki guidelines on the social and economic sustainability of forest management. Theimportance of the Finnish forestry industry, accounting for 36% of total exports, makes thecalculation of the subsidy to sustainable forestry particularly significant. In measuring the financialcost of sustainable forestry, this paper describes a comparative analysis which has not hitherto beenperformed for Finland. From the base year of 1948, the net present value (NPV) of the managementprogramme actually followed is compared to the maximum NPV which could, in theory, have beenachieved. This makes use of available time series data on timber prices, the costs of establishment,maintenance, thinning and harvesting, and any opportunity cost of land. Also required is an estimateof the demand curve faced by the Finnish forestry industry, and of the opportunity cost of capital,that is, the rate of interest available on alternative investments. While it cannot be assumed thatFinland is a price taker in the international timber markets, one can assume that the internationalrate of interest is unaffected by its investment decisions. Comparing the actual (sustainable) and“optimal” (NPV-maximising) strategies provides a measure of the annualised financial subsidy tosustainable forestry. This can be estimated as the annual return on the difference between the base-year present values of the two strategies. Having identified this figure, the study then makes use ofexisting estimates of recreational and other non-market values of Finnish forests, to find outwhether or not the sustainability subsidy can be justified as representing non-market values. Anypart of the financial subsidy not accounted for by such environmental values constitutes a puresustainability subsidy. This approach is of theoretical interest since it suggests a method forinferring a “willingness to pay for sustainability”, in both microeconomic and macroeconomiccontexts. Moreover, using the approach to value sustainable forestry in Finland provides animportant indicator of attitudes towards sustainability in general. The implications of this for thetypes of objective function which are most appropriate for use in models of optimal growth arediscussed.

VALUATION ISSUES

Session 1C6 CONFLICTS IN CONSERVATION: AGGREGATING TOTAL ECONOMICVALUES

Room 6 Timothy Swanson (CSERGE, University College London), Susana Mourato(CSERGE, University College London), Joseph Swierzbinski (CSERGE, UniversityCollege London)

This paper examines the meaning and importance of the concept of total economic value within thecontext of a case study of CITES - the Convention on International Trade in Endangered Species.This convention has been at loggerheads for the past ten years, as the result of fundamentaldisagreements between the various constituencies within it; specifically, there are conflicts betweenthe groups who support conservation by all measures and those who support only those forms ofconservation which are consonant with their views on animals’ rights and welfare. The purpose ofthis study was to examine, within the context of a case study on the black rhinoceros, the nature andextent of this conflict, in order to inform the CITES policy making process. Total economic valuesfor endangered species have been stated to be the sum of the range of potential use and non-usevalues corresponding to a given species; however, it is clear that these values do not aggregate insuch a straightforward fashion. Some individuals are willing to pay for non-use values of a speciesor habitat but not if the species or habitat continues in other uses. The conflict between the variousconstituencies supporting species conservation is obvious in fora such CITES, where the animalwelfare groups lobby against proposals (such as pro-trade measures) that might enhance stocks ofendangered species and their prospects for survival but might detract from the welfare ofindividuals of the species (through activities such as hunting and farming). This paper investigatesthe conflicts implicit within conservation movements by means of a survey of UK individuals inregard to their willingness to pay to support various forms of conservation programmes for anendangered species, ranging from the least intensive (eco-tourism) to the most intensive andintrusive (trophy hunting). The paper reports on the various motivations behind non-use values(animal welfare to personal leisure and sport), and analyses how these various motivations interactin the context of various management programmes. Surprisingly, we find that the strongest conflictbetween UK-based conservationists is not between animal welfare supporters and animal users(both of which support broad-based conservation measures); rather, we find that the greatestconflict exists between those who take utility from the use of animals and those who take disutilityfrom others’ use of animals. That is, there is a substantial vicarious disutility motive imbeddedwithin the aggregate willingness to pay for non-use of this species. This discussion demonstratesthat the fundamental nature of the conflict within a forum such as CITES is not between animalwelfare lobbies and general conservationists; rather, the fundamental conflict is between those whoenjoy specific uses of a species and those who receive vicarious disutility from this activity byothers. This implies that some countries may be able to maximise the total economic value of aparticular species by the proscription of specific uses provided that mechanisms are instituted to tapthe willingness to pay for such proscriptions.

VALUATION ISSUES

Session 1C6 "DAY TRIPS" AND "AWAY-BREAKS", ACCOUNTING FOR DURATIONOF STAY, ON-SITE ACCOMMODATION AND THE VALUE OF TIMESPENT IN DIFFERENT ACTIVITIES IN RECREATIONAL DEMANDMODELLING: AN APPLICATION OF THE THREE-LEVEL NESTEDLOGIT MODEL TO WILDLIFE-VIEWING VISITS

Room 6 Brett Day (University College London)

In recent years, random utility models (RUMs) have become an increasingly popular approach toestimating the welfare benefits derived by visitors to recreational sites. Researchers using suchmodels have tended to concentrate on the choice between sites; explaining a visitor’s decision bymeans of the different qualities of the available sites and the different costs of travelling to thosesites. This is all well and good for ‘day trips’ but for recreational trips characterised by visits lastinga number of days, concentrating solely on the choice between sites may be a grossoversimplification. For such ‘away-breaks’, a visitor’s choice of accommodation and length of staymay be just as important as the qualities of the site and the length of the journey in determining thecosts and benefits that result from the trip. This paper describes the application of a RUM known asa nested multinomial logit model (NMNL), which distinguishes the three dimensions of choice thatcharacterise away-breaks; duration of stay, choice of recreational site and choice of accommodationtype. Four costs are important in determining choice for such trips; the cost of travel to therecreational site, the cost of accommodation at the site, the cost of time whilst travelling and thecost of time whilst on-site. Previous applications have frequently assumed that travel time can bevalued at some exogenously determined proportion of the wage rate, whilst at the same timeignoring the value of time spent on site. The specification of the indirect utility function in themodel presented here, allows for the value of time to be inferred from the data by estimating theproportion of the wage rate that most appropriately values a unit of time spent in different activities.The model is applied to a unique dataset that records details of trips made by domestic householdsto the game reserves of the KwaZulu-Natal province of South Africa. These trips are typical ofaway-breaks, since visitors tend to travel fairly large distances to visit the reserves and typicallystay one or more nights on site. Each of the game reserves affords visitors different wildlife-viewingopportunities and provides a variety of accommodation facilities that vary greatly in their qualityand price. Geographical information system (GIS) techniques have been used to establish exactdoor to gate distances and provide accurate estimates of travel costs and travel times that takeaccount of assumed road speeds. GIS techniques have also been employed to garner socio-economic data on the households in the dataset. One further novel feature of the data is the use ofcomplex computer algorithms to accurately establish the choice sets faced by individualhouseholds. The three-level NMNL model is estimated using a full information maximumlikelihood (FIML) algorithm written by the author to account for the unusual form of the indirectutility function. The results of the analysis support the hypothesis that recreationists have a positivewillingness to pay to save time in travelling to a reserve, but as would be expected, are not willingto pay anything to save time spent on site. The model is used to calculate welfare estimates forcontinued access to the different game reserves. Average per-trip estimates of the consumer surplusenjoyed by domestic visitors range from around $15 for one reserve, up to almost $50 for another.Boot-strapping techniques have been employed to calculate standard errors for these benefitestimates. The final contribution of this paper is to build on previous work in determining thecompatibility of a three-level NMNL with utility maximizing behaviour. Simple necessaryconditions for the first and second derivatives of the choice probabilities are derived and applied tothe dataset.

VALUATION ISSUES

Session 1C6 RECONCILING ECOSYSTEM RESTORATION AND ECONOMICVALUATION

Room 6 J. Walter Milon (University of Florida), A. Hodges (Univerisity of Florida), K.Kiker (University of Florida)

Restoration of damaged ecosystems such as drained wetlands or nutrient-enriched lakes requiresdecisions about ecological endpoints. Ecological endpoints are quantitative indicators of ecosystemattributes that if changed would constitute a change in the health of the ecosystem. Functionalendpoints represent broad processes, such as hydrological and biogeochemical processes, whilestructural endpoints indicate the composition, distribution, and relative abundance of species withinthe ecosystem. Restoration decisions may be based on both types of endpoints. Typically a lack ofscientific knowledge about species interactions and spatial relationships limits ecologists to focusrestoration efforts on functional processes. On the other hand, economic valuation studies haveprimarily considered structural endpoints such as population levels of an individual species.Linkages between these disciplines have been difficult due to the conflicting subjects of theirresearch. One approach to reconciling these differences is to focus on public perceptions ofecosystems and alternative representations of ecosystem attributes. This paper describes the designand implementation of an empirical test of functional and structural endpoints based onmultiattribute utility theory (MAUT). The application is for the Florida Everglades ecosystemrestoration initiative which has been described as one of the largest, most complex restorationefforts ever attempted. The ecosystem encompasses more than 69,000 km2 and is home to morethan 6 million people, more than 350 bird species, 50 reptile species, 35 mammal species, and morethan 500 fish species. Across the entire ecosystem there are 48 endangered species, 14 threatenedspecies, and 62 candidate species. Alternative functional and structural endpoints for the ecosystemwere constructed based on ecological process and population simulation models. Empirical resultsfrom large sample personal interviews using the MAUT design indicate a high degree ofconsistency between preference orderings derived for alternative endpoint representations.Respondents were able to evaluate complex ecological scenarios when the choices were presentedin a clear, concise decision framework. These results suggest that cooperative research betweeneconomists and ecosystem scientists can yield useful information about public preferences andvalues to guide ecosystem restoration planning.

VALUATION ISSUES

Session 1C6 NATURAL RESOURCE ENFORCEMENTRoom 6 Felicity Ellen Bernadette Heffernan (Lincoln University), Paul Whiting (Lincoln

University)

Liability for natural resource damage is a prominent topic in New Zealand since the introduction ofthe Resource Management Act 1991. This paper seeks to clarify if the economic model is workingby focusing on specific case studies. An insight will be given into the strengths and weaknesses ofthe New Zealand system. The position is explained in the following poem:

"If the New Zealand system has its wayO come not that dreadful dayWe will be sued by lakes and hillsSeeking economic redress for all illsOur waters will babble in the courtsSeeking enforcement for every tortHow can I rest beneath a treeIf it may soon be suing me? "

VALUATION ISSUES

Session 1C6 MODELLING ECOSYSTEM ATTRIBUTES AS LATENT VARIABLESRoom 6 Linwood H. Pendleton (University of Southern California), J.S. Shonkwiler

(University of Nevada)

While great strides have been made in the modelling of demand for environmental quality, theidentification of actual measures of environmental quality have proven more elusive. Measures ofenvironmental quality must be objective, relevant to both consumers of quality and managers ofquality, analytically tractable, and, of course, measurable. Several important issues in themeasurement and representation of quality may affect the economic analysis of environmentalchange. First, the measures of environmental quality available to economists may be unknown orirrelevant to consumers. Second, even when data on well known attributes can be collected directly,perceived levels of environmental attributes may not perfectly coincide with actual levels ofattributes. In this case, it is possible that consumers do not have perfect information aboutenvironmental attributes or that these attributes are not directly important in their decision process.Finally, it is rarely the case that environmental attributes are independent of one another. Forinstance, the prevalence of predictable patterns of ecosystem attributes has given rise to standardassociations know as ecotypes. Problems of multi-collinearity have been shown to affect thevaluation of quality in automobiles (Arguea and Hsiao 1995) and are likely to affect the valuation ofenvironmental quality as well. In this paper, we offer a method that addresses both the issue ofmulti-collinearity in ecosystem attributes and the gap between measured and perceived ecosystemand environmental attributes. We use a latent variables approach to model trail attributes inwilderness areas of the Southeastern United States. This latent variable approach recognizes thatmany trail attributes tend to exist in regular combinations and that these combinations of attributesdefine the latent trail characteristics that people use to differentiate between trails. In a sense, thelatent variable analysis assumes that components of the environment interact to “produce” ameasure of quality that is relevant to consumers. Using attribute data from the Southeastern UnitedStates, we show that two habitat types, upland and riparian, can be modeled as latent trail attributes.Furthermore, we show that in a random utility model, these latent trail attributes characterize sitechoice better than directly measured proxies.

VALUATION ISSUES

Session 1C6 VALUING CHANGES IN ENVIRONMENTAL QUALITY: ANINTEGRATED SYSTEM FOR MANAGEMENT AND POLICY ANALYSIS

Room 6 Peter J. Parks (Rutgers University), Bengt Kriström (Sveriges lantbruksuniversiteit)

Mountain ecosystems are linked by economic and environmental ties to human communities withinand outside the mountain region. In Sweden, these fragile environments support a range of activitiesthat are essential to economic welfare and development. For example, Swedish mountainenvironments support reindeer husbandry, forestry, hunting, fishing, and nature-based recreation.The management of mountain environments for different purposes often involves allocating scarceenvironmental inputs to uses that compete for the same scarce plant, animal, or physical part of theenvironment. Policy or management that benefits one use may impose costs on another. Market andnonmarket sectors are linked by a part of the mountain environment that affects, or is affected by,both uses (e.g., soil quality, water quality, land area). By including the environmental input in theanalysis of each sector, the effect of policy- or management-driven changes in this input can bemeasured through changes in economic welfare provided by the market and nonmarket goods. Toaccomplish this goal, research results on environmental quantity constraints is integrated withmethods used to study linked markets. Methods and case studies of welfare analysis in quantity-constrained circumstances have been developed for unconnected markets. Theoretical extensions ofto general equilibrium analysis have been proposed, but few empirical studies of markets linked byenvironmental inputs exist. In contrast, numerous theoretical and empirical studies are available thatexamine markets linked by prices or costs. This paper uses quantities of environmental inputs,rather than prices, to link the relevant sectors. Economic values for changes in these environmentalinputs may be estimated within or outside the markets they influence.

ENVIRONMENTAL POLICIES

Session 1C7 REFUNDED EMISSION PAYMENTS - A HYBRID INSTRUMENT WITHSOME ATTRACTIVE PROPERTIES

Room 2 Thomas Sterner (Göteborg University), Lena Höglund (Göteborg University)

The purpose of this paper is to discuss the properties of a new, or at least modified, economic policyinstrument. It is in many respects analogous to a system of Tradable Emission Permits with‘grandfathering’ and we have chosen to call it Refunded Emission Payments (REP) to emphasisethe analogy. While the TEP turns command and control permits into a market instrument by makingthem tradable, the REP converts emission taxes into a financially neutral regulatory instrument byrefunding them. A distinction between REP and conventional TEP systems is that in the formerrevenues are refunded in relation to the output produced instead of in relation to a certain initialemission level. This gives an incentive to improve the environmental efficiency of productioninstead of a mere reduction of emissions. Just like in a grandfathered TEP scheme the incidence ofthe costs in a REP scheme falls rather lightly on the polluters. They will pay the abatement costswhile society will bear the costs for unabated pollution. The current Swedish charge on NOx fromlarge combustion furnaces is an empirical example of a REP scheme. Since 1990 it has successfullycontributed to a more than 50% reduction of NOx emissions from the targeted furnaces and at avery low administrative cost, between 0.2-0.3% of the revenues collected and refunded. Thus, theREP scheme offers an option to gain the advantage of the financial neutrality of a grandfatheredTEP scheme, but to switch the often heavy transaction costs associated with permit trades for thesmaller transaction costs of administering a fee system with refunding.


Session 1C7 ENVIRONMENTAL ADVERTISIMENT: AN ALTERNATIVEENVIRONMENTAL POLICY

Room 2 Eftichios Sartzetakis (University College of the Cariboo), Anastasios Xepapadeas(University of Crete)

It is very common in environmental economics to compare and evaluate environmental policies inthe absence of any other policies, such as commodity and labour income taxation. However asrecent developments in the "double dividend hypothesis" literature have shown, there aresubstantial interaction effects with non environmental policy instruments. Market based regulatoryapproaches, although more efficient than direct regulatory approaches, are themselves costly. Thus,it is important to examine alternative environmental policies that could supplement conventionalones and eventually, when possible, replace them. Our paper considers "environmentaladvertisement" as an alternative regulatory instrument when pollution arise from the consumptionor use of products. We use the term environmental advertisement to indicate informative and/orpersuasive advertisement regarding the environmental effects of consuming certain products, andpromoting certain public policy initiatives. Examples include the provision of information regardingavailable recycling programs, various garbage composting techniques and products assisting thecomposting process, as well as the effects of car pollution, the availability of public transportationand car pooling programs. In addition to information provision, governments can use advertisingstrategies to persuade consumers to participate in these programs. The combination of informationprovision and persuasive advertisement regarding environmental issues is henceforth calledenvironmental advertisement. It should be stressed that the term advertisement is not used in thetraditional economic approach to indicate "taste shifting" attributes. Following more recenttheoretical developments, we treat advertisement as a good that is complement to environmentallyfriendly behaviour. The cost of advertisement varies depending on the medium used. Newslettersdelivered free of charge have a low cost but are much less effective, if at all, relative to more costlyradio and television advertisements. We assume that consumers derive disutility by getting exposedto advertisement, and thus, they have to be compensated rather than pay for it. The governmentcovers the cost of compensation in the form of payments to television stations which then providehigher quality programs (i.e. compensation for the utility loss from advertisements). Our paperconsiders a very important element of environmental advertisement; namely time. We argue thatenvironmental advertisement --in its informative but most importantly in it its persuasive form--requires time to induce the desirable behaviour on the part of consumers. We formalize thisargument by assuming that the consumers' preferences depend on the cumulative level ofadvertisement rather than on its flow. Within a dynamic partial equilibrium framework withidentical individuals consuming two goods, one of which generates pollution, we find the optimalconsumption path taking into account the product pollution externality. We then compare twoalternative environmental policy instruments, advertisement and taxation, on the basis of their socialcost in achieving the optimal consumption path. Demand of both goods depends on the stock ofadvertisement as well as prices, taxes and income. Environmental taxation generates negativeinteraction effects with the nonenvironmental policies in place, while environmental advertisementdoes not. We examine an environmental policy which uses the revenues from environmentaltaxation to finance environmental advertisement. We find that this policy can be welfare superior toenvironmental taxation. As the stock of advertisement increases over time, the need for taxation toinduce a certain behaviour, decreases. Since preferences depend on the stock of advertisement, theoptimal environmental advertisement also decreases over time. Thus, the proposed environmentalpolicy is welfare superior since it alleviates the tax interaction effects.


Session 1C7 STOCKS POLLUTANTS AND POLICY CHOICE UNDER UNCERTAINTYRoom 2 William Pizer (Resources for the Future), Richard Newell (Resources for the

Future)

In 1974, Martin Weitzman found that the efficiency of taxes relative to tradable permits dependscritically on both the existence of cost uncertainty and the relative slopes of marginal benefits andcosts. We explore how uncertainty could influence the choice of policies to regulate pollutant flowswhen it is the stock, rather than the flow of pollution that leads to damages. For example, incontrolling emissions of greenhouse gases, the stock of greenhouse gases is associated with globalclimate change. Other environmental and natural resource examples include policies that addressozone-depleting substances, land use change, species preservation, hazardous waste disposal, andgroundwater pollution. Non-environmental examples include research, development, and education.Using a simple analytical model that incorporates pollution costs and benefits, pollution stockdecay, time discounting, and uncertainty, we uncover five important principles governing the choiceof taxes relative to tradable permits for stock pollution control. First, the slower a stock decays (orthe longer a pollutant persists), the more likely it is that permits are preferred to taxes becausedeviations in emissions under a tax policy persist over long periods of time. Second, low reinforcethis policy divergence over time, thereby favoring permits. Third, in a multi-period analysis resultshinge on correlation across periods. In particular, positive correlation among cost shocks acrosstime tend to decrease the net benefits of using taxes, thereby favoring permits. Fourth, controllingfor the aforementioned effects, the relative slopes of the marginal benefits and costs of pollutioncontrol continue to be critical determinants of the efficiency of taxes relative to permits, with flattermarginal benefits and steeper marginal costs favoring taxes. Fifth, and finally, it is either the casethat the economically efficient policy entails no growth in the pollution stock (e.g., 100%abatement), or a tax is the more efficient instrument. This raises an efficiency question abouttradeable permit policies that entail something less than stabilization of the stock. We then explorethe conditions under which the "pollution persistence effect" and the "cost correlation effect" arelikely to overwhelm the policy recommendation given by the traditional "relative slopes" argument,both generally and by applying our analytical results to empirical data on greenhouse gases andglobal climate change.


Session 1C7 THE NIMBY SYNDROME: AUCTIONS, TRADE-OFFS AND CHOICES INFACILITY SITING

Room 2 Euston Quah (National University of Singapore), Khye Chong Tan (NanyangTechnological University)

The siting of hazardous and non-hazardous facilities has only recently become an important publicconcern in Asia. Not too many years ago, the siting of a landfill, a pulp mill, a sewage treatmentplant, a hospice or a chemical plant within a community generated very little controversy. Factoriesand jobs were seen as progress, managing accidents and risks was something that business andgovernments knew how to deal with, and pollution emissions were considered to be inevitable by-product of growing economies. Today, facilities that produce, use, store and/or emit hazardoussubstances and generates external effects are the subject of intensive public scrutiny. Thus whilethese facilities offer useful services to the general public, and are often considered "necessary" bysociety, almost everyone agrees however that they should be located at places outside theirneighbourhood -- the aptly called NIMBY (not-in-my-backyard) syndrome (Popper, 1983; O'Hareet al., 1983; Quah, 1994). This is because these facilities which serve more than just a local area areperceived to create net local welfare losses. A cost-benefit analysis study of an environmentallyobnoxious facility based on a national accounting stance rather than a local or regional one, wouldin most cases, lead to acceptance of the facility, bowing to the demands of a greater general public.People who live in these neighbourhoods where such facilities are sited, and who are the directrecipients of the negative externality often go uncompensated under a Kaldor-Hicks efficiencycriterion. Attempts to impose these NIMBY facilities on unwilling recipients is one of the mostdifficult challenges faced by governments today. The literature seems to suggest that active publicinvolvement together with mitigation and compensation auctions during a siting decision process isa potentially useful and successful strategy (Wiltshire, 1987; Kunreuther et al., 1988; Kleindorfer,1996). However, it is without doubt that the decision process can be time-consuming, and in mostcases, a costly exercise. Where local residents are opposed to the siting of the facility, the largerpublic, on the other hand demands a faster response in meeting their needs. The purpose of thepaper is to provide a review of existing methodologies used by economists and public planners toaddress this siting problem of NIMBY facilities. We evaluate the available conflict-resolutioninstruments used for the siting of these facilities such as zoning alternatives, environment impactassessments, licenses and permits, compulsory acquisition of land, incentive mechanisms,compensation and mitigation policies, and auction mechanisms. Usage of these instruments inAsian countries are also highlighted. In an effort to examine some solutions to the NIMBYsituation, the paper presents a systematic alternative to conceptualising the siting problem. Thepaper also proposes two alternative auction mechanisms which might be useful for such facilitysiting purposes.


Session 1C7 INTERACTION OF ENVIRONMENTAL POLICIES: NATIONALECONOMIC COSTS AND SHADOW PRICES

Room 2 M.H.C. Komen (Wageningen Agricultural University)

When it comes to formulation of environmental policy, authorities are often referring to a reductionin flows of environmental pollutants. The Dutch government, for example, has developedquantitative environmental policy targets while dividing its environmental policy into differentthemes. These environmental themes are used as an inventory framework of current environmentalissues in the Netherlands. Typically, each policy target entails a specific reduction in emissions thatcause the environmental problem described by the theme. This paper focuses on the economiceffects of achieving these different environmental targets. Special attention is paid to the interactionof the different policies and the level (sectoral or national) at which the restrictions are defined. Indoing so, the main causal relationships linking the economy and environment are quantified and theshadow prices of the different environmental themes are determined. The tool used in this paper isan applied general equilibrium (AGE) model for the Dutch economy. Since economy-wide effectscan be expected from environmental restrictions, using an AGE model is appropriate. Moreover, anAGE model takes into account important feedback effects in terms of factor reallocation andremuneration. To be able to quantify the environmental effects of economic activity, nine differentemissions related to inputs, production and consumption are explicitly taken into account (CO2,N2O, CH4, SO2, NOx, NH3, N, P and waste). A NAMEA (National Accounting Matrix includingEnvironmental Accounts) is used to extend the AGE model. The NAMEA contains detailedinformation on the environment and, using theme equivalences, converts the flows of emissions intoa number of summary environmental indicators. In this paper, four environmental indicators arereported: greenhouse effect, acidification, eutrophication, and waste. With respect to the level ofindustry and commodity aggregation, a high level of disaggregation is applied for those industriesand commodities that are important contributors to environmental problems. In doing so, it is takeninto account that industries might react differently on environmental restrictions becausesubstitution possibilities differ. The simulations in the paper take the form of (whether or notsimultaneous) quantitative restrictions on environmental indicators. Implicitly this means arestriction on outputs, inputs and consumption, since the emissions that are converted to indicatorsare linked to these economic variables. Each such a restriction entails a shadow price. Sinceindustries within the Dutch economy contribute to environmental problems to a different extent,shadow prices are likely to differ. If it is assumed that quantitative restrictions take the form of asystem of tradable emission permits, shadow prices will represent the value of these permits. Bytrading emission permits, shadow prices will be equalized in the economy. The paper is organisedas follows. First, the relations between environmental policy themes, environmental indicators andemissions are elaborated. Second, an explanation of the AGE model and information on theavailable data is provided. Third, the environmental targets are translated into quantitativerestrictions and simulations will be described. Special attention will be given to the existence andeconomic meaning of shadow prices within an AGE model. Fourth, the results of the differentsimulations will be elucidated. Finally, a discussion and general conclusions are provided.


Session 1C7 "NO RETURN, NO REFUND": AN ANALYSIS OF DEPOSIT-REFUNDSYSTEMS

Room 2 Praveen Kulshreshtha (Madras School of Economics), Sudipta Sarangi (VPI & SU)

Recycling is an integral aspect of environmental conservation and waste management effortsthroughout the world today. Firms and governments, especially in developed economies, frequentlyemploy deposit-refund systems to promote return and reuse of product packages and containers.Deposit-refund schemes are common in many markets including the beverage industry and baggagecart rentals at airports. In many cases, recycling generates significant "external" benefits in the formof reduced street litter and a cleaner environment. We model a monopoly that offers a refund toconsumers in exchange for its used packages. This refund takes the form of a deposit that is addedto the price of the product at the time of purchase. It is assumed that recycling (package return byconsumers) can generate an external benefit. We show that if the refund affects product demand andconsumers' marginal disutilities of package return differ, then the firm can use its deposit-refundoffer to price discriminate among consumers. The firm may choose a refund for which someconsumers do not recycle even though the marginal benefit of recycling to the firm exceeds themarginal disutility of recycling (net of its external benefit) to these consumers. It is shown that inthis case, the level of recycling induced by the firm is socially suboptimal ("under-recycling"). Theresult holds even if the external benefit of recycling is zero. This contrasts with the conventionalwisdom that under-recycling arises so long as the external benefit of recycling is positive. This isdriven by the fact that the private and social incentives to recycle diverge in the above case. It isalso interesting to note that in the absence of external benefits our model can be interpreted as oneof mail-in rebates and discount coupons. However, the above result does not arise if consumers can"hustle" and return packages only to receive the refund money. It is shown that in this case, the firmis unable to price discriminate among consumers. Nevertheless, the level of recycling can still besocially suboptimal due to divergent private and social incentives, i.e. as long as the external benefitof recycling is positive. We also analyze the role of policy instruments such as (i) a subsidy to thefirm, and (ii) additional government deposit-refunds in inducing the socially optimal level ofrecycling.

ACID RAIN

Session 1C8 THE COSTS AND BENEFITS OF REDUCING ACID RAINRoom 3 Alan Krupnick (Resources for the Future), Dallas Burtraw (Resources for the

Future), Erin Mansur (Resources for the Future), David Austin (Resources for theFuture), Deirdre Farrell (Resources for the Future)

Title IV of the 1990 Clean Air Act Amendments initiated a dramatic reduction in emissions ofsulfur dioxide and nitrogen oxides by electric power plants. This paper presents the results of anintegrated assessment of the benefits and costs of the program, using the Tracking and AnalysisFramework (TAF) developed for the National Acid Precipitation Assessment Program (NAPAP).Although dramatic uncertainties characterize our estimates especially with respect to the benefits ofthe program, many of which we have modeled explicitly, we find that the benefits can be expectedto substantially outweigh the costs of the emission reductions. The lion’s share of benefits resultfrom reduced risk of premature mortality, especially through reduced exposure to sulfates, and theseexpected benefits measure several times the expected costs of the program. Significant benefits arealso estimated for improvements in health morbidity, recreational visibility and residentialvisibility, each of which measures approximately equal to cost. In contrast, areas that were the focusof attention in the 1980s including effects to soils, forests and aquatic systems still have not beenmodeled comprehensively, but evidence suggests benefits in these areas to be relatively small, atleast with respect to “use values” for the environmental assets that are affected.

ACID RAIN

Session 1C8 THE ACID RAIN GAME RECONSIDERED: ARE POLITICIANS REALLYIRRATIONAL?

Room 3 Michael Finus (University of Hagen), Sigve Tjotta (University of Bergen)

The acid rain problem has been studied by Mäler in 1989 based on emissions in 1984. He estimatedcosts and benefits of a socially optimal solution and determines the gainers and losers of such anagreement. In a later paper Mäler checks stability of such an agreement by applying the concept ofsubgame-perfect strategies. He finds that for a discount factor close to one such an agreementshould be stable. However, looking at the actual agreement of the first "Protocol to the Conventionon Long-Range Transboundary Air Pollution" in 1979 and the follow-up protocols since then, it isapparent these protocols are far from being socially optimal. This is the starting point of ouranalysis which aims at providing a sound explanation for the actual development of this treaty in thepast. We introduce three new features to the analysis of the acid rain game. First, we estimate aquadratic damage cost function instead of a linear cost function as used by Mäler. Moreover, we useemission data from 1980 until 1994 in order to analyze the changes in the abatement targets acrossthe various Protocols. Second, we employ the stricter concept of weak and strong renegotiation-proofness to study stability along the emission path from 1980 until 1994. Third, we develop thisstability concept further to take into account various "real-world restrictions. E.g., we depart fromthe "unrealistic" assumption of a discount rate close to zero and use instead market interest rates.Moreover, we consider different limitations on punishment options which are either economicallymotivated or are given by the practice of international law. E.g., we do not assume simplepunishment profiles in the sense of Abreu, but choose punishment profiles which reflect the"severeness of the defection". We derive the following results: 1) A socially optimal solution couldnot have been established as a self-enforcing agreement at any time since 1979. 2) In contrast, thisis possible for the abatement targets specified in the various protocols. 3) The actual abatementtarget of the most recent protocol in 1994 comes very close to what is maximal achievable, given"real world restrictions". Finally, we discuss possible further developments of this Convention ifsome of the key parameters of the model, e.g., costs and benefits of abatement, and discount rates,change in the future.

ACID RAIN

Session 1C8 COMPARING COSTS AND ENVIRONMENTAL BENEFITS OF ANACIDIFICATION STRATEGY FOR THE EUROPEAN UNION

Room 3 Wolfram Krewitt (University of Stuttgart), Thomas Heck (Institute for EnergyEconomics and the Rational Use of Energy), Rainer Friedrich (University ofStuttgart)

One of the long-term objectives defined in the Fifth Environmental Action Programme of theEuropean Commission is a reduction of emissions to achieve =91 no exceeding ever of criticalloads and levels=92. In response to a request from the Environment Council, the EuropeanCommission developed a cost-effective strategy to combat acidification. As current and plannedlegislation seems to be not sufficient to achieve the goal of no exceedance, the proposedacidification strategy has identified cost-effective =91gap-closure=92 scenarios which aim atreducing the exceedance of critical loads. Using the different gap-closure scenarios identified by theCommission as a starting point, the paper estimates the benefits resulting from avoided damage onhuman health, crop production and building materials which have not been considered for thedefinition of the emission reduction strategies. Following a bottom-up =91damage function=92 or=91impact pathway=92 approach that has been developed within the EU funded ExternE project,physical impacts for a wide range of endpoints including e.g. mortality, morbidity, yield losses,repair frequencies are quantified based on detailed air quality and impact assessment modeling.Physical impacts are translated into economic damage by using monetary values based on thewillingness-to-pay approach, and - as far as possible - by using market prices. The valuationincludes a sensitivity analysis reflecting different assumptions e.g. concerning the valuation ofmortality (Value of Statistical Life versus Value of Life Year Lost approach). Results show that forthe whole of Europe the overall benefits resulting from reduced damage on human health,agricultural production and materials exceed the costs of achieving them. However, the study takesinto account the geographical variation in damages with respect to source of emissions and thelocation of damage receptors, indicating that some countries show a net loss, as they invest inemission reduction measures leading to environmental benefits in other countries.

ACID RAIN

Session 1C8 JOINT ABATEMENT STRATEGIES: A DYNAMIC ANALYSIS OFACIDIFICATION AND TROPOSPHERIC OZONE

Room 3 Erik C. Schmieman (Wageningen Agricultural University), Ekko C. van Ierland(Wageningen Agricultural University)

Problem definition: A cidif ication impacts the envir onment mainly becaus e of the accumulatingeff ects of acidifying compounds in w ater and s oil. Ther efore, acidif ying pollutants ar e typicalexamples of s tock pollutants . Tropos pher ic ozone ( ground level O3) can caus e negative health ef f ects and vegetation damage. Acidifying compounds s uch as s ulphur dioxide (S O 2) and nitr ogen oxides ( N Ox) are of ten produced together, most typically by the burning of f os s il f uels. Nitr ogen oxides andvolatile or ganic compounds ( V OCs) ar e impor tant f actor s in the f or mation of tropos pher ic ozone.Cur rently, many ecos ystems in the U nited States, Europe, and the emerging economies in A sia f aceacid depos itions f ar in excess of their s pecif ied critical loads, and ozone over f lowing cr itical levels .Abatement policies for acidification and tropospheric ozone presently in place in the EuropeanCommission and the United Nations Economic Commission of Europe (UN ECE) are based on theconcepts of critical loads and critical levels. In addition to UN ECE studies and the dynamic gametheoretical approach of Mäler (1994) and Mäler and De Zeeuw (1994) this paper analyses thedynamic characteristics of cost effective reduction of the problem of acidification and troposphericozone. The study focuses on the accumulation of acidifying compounds and the sensitivity andrecoverability of ecosystems. It asks the questions of how long depositions above the critical loadscan be maintained, and what the optimal time path of emissions reduction for acidifying compoundsand ozone precursors will be from a theoretical and empirical point of view. In this manner thepaper analyses multiple pollutants and multiple targets in a dynamic setting. M ethod: This s tudyuses optimal contr ol theor y and dynamic acidif ication models to analys e policy options , whenaccumulation of acidification and f uture respons es of ecos ys tems are taken into account. A dynamicoptimisation of cost ef fective abatement strategies of a combined reduction of S O 2, N Ox and V OC hasbeen per for med. Tropos pher ic ozone is determined us ing s our ce receptor r elationships f or N Ox andV OC as developed by EMEP/ MSC-W (1996). A ccumulation of acidification over time andr es ponses of ecosystems to acidif ication ar e calculated us ing char acter is tics of dynamic s oilacidif ication models (e.g. S MA RT) , including s oil bas e s atur ation and s ur face water pH . As atheor etical illustration, dose- respons e f unctions are us ed w hich r elate the quantity of acidifyingdepos ition received to ecosystem damage. The paper analyses the us e of foss il fuels and renew ableenergy s our ces, since S O2 , N Ox, and VO C emiss ions are clos ely r elated to energy use. I n addition tos hifts in energy s our ces, ener gy conservation is cons idered to be an option to r educe emis s ions . Theoptimisation model is developed in a Eur opean trans boundary context, focus ing on a cas e s tudy for the N ether lands and G er many, but the method developed is als o r elevant for other ar eas . Res ults: Thes tudy pr ovides a f ramew or k to analys e the time path of emiss ion r eductions f or the major acidif yingcompounds r equir ed to r each the critical loads , avoiding excess ive damages as a r es ult of exceedingcritical loads over long per iods. The inf luence of acid related policies on ozone precur sor s and ozonef or mation is als o as s es sed. Pr eliminar y r es ults indicate that the combined analys is of acidif ication andtropos pher ic ozone r equir e ener gy r elated policies , in addition to technical “end-of- pipe” meas ures.These extr a emis sion reductions might be realised thr ough energy conser vation and the intr oductionof r enew ables . Calculations w ith the model illus trate how dynamic analysis can contr ibute to a better under s tanding of the dynamic as pects of combined cost-ef fective abatement of acidif ication andtropos pher ic ozone.

ACID RAIN

Session 1C8 DEPOSITION MARKETS FOR MULTIPLE POLLUTANTS: NEWOPPORTUNITIES FOR TRANSBOUNDARY AIR POLLUTIONREGULATION

Room 3 Sinja Kruitwagen (Wageningen Agricultural University)

Economic instruments like tradable pollution permits are strongly advocated for environmentalpolicy. However, in practice only a limited number of emission trading schemes are implemented.This paper analyses some of the reasons why tradable permits are not yet introduced and suggeststhat deposition permits for ‘hot spots’ provide an attractive alternative to emission permits systems.In the literature several alternative permit systems for non-uniformly mixing pollutants aresuggested. This paper focuses on the use of deposition permits since these permits instantaneouslyallow for the difference in the acid potential and the difference in atmospheric transport of sulphurdioxide emissions and nitrogen oxide emissions. In this paper the opportunities for depositionpermits for acid equivalents are studied in a European context. Both sulphur dioxides and nitrogenoxides contribute to acidification of the environment. To date reduction policy for acidification canbe characterised as single pollutant policy. However, regarding sulphur and nitrogen collectivelymay increase the cost effectiveness of reduction policies. Consequently, unlike former studies onthe use of tradable permits for single pollutants, this paper focuses on a permit system for multipleacidifying pollutants. To capture these pollutants in one permit trading system permits are definedfor acid equivalents. A disadvantage of deposition permit markets is transaction complexity. Toavoid high transaction costs of permit trading the number of permit markets can be reduced byapplying the ‘hot spot’ approach. To establish a well functioning ‘hot spot’ deposition permitmarket an appropriate selection of ‘hot spots’ is needed. A prerequisite is that binding receptorsbelong to the ‘hot spots’. Additional criteria for the selection of ‘hot spots’ have been formulated inthis paper. To analyse the consequences of ‘hot spot’ deposition permit markets empirically apermit market simulation model has been developed. Data on emission, abatement costs andatmospheric transport have been taken from the Regional Acidification Information and Simulation(RAINS) model. Simulation results indicate that a single ‘hot spot’ deposition permit market cannotguarantee the non-violation of deposition targets at all receptors. However, by establishingadditional markets the violation of deposition targets is reduced. Since both sulphur and nitrogenreduction can contribute to meeting the deposition target, tradable deposition permits for acidequivalents allow for an ample choice in alternative reduction measures. This choice is influencedby the acidifying potential of sulphur and nitrogen, by the transfer coefficients for sulphur andnitrogen and by the abatement costs of sulphur and nitrogen reduction. The permit trading systemresults in substantial cost savings as a result of the enlarged opportunities for deposition reduction.

ACID RAIN

Session 1C8 EQUITY , BURDEN SHARING AND POLLUTION ABATEMENT INEUROPE

Room 3 Giles Atkinson (CSERGE, University College London)

Recent proposals for co-operative agreements within the United Nations Economic Community ofEurope (UN ECE) to reduce emissions of non-uniformly distributed pollutants (e.g. sulphur) haveshared the costs of reaching prespecified deposition targets between countries on the basis of least-cost criteria. There is evidence to suggest that the allocation of these costs is regressive in income,in particular falling disproportionately on some transition economies. Given that these samecountries have expressed concern regarding their capacity to absorb these costs this is turn raises thesuggestion as to whether costs (or more specifically, assistance with these costs) could be sharedmore equitably on the basis of ability to pay. We begin by grounding these proposals in welfareeconomics, specifically taxation theory using the concept of equal sacrifice. We then illustrate theoperation of this principle, for example that the average individual in each country is expected tosacrifice the same amount of utility, in the context of the Second Sulphur Protocol. While in a sensethis ‘solves’ the ability to pay problem it raises several issues. Some are familiar from taxationtheory, for example, the demanding assumption that all individuals have the same utility functionand the selection of a value of the elasticity of the marginal utility of income. This latter magnitudewill determine for, some forms of equal sacrifice, whether cost sharing is regressive, proportional orprogressive (where presumably only the latter two capture the income-equity concern raised withinthe ECE). In addition, while there exists supporting evidence for equal sacrifice inferred fromwithin country income tax schedules, application beyond these boundaries is less clear.Nevertheless, discussions of similar environmental policy and equity questions within countrieshave commonly reflected a concern for neutrality. If we extend this logic it implies the simple rulethat countries pay in proportion to their incomes. In effect this will keep the income distributionbetween (the average citizen in) each country constant and itself can be interpreted according theprinciple of equal sacrifice. Other issues cast doubt on ability to pay at least in its pure form. Theseinclude other relevant dimensions of equity such as responsibility (e.g. the polluter pays principle)or beneficiary pays. It is likely that the weights to assign to this mixture of motives will be onlyproperly determined through some bargaining process. How burdens might be distributed withinany one country will also affect how the ability to absorb costs is viewed both outside and within(for example, sulphur abatement falls largely upon the power sector while nitrogen abatement alsocreates burdens for transport and agricultural sectors). Lastly, the degree to which, possibly large,transfers will be realised is questionable where potential payments will presumably be bounded bydifference between a country’s stand alone and co-operative burdens in the cost-effectiveness case.

MACROECONOMIC ANALYSIS OF ENVIRONMENTAL TAXES

Session 1D1 WHERE DOES PIGOUVIAN TAXATION ON AIR POLLUTION LEAD USIN THE EU?

Room 5 Stef Proost (CES-KULEUVEN), Denise Van Regemorter (CES-KULEUVEN)

Pigouvian taxation has been advocated in the EU for different reasons ranging from environmentalconsiderations to employment. In this paper we evaluate this proposal by combining recentenvironmental damage estimates and recent general equilibrium modelling work. Theenvironmental damage estimates for air pollution are derived from the latest EXTERN-E exercise,they produce for all major air pollutants damage estimates. The general equilibrium model used isGEM-E3. This model contains modules for each country that are linked via trade flows and viatransfrontier transport of pollution. The model contains 18 sectors, can handle disequilibria on thelabour market and contains as environmental policy instruments, fuel taxes and emission taxes,emission standards as well as marketable permits. The Pigouvian policy is implemented viaemission taxes for the big users (industry and electricity generation) and via a combination ofemission standards and fuel taxes for the small consumers (transport and residential). The revenueof the tax is returned via reductions in social security contributions. The welfare effects of thisPigouvian instrument are examined with emphasis on the following dimensions. What are thewelfare distribution effects across European countries - and how can they be corrected that theparticipation constraint is satisfied? Are the resulting taxes very different across countries and arethe tax differences not too distorting? To what extent does the marginal cost of public funds(environmental tax as implicit labour tax) influence the optimal level of the Pigouvian tax inEurope? Does this fullfil the Kyoto requirements accepted by the EU?


Session 1D1 MACROECONOMIC IMPACTS OF THE EU ENERGY TAX PROPOSALFROM 1997

Room 5 Ger Klassen (European Commission DGXI), Heinz Jansen (European CommissionDGII)

In March 1997, the European Commission adopted a proposal for a Directive restructuring theCommunity framework for the taxation of energy products. The main objective is to strengthen theinternal market. In addition, it encourages Member States to shift the burden of taxation away fromemployed labour towards the use of energy. Under the new proposal the Community minimumlevels of taxation on mineral oils are up-rated and minimum levels are introduced for other energyproducts than mineral oils. The proposal contains mandatory and optional exemptions for energyintensive industries. This paper analyzes the macroeconomic impacts of the proposal. The paperstarts with a brief description of the three models employed. The paper than summarises andexplains the results of model simulations, which include the models HERMES, GEM-E3, andE3ME. All models confirm that when the tax revenues are used in a budget-neutral way to reducethe social security contributions paid by employers, the proposal will have positive impacts on theperformance of macroeconomic indicators such as GDP and employment. For the EU as a whole,the model simulations suggest that GDP is estimated to be 0.02 to 0.06% higher with than withoutthe proposal in the year 2005. Overall employment in the EU is expected to be 150,000 to 400,000persons higher in the same period than in the baseline. Finally, CO2 emissions are 0.5 to 1.6 percentlower than the baseline. The positive EU-wide effects can be observed in practically all MemberStates. For some countries GEM-E3, however, predicts a net negative impact. However, in thesecases the order of magnitude is generally small. While the proposal leads to some structural change,the sectoral impacts are rather modest. The EU results are relatively robust among the differentmodels, with the energy sector (in especially ferrous and non-ferrous and the gas distributionsectors) expected to face the most significant but still modest negative impacts on production.


Session 1D1 TAX REFORM AND ENVIRONMENTAL POLICY: SECOND BESTANALYSIS USING A FRENCH APPLIED DYNAMIC GENERALEQUILIBRIUM MODEL

Room 5 Olivier Beaumais (ERASME-MAD and University of Metz), Lionel Ragot(ERASME-MAD)

This study draws upon the construction and use of a dynamic applied general equilibrium model,with perfect foresight, designed for clarifying the questions concerning taxation and theenvironment. The first section gives an overview of the model, focusing on the way of an explicitintroduction of the environmental dimension in the behaviour of the agents. Consumers choosebetween « green » products and « non-green » products under the influence of an environmentaldeterioration index, while the final and recyclable wastes intervene directly in the determination ofthe optimal firms plan. The second section will explain the hypotheses we made for the calibrationmodel based on French data and will describe the long term and dynamic impact that fiscal shocks(changes in VAT rates, modification of taxes placed on wastes) exhibit on the variousmacroeconomic and environmental variables.


Session 1D1 ABATEMENT COSTS IN RESPONSE TO THE SWEDISH CHARGE ONNITROGEN OXIDES

Room 5 Lena Höglund (Göteborg University)

The Swedish charge on emissions of nitrogen oxides (NOx) from large combustion furnaces hasbeen in effect since January 1, 1992. The charge has a unique design. It is collected by the amountof NOx emitted and refunded to the same furnaces by the amount of energy produced. It therebypromotes environmental efficiency of the production in a financially neutral manner. The furnaceswill pay the abatement costs while society bears the costs of the unabated pollution. Since thecharge was decided upon in 1990, it has successfully contributed to a more than 50% reduction ofNOx emissions from the targeted furnaces. The reduction is due to various abatement measures,such as trimming, combustion measures, and flue gas treatment. This is an analysis of the abatementcosts associated with the NOx reduction. The analysis is based on a panel data set containing 115furnaces followed yearly over the period 1990 to 1995. The estimated abatement cost functions areused to calculate total abatement costs of an alternative system of emission standards. In order tomeasure technical change a time variable is introduced in the abatement cost functions estimatedseparately for each type of abatement measure.


Session 1D1 EMPIRICAL ASSESSMENT OF THE IMPACTS OF ECOLOGICALTAXATION IN THE CZECH REPUBLIC

Room 5 Michael Sørensen (COWI), Jørgen Jordal-Jørgensen (COWI)

This paper contains an assessment of the impacts of implementing ecological taxation in the CzechRepublic based on a general framework for strategic policy instrument assessment. Two taxationalternatives are analysed: The recent EU proposal for new energy taxes (COM(97) 30 Final) and ataxation scheme related to specific Czech environmental characteristics (mainly higher taxation ofbrown coal). The taxation alternatives are combined with different compensation principles. Themain elements of the framework for policy instrument assessments are:• Analysis of environmental effects.• Analysis of revenue effects.• Analysis of distribution effects on sectors, sub-industries and different types of households.• Other implementation considerations (political feasibility, institutional capacity).The assessment of impacts and effects are based on first order effects. The first order effects are theimmediate effects where no behavioural reactions are taken into account. The main second ordereffects comprises the reduction in energy consumption due to the tax on energy. Proper estimationof secondary effects requires reliable elasticity measures and a macro econometric model. In thecase of the Czech Republic no macro economic model is yet available and the use of such models ina transition period is questionable as econometric models are not well suited for simulating changesin fundamental institutional structures such as the transition of the CEE economies. It is animportant aim of the paper to demonstrate the usefulness of assessing and estimating first ordereffects, which is a feasible task considering the availability of data. The preliminary analysis hasshown the following first order effect of implementing the EU proposal for energy taxation:• the EU proposal would lead to energy price increases for households, trade and service andindustry in the order of 15%,• the proposal would lead to an increase in tax revenue by approximately 35 billion Ke' or 3%of total GDP.• increase costs of industries by approximately 3% of GDP. However, for energy intensiveindustries such as basic metal production industries the tax would increase production costs in theorder of 6% of GDP.For the household sector the impacts on low income groups like the pensioners are important. Thepensioners spend a larger share of their net income on energy consumption. However, sincepensioners use less transportation which is relatively high taxed in the EU proposal, the finaloutcome of introducing energy taxation as included in the EU proposal could be a more evenincome distribution. This is based on the assumption that the revenue of the tax is recycled to thehouseholds sector in form of lower income taxes. Beyond the economic effects the institutionalcapacity and politically feasibility have been also been analysed. The results from these analyses aresummarised briefly in the paper.

TRANSPORTS

Session 1D2 ADDRESSING THE ENVIRONMENTAL COSTS OF FUELSRoom 8 Kseniya Lvovsky (The World Bank), Gordon Hughes (The World Bank)

The paper examines the impacts of fossil fuel use on air quality in major metropolitan areas andranks options for mitigating the damage. It draws upon case studies of a range of large cities intransition and developing economies including Bangkok, Calcutta, Katowice, Krakow, Jakarta,Manila, Mumbai, Santiago, Sao Paulo, and Shanghai. These urban agglomerations, like many othercities in the developing world, suffer from very high levels of air pollution caused by fuels used inthe industrial, residential and transport sectors. The analysis of the environmental costs of fuel useis based on the available evidence on the adverse health and non-health effects of exposure to airpollution in urban areas and related literature on Willingness-to-Pay to avoid these effects. Theseeffects are linked to emissions from fuel combustion with the help of: (a) dispersion models thatrelate source-specific emissions to the impact on ambient conditions; and (b) emission factors forkey air pollutants that estimate the resulting volume of emissions using data on the amount of aparticular fuel, the quality of a fuel, and the typical level of pollution abatement in each sector.These yield the health and non-health damages per B5g/m3 change in ambient concentrations (forlocal air pollutants), per ton of emission by type of pollutant and sector; and per ton of fuel by typeand sector in a particular location. A database of control and policy options -- includingimprovements in fuel quality, fuel switching, and emission control technologies -- is then used toidentify cost effective options for reducing emissions together with market mechanisms that willencourage their adoption and/or implementation. The findings from case studies suggest thatdamage costs associated with some uses of fuels are very substantial and are dominated by localhealth impacts rather than by global climate costs. The greatest portion of the damages comes fromlow-level pollution sources comprising small industries and services , households, and transport.The analysis shows that the environmental damage perton of fuel may be much larger than thetypical purchaser cost of the fuel for some fuel and sector combinations. The study highlights thedifficulties of implementing simple market instruments because the appropriate tax rates may bevery high and sectoral differentiation may be impossible to enforce. Alternative approaches thatselectively combine imputed pollution charges with mandatory use of certain types of emissioncontrol technologies may be more promising policy options.

TRANSPORTS

Session 1D2 COST EFFECTIVENESS OF EARLY RETIREMENT PROGRAMS OFGASOLINE POWERED VEHICLES IN SANTIAGO, CHILE

Room 8 Luis A. Cifuentes (Catholic University of Chile), Francisco Lepeley (CatholicUniversity of Chile)

Santiago, the Capital city of Chile, suffers from severe air pollution. The ambient standards forparticulate matter, carbon monoxide, and ozone are regularly exceeded. According to officialemissions data, gasoline powered vehicles (private and taxicabs) account for approximately 72% oftotal CO emissions, 34% of total NOx emissions, and 25% of COV emissions. Several measureshave been taken to curtail the growth of vehicle related emissions. All vehicles should pass an idleemissions test every year. Since 1993, all vehicles should comply with stricter emission standards,that require the use of three-way catalytic converters. However, the growth of the vehicle fleet at acontinuously increasing rate, coupled with the high average life of a vehicle in Santiago, has resultin an ever increasing share of emissions from gasoline-powered vehicles.

TRANSPORTS

Session 1D2 NUMERICAL OPTIMISATION OF URBAN TRANSPORT ANDENVIRONMENT POLICIES

Room 8 Kurt Van Dender (Katholieke Universiteit Leuven), Stef Proost (CES-KULEUVEN)

Road transport causes externalities. A numerical simulation and optimisation model is used for theevaluation of policy packages aimed at reducing these externalities, in urban environments.Externalities taken into account are atmospheric pollution (ozone, acidification, CO, CO2,particulates, etc.), congestion, accidents and noise. A social welfare criterion is used for theevaluation. Section 1 of the paper describes the analytical framework. Consumer behaviour isrepresented by a nested CES function. A large number of transport markets are distinguished(passengers, freight, peak, offpeak; private, public; petrol or diesel car, etc.). On the supply side,account is taken of scale effects in the provision of public transport (the Mohring effect).Alternative equilibria are generated by combinations of policy instruments. For a given set offeasible instruments, the model computes the welfare maximising values of the instruments. Policyinstruments include fuel taxes, environmental standards for cars, road pricing, parking charges, etc.The model allows for different types of revenue use (equal redistribution over consumers, decreaseof labour taxes, etc.). Issues of equity can be addressed, since 4 consumer groups are distinguished.Section 2 deals with case studies. First, for a Belgian city (Brussels or Antwerp), a detailedcomparison of the effects of popular policy proposals is presented. The effects on welfare (ingeneral and for consumer groups), transport demand, market shares of modes, levels of externalcosts, tax levels are studied. The benefits are compared to implementation cost estimates fordifferent policy packages. The influence of revenue use on welfare is emphasised. Second, theeffects of a number of policy packages are compared for different European cities. This analysisindicates to what extent optimal transport policies depend on characteristics of cities (size,topological structure, socio-economic functions, etc.). Section 3 summarises and concludes.

TRANSPORTS

Session 1D2 UNLOCKING TRANSPORT SUSTAINABILITY: ANALYSINGRESISTANCE TO MODAL TRANSFER FROM CARS

Room 8 Alan Collins (University of Portsmouth), Colin Black (Oscar Faber TransportConsultants), Martin Snell (University of Portsmouth)

There is a general consensus that to effect a more sustainable transport policy, there is a necessity toreduce car use (especially for short trips). Yet several empirical studies have pointed to thedifficulty of meeting this objective in spite of, for example, increasingly draconian physicalplanning controls, and the application of fiscal correctives. Resistance to modal transfer from carshas been shown to be embedded in various psycho-social obstacles which are not readily teased outin orthodox econometric studies of travel demand. This paper reports on an empirical study whichfuses psychometric and econometric analyses in an attempt to uncover the psychological factorsinfluencing modal choice, as well as the usual range of economic and demographic factors. In orderto do this it is important to appreciate that the psychological motivations to adopt a particular travelmode (fear of personal attack, fear of road crossing accidents, denial of environmental problemsetc.) is likely to vary by trip purpose. Accordingly, the study analyses one specific short trippurpose that has persistently frustrated transport analysts (the journey-to-school trip), trying toinduce more walk, cycle, or public transport based trips. Parents of infant schoolchildren in variousschools in south east Hampshire, and the Stoke-on-Trent, and Crewe areas of England weresurveyed (eliciting over 4200 responses), regarding their household characteristics, travelbehaviour, and attitudes to various environmental and traffic related statements. These statementswere framed in terms of a Likert type scale, whereby values are assigned along an attitudecontinuum from one extreme to another. In addition to analysing the raw descriptive statistics of allthe data, Principal Components Analysis was used to support the sorting and reduction of thesemantic differential responses to the statements. The results of multinomial logit analysis andsimulation exercises are used to help explain travel behaviour in the context of this specific trippurpose, and to provide clues towards the effective promotion and design of sustainable transportpolicy, particularly in the light of various psycho-social obstacles to modal transfer from car.

TRANSPORTS

Session 1D2 TRADE LIBERALIZATION AND TRAFFIC CONGESTIONRoom 8 Teresa Delgado (University College London)

Many countries in Latin America underwent a process of trade liberalization during the early 1990s.The reduction in tariffs associated with this process has often meant a dramatic increase in theimport and in the overall sale of automobiles. The increase in the number of automobiles hascreated dramatic congestion problems, especially in urban areas. In Colombia, for instance, between1992 and 1994 the import of cars almost tripled. In the paper, I develop a model in which individualhouseholds derive utility from the services of cars of different vintages and from public transport. Itherefore model explicitly both ownership and usage of cars. Given the preference parameters, theprice of new cars (assumed to be exogenous and largely determined by the level of tariffs), the priceof scrappage, and the distribution of income, the model determines the distribution of ownership,the price of used cars and the usage of cars. I study two versions of the model, one with acongestion externality and one without. For the latter I can get an analytical solution, while for theformer I have to solve the model numerically. I then calibrate the model with realistic parametersand study the implications of different policies. The richness of the model allows me to study thedesirability of several policies to be used in conjunction with liberalization (such as scrappagesubsidies, increases in the price of gasoline or increases in the registration tax) to avoid or minimisethe congestion problems.

ENVIRONMENT AND DEVELOPMENT III: NATURAL RESOURCEMANAGEMENT A

Session 1D3 THE EFFECTS OF THE STRUCTURAL ADJUSTMENT PROGRAMMEON DEFORESTATION IN GHANA. THE ROLE OF COCOA AND TIMBERINDUSTRIES

Room 6 James K.A. Benhin (University of York), Edward B. Barbier (University of York)

The forests, especially tropical forests, have been identified as very important for the very existenceof man. The reason been many benefits that man derive from the functions of the forests. This is thebasis for the statement that, when the last tree is cut the last man dies. In spite of this, the rate offorest loss, especially in the tropics, is increasing year after year. Efforts have been made throughinternational treaties and conventions to help reduce the rate of forest loss. One of the recognisedcauses of this rate of forest loss is the positive incentives that people have to use the forest resource.These have been refereed to as the underlying causes of forest loss. The focus of this paper is toinvestigate the underlying causes of forest loss in Ghana and what policies over the period, 1965-95have mitigated or exacerbated the problem. Food and cash crop production and timber extractionshave been identified as the main proximate factors that lead to forest loss in Ghana These areinfluenced by the underlying causes of mainly prices that increase the expected net benefits fromthese proximate causes of forest loss. Macroeconomic policies, working through these underlyingcauses, and other specific sector policies have also been identified as, either mitigating oraggravating the problem. The problem has arisen because other benefits of the forest are generallyignored in the cost structure of these proximate factors, making their net benefits to be veryattractive and therefore encouraging excessively use of the forest resources. Other benefits areignored mainly because existing markets are not able to estimate these benefits. It is envisaged that,given the existing state of knowledge on the importance of the forest, and the existing market, whenthe extent of the relationship between the underlying causes of forest loss in Ghana are known,policies that influence them can be used to help mitigate their negative impact on forest. To achievethis objective. the paper develops a model based on a dynamic optimal control problem of arenewable resource. The model assumes a three-sector tropical forest land use (cocoa, maizeproduction and timber extraction) with well-behaved productions. Maximising the stream of totalnet benefits, the first order conditions are used to derive relationships for forest land conversion tococoa and maize land, and timber exploitation, that is the demand for the stock of forest land as aninput for the production of cocoa, maize and timber, as functions of output and input prices. Aforest loss equation is also derived. These equations are estimated using secondary data for periods'1965-1995. A chow test and a piecewise linear regression approach are used to investigate theextent to which the structural adjustment programme has impacted on the forest through itsinfluences on input and output prices. Policy simulations scenarios are also undertaken toinvestigate the impact of different policies.


Session 1D3 SPATIAL MODELING OF EXTRACTION AND ENFORCEMENT IN LDCPROTECTED AREAS

Room 6 Heidi J. Albers (Food Research Institute, Stanford University)

Conflicts between resource-dependent people and protected area managers abound in manydeveloping countries. From the rural people's perspective, protected areas may contain valuable ornecessary natural resources that are worth the effort, and risk of capture, to extract. From theprotected area manager's perspective, the rural people's extraction of resources causesenvironmental degradation and is illegal. Protected area managers attempt to enforce the regulationsagainst such extraction but, due to serious budget constraints, cannot deter all extraction. Becausethe rural people's marginal net benefit from extraction is a function of the distance from theirvillage, the protected area managers have an opportunity to allocate their enforcement effort in aspatial pattern that reduces that marginal benefit and minimizes the resource degradation for a givenbudget level. This paper develops a spatial model that determines the protected area manager'soptimal enforcement pattern and the rural people's optimal extraction pattern under thatenforcement pattern. The results reveal the inefficiency of many protected area policies thatmaintain constant levels of enforcement throughout the protected area. This spatial decisionframework then creates a platform for analyzing the dynamic aspects of the issue includingopportunities for resource regeneration and instances of irreversible encroachment.


Session 1D3 FORESTRY INTERVENTIONS FOR RURAL DEVELOPMENT: WHATWE KNOW AND WHAT WE NEED TO KNOW FOR SUCCESSFULINTERVENTIONS

Room 6 Gunnar Kohlin (Goteborg University), William F. Hyde (Virginia Tech)

This paper reviews the expectations for forestry's contribution to rural development--and the specialexpectations for its contributions to the most disadvantaged, women and landless users of the forestcommons. A growing literature challenges some of these expectations but could also be used toprovide empirical support for sharper definitions of deforestation and measures of scarcity forfuelwood and other resources that the poor obtain from trees. Such analysis could suggest whereand for whom the effects of forest interventions are most likely to offer development opportunity.This paper reviews the recent literature, suggest some unifying hypotheses, and identifies someremaining outstanding research questions. The fundamental contention of the paper is that forestryinterventions should be analyzed with regard to markets, policies and institutions. Markets for theseforest resources exist but are often thin. Reliable predictors of adoption, e.g. based on price andcross-price elasticities, are exceedingly difficult to estimate, but it can be done. The appropriateinstitutional arrangement for increasing social welfare is the institution that best secures lessexpensive rights to the scarce resource. Social and community forestry, improved stoves, new orimproved multi-purpose trees, and even private commercial forest operations still have potential toimprove local social welfare. Successful interventions could be predicted where economic scarcityis correctly measured, given that the intervention is based on proper land use, investment andmanagement institution. The increasing evidence of reforestation and resulting private and commonbenefits from trees that we observe in developing countries around the world are evidence thatforestry development activities do satisfy these scarcity conditions in many important cases.


Session 1D3 NATIONAL PARKS AS DEVELOPMENT PROJECTS: GAUGING LOCALSUPPORT

Room 6 Subhrendu Pattanayak (Duke University), Randall A. Kramer (Duke University),Erin O. Sills (North Carolina State University)

Over the past decade, many of the national parks established with international funding andassistance have followed the Integrated Conservation and Development Project (ICDP) model,which links biological resource conservation with socioeconomic development. Proponents ofICDPs argue that the protection of a park's biological resources will only be possible if local peoplehave a stake in the park and support the ICDP agenda. The purpose of this paper is to examine thelocal support for two ICDPs recently established in Indonesia: Siberut National Park in Sumatra andthe Ruteng Nature Recreation Park in Flores. In early 1996 a stratified random sample ofapproximately 1000 households from the communities in and around each park, were administereda socio-economic questionnaire containing detailed questions on demographic characteristics, farmand forestry activity, household labor and financial allocation, and contingent valuation. Thequestionnaire was developed by local experts, focus groups and pretests. Open ended contingentvaluation questions were used to elicit responses about the maximum willingness to pay an annualhousehold fee to support the park activities. Willingness-to-pay is one way to gauge local support.A Tobit regression model was estimated for each park sample to determine the relationship betweenwillingness to pay and demographic, economic, biophysical and attitudinal characteristics of thesurvey respondents. Preliminary results from log-linear regressions on the contingent valuationresponses in each park show that, as expected, willingness to pay an annual fee for the park packageis positively related to the household's annual budget and to indicators of wealth. In Siberut,households that have more cleared agricultural land, households that plan to clear forest foragricultural land in the coming year, and households that hunt monkeys are less supportive asexpected, given that the park will restrict agriculture and hunting. In Ruteng, opinions such as ifthey believed that deforestation induced hazards (e.g. landslides) have decreased over the last tenyears, if park tourism is not a source of economic opportunities or if they did not need anyagricultural assistance or extension services, are all negatively correlated with willingness to pay.Finally, the data from both parks were pooled to estimate a tobit model that utilized a simplespecification from the set of common covariates. Again, wealth and income were importantexplanatory variables. The dummy variable on site has a large and significant coefficient, indicatingsignificantly greater willingness to pay for the Ruteng project. The latter was an expected resultgiven that Ruteng project has enjoyed a more stable and efficient management, as well as lessculture based conflicts between the government and park staff and local people. Based onpreliminary results, it appears that the management plans for two new parks in Indonesia represent apackage of conservation and development activities that local people are willing to pay for, at leastat a modest level of financial commitment.


Session 1D3 GOVERNMENT MANAGEMENT OF COMMONS: EVALUATING TWOFOREST

Room 6 Ethan Ligon (University of California), Urvashi Narain (University of California)

Our paper, "Government Management of Village Commons: Evaluating Two Forest Policies,"develops a dynamic household model of common property management to determine which of twoforest management schemes is preferred by villagers and the state in India. The two forestmanagement schemes compared are the status quo and Joint Forest Management. Under the statusquo, the state grants villagers the right to harvest some stream of forest products but reserves theright to cut timber without prior notification. Under Joint Forest Management, the state promises togive the villagers a share of the timber harvest at a stipulated date in return for which the villageagrees to regulate its use of the forest. We develop a theoretical model in which the villagers wantto maximize their discounted intertemporal utility from the consumption of forest products whilethe state wants to maximize the present value of its timber revenues. There is no reason to supposein advance that one or the other forest management scheme will better meet the objectives of thevillagers or the state. Rather, the superiority of one scheme over the other will depend on householdand village characteristics. Our paper shows that villagers' preferences over the two policies dependon their ability to cooperate while the state's preferences depend on the villagers' risk aversion.

ENVIRONMENTAL ACCOUNTING I

Session 1D4 GREEN ACCONTING AND GREEN TAXES IN THE GLOBAL ECONOMYRoom 2 Thomas Aronsson (University of Umeå), Karl-Gustaf Löfgren (University of Umeå)

Global external effects cause fundamental valuation problems of relevance for green accounting.These problems have frequently been neglected in previous studies. In this paper, we explore therelationship between, on the one hand, the appropriate national and global welfare measures and, onthe other, the national and/or global tax policies used in an attempt to improve resource allocation.If the economies follow the cooperative solution, the global welfare level (the sum of the individualcountries' welfare levels) is appropriately measured by a static index related to the sum of thecounties' green net national products. Interestingly, however, it is not straight forward to split thisglobal welfare index into static national welfare indices. If, on the other hand, the countries actnoncooperatively, neither national nor global welfare can be summarized by static indices related tothe green net national product. The paper also addresses the question of using the willingness to paytechnique to collect information relevant for green accounting.


Session 1D4 ENVIRONMENTAL ACCOUNTING AND ENVIRONMENTAL RISKMANAGEMENT IN THE DOWN-STREAM SECTOR

Room 2 Giorgio Vicini (Fondazione Eni Enrico Mattei)

This paper focuses the attention on the environmental risk management at Italiana Petroli spa (IP),an ENI group company that operates in the petroleum down-stream market. It is an economicanalysis of the environmental risk management. The main environmental problem of IP is related tothe oil spill from service station tank. IP, in response to recent environmental regulations andprivatization plans for the company, implemented a risk management program. The program isdivided in two stages: the first stage identifies the high environmental risk service stations becauseof it is impossible to do an environmental audit on all the service stations and therefore it isnecessary to select a sample; the second stage identifies the economic consequences of anenvironmental proactive strategy. The idea of the company is that a proactive strategy is profitablein the medium period, and therefore it is profitable to identify the high environmental risk servicestations and implement a preventive strategy only on these service stations. The purpose of thepaper is to analyse the economic and financial effects of a proactive risk management strategy byevaluating the economic effects on the company balance-sheet (income statement and assets andliabilities accounts).The first chapter describes the company activities, the environmental effectsand the environmental management systems. The second chapter focuses the attention on theenvironmental risk management and on the economic evaluation.


Session 1D4 GREEN ACCOUNTING AND ENVIRONMENTAL EFFICIENCY INDEXESRoom 2 Anni Huhtala (Finnish Forest Research Institute)

We derive a theoretically consistent welfare measure that is to be interpreted as a `green' netnational product. A major advantage of the measure suggested is that, instead of using shadowprices of pollution that are not readily available, we can focus on quantitative data, or the annualconsumption baskets actually chosen by societies. Using technology parameters, we derive theweights to be used in green NNP calculations for the adjustment of environmental effects. Thisissue has not been discussed in the context of green national income accounts to date, and here weshow that this omission is partly a result of a tradition of modelling pollution externalities in growthmodels. We suggest that, in addition to the direct disutility caused by pollution, the effects ofpollution on the natural resource base and its productivity should be considered. Otherwise, theresult can be a `corrected' but misleading measure of welfare. Finally, we discuss the feasibility ofthe measurement rule suggested.


Session 1D4 CORPORATE ENVIRONMENTAL ACCOUNTING: HOW TOTRANSLATE THE ENVIRONMENTAL CONCERNS INTO THELANGUAGE OF BUSINESS

Room 2 Stefania Borghini (Fondazione Eni Enrico Mattei)

Spending in waste management, waste water treatment and atmospheric pollution abatement bymanufactures is running at a high percent of sales and rising according to recent North Americanand Italian statistics. Unfortunately conventional accounting practice –developed to serve financialreporting requirements– rarely illuminate environmental costs or stimulate better environmentalperformance. Environmental costs in fact are dispersed throughout most business and can appearlong after decisions are made. This project investigates the opportunities of using managementaccounting as an environmental management tool in medium and large Italian industries and inparticular its possible relevance in improving both business decision making process andenvironmental performances. The empirical research relied on case studies of three representativefirms: one large industry involved in the petroleum production (Agip), a medium size industry, inproduction of coated fine papers (Cartiera Favini), and the third a global independent semiconductorcompany (SGS THOMSON). The focus of these case studies are the corporate environmental costsrecording and the role of environmental costs and liabilities in decision making processes. TheEnvironmental accounting frameworks proposed by the literature are a baseline against which thecase studies results are evaluated. The final aim of this research is to develop a new framework thatallows to translate the environmental concerns into the language of business and to enhance theprofitability and the productivity of the company incorporating environmental costs in operationaland capital budgeting.

ENVIRONMENTAL OUTCOMES ASSESSMENT: CONCEPTUAL ISSUES

Session 1D5 ENVIRONMENTAL PROJECT EVALUATION FOR DEVELOPINGCOUNTRIES: VALUING ENVIRONMENT AS AN INPUT

Room 7 Edward Barbier (University of York)

The following paper suggests that the most important evaluation problem in developing countries isdetermining the value and optimal use of environmental resources as inputs into production.Essentially, this amounts to determining the best use of land, water and other resources. The paperoutlines the simple methodology behind the general evaluation approach, e.g., determining the mostefficient use of a resource requires incorporating environmental costs and benefits, and comparingthe returns from competing uses. To illustrate this methodology, the paper draws on several casestudies, such as efficient timber operations on forestry land, allocating agricultural land amongcompeting uses (e.g. gum arabic vs. annual crops in Sudan), diversion of water from downstreamfloodplains for upstream water developments (e.g. Hadejia-Jama'are floodplain in NorthernNigeria), and evaluating the benefits of ecological services in support of economic activity (e.g.mangrove-fishery linkages in Mexico).


Session 1D5 METHODS FOR AGGREGATING PERFORMANCE INDICATORSRoom 7 James Kahn (University of Tennessee and Oak Ridge National Laboratory)

The measurement of environmental quality has proven to be a very daunting task. There are literallythousands of relevant variables which can be measured and tracked over time. Unfortunately, largenumbers of variables makes comparisons more difficult and there is a pressing need to developmore aggregated indicators of environmental quality. This paper reviews several different methodsfor developing aggregated indicators and suggests a survey-based approach which develops a trade-off weighted measure of environmental quality. It is shown that this measure is conceptuallyanalagous to GDP. The paper also discusses methods for using the aggregated index in policyanalysis.


Session 1D5 USING INDICATORS TO LINK THE MACROECONOMY AND THEENVIRONMENT: FROM CONCEPT TO IMPLEMENTATION

Room 7 John Dixon (World Bank)

As the World Bank prepares country assistance strategies (CASs) that both identify keydevelopment issues and lay out the Bank's approach to addressing them for each borrowing country,a major challenge has been demonstrating how environmental management (or mismanagement)affects macroeconomic outcomes. The use of indicators, including such concepts as genuinesavings, selected "green sectoral accounts", and pollution damage estimates, illustrate a promisingapproach now being applied. The goal of this form of analysis is to present a picture of economicdevelopment that incorporates environmental outcomes, and thus allows a fuller analysis ofalternatives. The target audience is as much the Ministers of Finance or Economy as the Minister ofthe Environment. Current case studies are used to illustrate what has been done and the differencethat it makes.


Session 1D5 ENVIRONMENTAL IMPACT ASSESSMENT: THE BRAZILIANEXPERIENCE

Room 7 Dan Billar (Getùlio Vargas Foundation)

Compared to other developing countries, Brazil has had a long history of environmental policymaking. Some state environmental agencies were fully functional during the 1970s, andenvironmental concerns date as far back as the 1960s through urban masterplans and otherinstruments. At the federal level, environmental processes became more institutionalized in theearly 1980s with legislation related to environmental policy involving among other instrumentsenvironmental impact assessments (EIA's). In fact, for over 15 years Brazil has had laws and normsaddressing EIA's. Even the country's 1988 constitution, which has a chapter solely devoted to theenvironment, implicitly emphasizes the EIA process. EIA's became a regulating tool rather than aplanning mechanism, since it is directly linked to environmental licensing. Projects incur significantcosts in addressing this requirement, but the social benefits they are supposed to generate are oftenabsent. This paper takes a first look in the EIA process in Brazil, assessing their costs anddiscussing their possible benefits. Further, it suggests ways of improving the process, so as tominimize its costs without jeopardizing possible environmental benefits.

GLOBAL WARMING II

Session 1D6 THE COSTS OF CARBON ABATEMENT IN SIX EU COUNTRIES:IMPLICATIONS OF ALTERNATIVE BASELINE ENERGYPROJECTIONS

Room 3 Jesper Jensen (Ministry of Business and Industry, Denmark), Christoph Bohringer(University of Copenhagen), Thomas Rutherford (Ministry of Business and Industry,Denmark)

The on going climate change negotiations explicitly recognize the importance of the participatingcountries’ starting points. Another central factor for cost estimates of climate change policies iswhat happens under business as usual. Unfortunately, both factors are extremely uncertain. Whatare the possible cost implications in the EU of two alternative projections of future energy markets?In an otherwise identical model we contrast the projections reported in a recent study by theEuropean Commission with projections reflecting more conservative assumptions about the futureenergy markets. We conclude that the alternative projections have a major impact on the magnitudeand distribution of abatement costs. Specifically, we find that the optimistic EC projections implysignificantly lower abatement costs. The EC projections also imply that country-specificassumptions about energy efficiency improvements and fuel mix changes in power generation maydominate the cost implications of the differential abatement targets currently adopted by the EUmember countries.

GLOBAL WARMING II

Session 1D6 LEAST-COST AIR POLLUTION: A CGE FRAMEWORKRoom 3 Deborah Vaughn Nestor (Law and Economics Consulting Group, INC.), Carl A.

Pasurka Jr (U.S. Environmental Protection Agency)

This paper specifies a computable general equilibrium (CGE) model in order to calculate the leastcost policy to reducing air pollutants (other than CO2) to a desired level. These air pollutants (suchas SOX) pose modeling problems which are not confronted when modeling least-cost solutions toreducing CO2 emissions. Specifically, it is necessary to allow for the existence of pollutionabatement activities (currently there is no feasible abatement technology for CO2). While otherstudies have attempted to incorporate abatement technology, they have relied on engineeringestimates of pollution abatement activities rather than actual data, or have invoked limitingassumptions, namely that all pollution abatement is “end-of-pipe” (for example, seeBergman,1991). This study proposes a more flexible approach to modeling pollution abatementwithin the CGE framework, one that treats the problem as an issue of joint production of “good”and “bad” outputs . More specifically, this paper employs linear programming techniques (oractivity analysis), as developed in Kohn (1975) and Färe, Grosskopf, Lovell and Pasurka (FGLP)(1989). These techniques allow us to estimate the production possibilities frontier between “good”and “bad” outputs. Using a unique dataset for 1970 through 1990 which consists of inputs, outputs,and air pollutant emissions for 20 manufacturing sectors and the electric utility sector, we constructseparate production technologies for each sector in the CGE model. Consequently, there are uniqueabatement technologies for each pollutant for each sector, and these are based on actual as opposedto engineering data. The important advantage of this approach is that it does not limit abatementactivities to end-of-pipe technologies. This is interesting from a policy perspective since changes inproduction technology have become a more frequently used approach to reducing emissions.Finally, we demonstrate application of the CGE model by estimating the cost associated with notpursuing least-cost strategies in the United States.

GLOBAL WARMING II

Session 1D6 WHY DO CARBON EMISSIONS SCENARIOS DIFFER?Room 3 Dennis Anderson (Imperial College of Science, Technology and Medicine)

There have been more than 130 peer reviewed studies containing over 300 scenarios and projectionsof carbon emissions from energy production and use over the next century. Projections over thenext 50 years differ over a 5-to-1 range, and are even wider over the 100 year period. Carbonemissions today are around 6 giga-tons per year. At one extreme, some studies show emissionscontinuing to rise at first, but eventually declining to zero by year 2100 -- suggesting that a processof carbon decumulation in the atmosphere could be initiated in the second half of the century. At theother extreme, other studies estimate that emissions may rise to 60 giga-tons or more by year 2100.Even ignoring the outliers, there is a dense distribution of projections for year 2100 in the range 5 to50 giga-tons per year. The paper will attempt to explain that such huge differences arise fromdiffering assumptions on: (1) the long-term rate of economic growth and its variation betweencountries; (2) population growth and its links with economic growth, education, health and incomedistribution; (3) income distribution, which among other things influences population growth andthe kinds of fuels used; (4) climate change policies; (5) local and regional environmental policies,which have significant influences on the choice of energy sources and the rate of "decarbonisation"of energy; (6) the influence of endogenous technical change on the relative costs of the variousenergy sources or carriers -- on coal, gas, oil, nuclear power, hydrogen, fuel cells and renewableenergy for example; (7) regulatory policies in the energy industry, on account of their effects onrelative prices, costs and technology development; (8) technology policy, which in the past 50 yearshas been heavily concentrated on nuclear fission and fusion, but is shifting toward environmentalconcerns; (9) transport policies, in urban areas in particular; (10) the rate of growth of energyefficiency; and (11) uncertainties in the structural forms, the residuals and the parameters of theunderlying relationships. A methodology will be proposed by which we can begin to analyse suchfactors quantitatively. The paper (which has been suggested to the author by the IPCC), is intendednot only to provide the basis of an explanation of why scenarios and projections of carbonemissions differ, but to point to the influence of a range of policies on the likely course of carbonemissions.

GLOBAL WARMING II

Session 1D6 THE TOLERABLE WINDOWS APPROACH TO GLOBALWARMING

Room 3 Thomas Bruckner (Potsdam Institute for Climate Impact Research), GerhardPetschel-Held (Potsdam Institute for Climate Impact Research), Ferenc Toth(Potsdam Institute for Climate Impact Research)

The Tolerable Windows Approach (TWA) to integrated assessments of global warming is based onexternal normative specifications of tolerable sets of climate impacts as well as proposed emissionquotas and policy instruments for implementation. In a second step, the complete set of admissibleclimate protection strategies which are compatible with these normative inputs is determined byscientific analysis. In doing so, minimum requirements concerning global and national greenhousegas emission paths can be determined. Finally, a specific climate protection path may be singled outby optimization in a “second best manner“. While the final task can be embedded into the well-known cost-effectiveness framework, the second step requires an appropriate mathematicalfoundation which is based on the "Theory of Differential Inclusions". The developed methodicaltools appropriately take into account the dynamic aspects of the entire problem, e.g. restrictions onthe rate of change of climate or socio-economic conditions. From this point of view, the TWA maybe considered as a dynamic generalisation of the critical loads concept, which has been verysuccessful in the negotiation process of the Second Sulphur Protocol. The integrated assessmentmodel of the international ICLIPS project is meant as an exemplary realisation of the TWA. Theheart of the actual version of the ICLIPS model consists of a reduced-form climate model whichtakes into account all major greenhouse gases (CO2, CH4, N2O, halocarbons, tropospheric andstratospheric ozone, and stratospheric water vapour) as well as the radiative effect of aerosolsoriginating from SO2 emissions and biomass burning. Emission corridors for Annex-I and Non-Annex-I nations of the Framework Convention on Climate Change are presented, based onexplicitly specified equity considerations and additional normative settings, which have beenestablished by the German Advisory Council on Global Change (WBGU). The respectiverestrictions include a maximum temperature change of 2 degree centigrade and a maximum rate oftemperature change of 0.2 degree centigrade per decade as well as a socio-economic restrictionimposed by a maximum global emission reduction rate of 4% per year, whereby equal per capitaemissions should be achieved until 2050 at the latest. Under these restrictions the time we canfollow business-as-usual according to the IPCC IS92a scenario is restricted to about 20 yearsprovided that afterwards all greenhouse gases (except halocarbons) and SO2 are sharply reduced inphase with CO2 emissions at the assumed maximum emission reduction rate of 4% per year.

GLOBAL WARMING II

Session 1D6 GLOBAL WARMING AND ECONOMIC CONVERGENCE: THEROLE OF TECHNOLOGICAL DIFFUSION

Room 3 Juan Carlos Ciscar (Institute for Prospective Technological Studies), Antonio Soria(Institute for Prospective Technological Studies)

After the ratification in 1994 of the Framework Convention on Climate Change, the negotiatingparties are to set targets on greenhouse gas reductions. A key characteristic of the current situationis the fact that the negotiation process takes place with several players, having each one differentobjectives and constraints. This paper analyses from a game theory perspective the strategicalinteractions among players, using a modification of the DICE model developed by Nordhaus. Inparticular the paper focuses on the extent to which the hypothesis on the rate of technologicaldiffusion from developed to developing countries plays a role in the actual outcome of thebargaining process. In fact, this analysis is strongly linked to the analysis of economic convergenceamong regional blocs in the world economy. Thus, it may exist a relationship between the incentiveto cooperate and the convergence hypothesis implied by the technological diffusion pattern. In thisrespect, when there is absolute convergence the gains from cooperation in controlling CO2emissions may be higher than if there is not convergence. Moreover, this issue is related to JointImplementation given that this cooperation mechanism can stimulate growth in developingcountries through the technology transfer involved and, as a consequence, convergence.

ENVIRONMENTAL TAXATION

Session 1D7 TAXES VERSUS QUOTAS FOR A STOCK POLLUTANTRoom 1 Michael Hoel (University of Oslo), Larry Karp (University of California, Berkeley)

Previous literature has ranked a tax and quota policy when abatement costs and environmentaldamages both depend on the flow of pollution, and the polluter has better information than theregulator concerning abatement costs. Under certain assumptions, the quota dominates the tax if andonly if the slope of the marginal damage function is steep, relative to the slope of abatement costs.We study the situation where environmental damages depend on the pollution stock rather than theflow. In this circumstance, a direct comparison of the two slopes is not meaningful, since the unitsof the two are not the same. We show that the intuition provided by the static model continues tohold, insofar as greater convexity of the damage function, or less concavity of the benefits function,make it more likely that a quota is preferred. However, when environmental damages depend onpollution stocks, the ranking of the two policies also depends on the discount and stock decay rates.Higher discount and/or higher decay rates increase the importance of current flows relative to stockeffects, which are felt in the future. The chief advantage of the quota is that it makes it possible tocontrol exactly (without randomness) the evolution of the stock. Both a higher discount rate and ahigher decay rate decrease the importance of future stock effects, and therefore decrease the valueto the regulator of exact control of the evolution of the stock. Consequently, higher discount anddecay rates make it more likely that a tax is preferred. The ranking of the two policies also dependson the amount of flexibility that the regulator has. We consider two extreme cases. In the first theregulator chooses the entire policy trajectory at the initial time, and in the second the policy level attime t is conditioned on information at time t. Since the quota eliminates uncertainty about theevolution of the state, the ability to condition the quota level on future values of the state providesno benefit. Under a quota the regulator's payoff is independent of the amount of flexibility.However, under a tax, the evolution of the stock is stochastic. The ability to condition policy oncurrent information then increases the regulator's payoff, making it more likely that the taxdominates the quota. In summary, we show that with stock pollution and asymmetric informationabout abatement costs, the ranking of taxes and quotas continues to depend on the relativecurvatures of costs and benefits. The ranking also depends on decay and discount rates and on theregulator's ability to change policies in light of new information.


Session 1D7 EXTERNALITIES AND OPTIMAL TAXATIONRoom 1 Helmuth Cremer (IDEI and GREMAQ, Université de Toulouse), Firouz Gahvari

(University of Illinois at Urbana Champaign), Norbert Ladoux (University ofToulose)

This paper studies the optimal taxation of polluting goods in a second-best environment, when taxinstruments are not restricted in an ad hoc way, but only by the informational structure in theeconomy. It examines two basic questions. The first question concerns the nature of the optimal taxon an externality generating good when first-best taxes are not available. Under what circumstancesdoes the tax differ from the Pigouvian tax (equal to the marginal social damage of pollution)? Whatfactors determine the sign and the magnitude of this difference? The second question inquires intothe properties of second-best taxes on « private » good and income in the presence of externalities.In particular, what are the interconnections between environmental levies and traditional taxinstruments? The main results are: (i) environmental levies ought to be Pigouvian only in specialcases (ii) in general they differ from the Pigouvian tax by a term which reflects the redistributionalimpact of the tax (iii) depending on the nature of the good and on the structure of preferences, thetax on the polluting good may be larger or smaller than the Pigouvian tax; consequently, neither the« double dividend » hypothesis, nor Bovenberg and De Mooij's critique can provide sufficientlygeneral and robust policy recommendations.


Session 1D7 ENVIRONMENTAL TAXATION AND TRANSACTION COSTSRoom 1 Sjak Smulders (Tilburg University ), Herman R.J. Vollebergh (OCFEB and

Erasmus University of Rotterdam)

In many cases of pollution externalities, a large number of pollutors is involved (e.g. in case of CO2emissions). The Pigouvian principle prescribes to tax all emissions according to the marginaldamage to the environment. However, the optimality of Pigouvian taxes may break down if costs ofenforcement are substantial, for example because they are related to the number of agents to bemonitored. In order to save on monitoring and enforcement costs -- or more generally, transactioncosts -- it might be optimal to switch to a tax system in which only a few big polluters are taxed orto a system that relies on taxes which are less efficient in reducing emissions but also involve lowertransaction costs (e.g. an enegy tax instead of an emission tax). In this paper we show why thePigovian policy principle no longer holds if transaction cost are included in the overall welfareassessment. In such a world it is costly to tax each specific polluter separately inducing thegovernment to balance the potential loss of less targeted incentives for specific polluters against apotential gain in transaction costs savings. We develop a three sector model where two sectorsproduce both a desired output and emissions and the third sector produces an intermediate good(e.g. energy)used as an input in both other sectors. Abatement allows for re ductions in emissionsper unit of output in all sectors. We analyze to what extent sectoral differentation of an emission taxis a useful strategy for the government to optimize welfare and what the level of the optimalemission tax would be in that case. Furthermore, we show the importance of other tax bases inmaximizing welfare if transaction cost differ according to the kind of tax implemented. Inparticular, we investigate under what conditions the introduction of an input tax (e.g. tax on energy)yields higher welfare gains than introduction of an emission tax..


Session 1D7 WELFARE IMPROVING ENVIRONMENTAL TAX REFORMS WITHHETEROGENEOUS INDIVIDUALS

Room 1 Thomas I. Renstrom (University of Birmingham), Laura Marsiliani (LondonBusiness School)

It is argued that an environmental tax reform, that is shifting the burden of taxation away fromlabour toward the environment can improve environmental quality (first dividend), boostemployment (double dividend) and increase welfare. The paper investigates the welfare effects ofsuch a reform in a general equilibrium framework. The analysis is second best since a number ofdistortions are included: pollution externalities, distortionary labour taxes, imperfectly competitivefirms and involuntary unemployment. Households are of three types: employed, unemployed andshareholders. Within each type the households may differ in income. It turns out that the exactnature of the market imperfections are of crucial importance in assessing the welfare effects of anenvironmental tax reform. The contribution of this paper is to show exactly how the sufficientconditions for increase (decrease) in employment and welfare depend on the competitive andtechnological structure of the economy. Despite the fact that an environmental tax reform may notlead to a Pareto optimum we find sufficient conditions under which it is Pareto improving.


Session 1D7 CONVERTING IMPLICIT INTO PURE CARBON TAXESRoom 1 Akira Yokoyama (Chuo University), Kazuhiro Ueta (Kyoto University) and Kiyoshi

Fujikawa (Konan University)

Global warning and the greenhouse effect have become one of the most important issues ininternational society. In Japan, environmental taxes as well as other instruments became popularwith policy-makers, but there is little acceptability of a carbon tax which will abate the emissions ofCO2. This paper proposes a tax reform which converts the existing implicit carbon taxes into purecarbon taxes under the condition of revenue neutral. The implicit carbon taxes in Japanese taxsystem consist of seven taxes on fossil fuels, the revenue of which amounts to about 5 trillion yen.This paper examines the effect of the tax reform under the condition of revenue neutral on thereduction of CO2 emissions, by assuming that the price elasticities on the demands of the fossilfuels are the same: 0.2 or 0.1. The results of this examination are as follows. In the case that theelasticities are 0.2 (0.1), the pure carbon tax of 18.975 (17.145) yen per kg carbon can finance thesame amount of revenue as the existing implicit carbon taxes and abate CO2 emissions by 70.547(31.544) million tonnage carbon while the implicit carbon taxes could abate the emissions by only19.265 (8.700) million tonnage carbon. The tax reform may keep the uses of revenues from theimplicit carbon taxes. As the consequence, the tax reform could mitigate the movement against theintroduction of a carbon tax and abate effectively CO2 emissions.

REGIONAL STUDIES I

Session 1D8 THE TRAVEL COST MODEL AND WILDLIFE RECREATION DEMANDAT THE RAS AL HADD TURTLE RESERVE

Room 4 Grace V. Chomo (Sultan Quaboos University), H.J.W. Grobler (Ministry ofRegional Municipalities and Environment Sultanate of Oman)

An economic model of consumer resource valuation is designed for recreational visits to a sea turtlenature reserve in the AI-Sharqiya region of the Sultanate of Oman. Ras Al Hadd has grown inpopularity since it was established in 1991. Permit applications have increased 300 percent between1991 and 1996. However, due to the public nature of the good, market data is not available onconsumers' willingness-to-pay for visits to Ras Al Hadd. Visitor surveys can be used to deriveshadow prices for this nonmarket good. In this study, current use value will be estimated using theTravel Cost model. The travel cost model uses distances traveled to the recreation site and data oncosts of the trip to approximate consumers willingness-to-pay for visits to a public access site. Aquestionnaire was designed for Ras Al Hadd visitors that includes travel distance, income, and otherrelevant variables. Visitors will be surveyed during the winter season, October 1997 - February1998. The model parameters will be estimated from the survey and available market cost data.Bstimates of consumer willingness-to-pay for recreational visits to Ras Al Hadd will be useful formanagers of this natural resource.

REGIONAL STUDIES I

Session 1D8 REFORESTATION INCENTIVES IN THE UK AND AUSTRALIA: ACOMPARATIVE EVALUATION

Room 4 Stephen Harrison (The University of Queensland), Paul Hill (Farm Business Unity,Wye College, University of London)

The UK and Australia both have substantial net timber imports. In both countries, governmentsplace high priority on reforestation on private land, for timber production and environmental andaesthetic reasons. Government intervention is believed to be justified because social benefits aresubstantial and private benefits insufficient to induce planting. Incentives provided are clearlydifferent between countries. Woodland planting grants are the favoured incentive scheme in theUK, while in Australia joint venture schemes and direct tree planting assistance for growing ofnative tree species are adopted. Taxation treatment also differs markedly - in the UK reforestation isoutside the taxation system whereas in Australia expenditures are deductible in some circumstances.In both countries, there is an emphasis on planting on degraded or less productive farm agriculturalland. Intervention measures currently adopted have evolved and been refined in both countries overtime. It is perhaps surprising that they have taken such different directions. UK reforestation policy(in recent years) has been influenced by the high cost of the Common Agricultural Policy and theneed to divert land out of farming. In spite of a relative abundance of agricultural land, motives forreforestation in northern Australia have not been supply control. The Forestry Authority andDepartments of Agriculture have been the prime force behind support for tree planting in the UK. InAustralia, State and Local government has been the driving force in promoting reforestation. Thispaper explores government objectives and intervention methods to encourage reforestation in theUK and northern Australia. Differences between the measures adopted, and reasons for thesedifferences, are examined.

REGIONAL STUDIES I

Session 1D8 IMPROVING THE ASSESSMENT OF WATER RELATED HEALTHIMPACTS: A CASE STUDY FOR BATHING WATER IN PORTUGAL

Room 4 Fernando Machado (Universidade Católica Portuguensa), Susana Mourato(CSERGE, University College London)

One of the major environmental concerns in Portugal is the problem of water pollution. Bathingwater pollution is thought to be the cause of a wide range of health effects including gastrointestinaldiseases, skin problems, respiratory illnesses and eye or ear infections. Measuring the healthimpacts of water pollution from the point of view of the population at risk poses a number ofdifficulties as water pollution has a multiplicity of effects that may affect human welfare. Not onlyone’s own health may be at risk, but also the health of others, recreational possibilities, marine lifeand possibly a range of other values not related to any specific use. In addition there is theunresolved issue of whether the specific source of the health risk matters. This study presents acomprehensive analysis of the health impacts from bathing water pollution in the coast of Lisbonthat translates the existing epidemiological evidence into economic values. Using a four-way split-sample contingent valuation survey, the study tries to disentangle the public’s willingness to pay toavoid a number of individual ill-health symptoms and to avoid third party health effects from thetotal value of water quality improvements. In addition, the survey design permits an investigation ofthe extent to which contextual elements matter. Specifically, the study compares (i) both the WTPfor avoiding ill-health symptoms in general and for health symptoms specifically arising from waterpollution, (ii) the WTP for avoiding water related ill-health symptoms in polluted and non-pollutedsites and (iii) the WTP for a general improvement in bathing water quality elicited through bothtraditional valuation questions and contingent ranking experimental designs. With 1,500respondents, spread across different sub-samples, this study is the largest contingent valuationsurvey ever to be conducted in Portugal. The interviews were carried out during the Summer of1997. The resulting estimates show a remarkable consistence across health values in differentcontexts. On the contrary, general water values were found to be greatly influenced by theframework within which they were elicited with the payment mechanism being a strongdeterminant of the resulting estimates. The results shed some light on the methodologicalrequirements needed for accurate valuations of health in the water context.

REGIONAL STUDIES I

Session 1D8 FARMER'S WATER ASSOCIATION (FWA) IN GROUNDWATERMANAGEMENT: A STUDY IN THE NORTH - CHINA PLAIN

Room 4 Lubiao Zhang (Chinese Academy)

Transfer of irrigation management and maintenance from public agencies to water usersassociations and other forms of local management has been a global phenomena. Over the past twoyears, the North-China Plain has been transferring partial responsibility for managing irrigationschemes to farmers at a rapid pace. The experience has been judged a success by proponents,largely on the basis of the rapid rate of transfer. The study in the North-China Plain hasdemonstrated that FWAs are well capable of solving the problems of groundwater managementbeyond the state and the market. This locally-initiated irrigation management originated from theneeds for water of the farmers within the same aquifer or watershed. Their dependence ongroundwater for a sustainable livelihood brought the farmers together to form FWA to regulate jointuse, sustain yields, and exclude non-members. The definite geographical and social (clan) units ofvillage communities and traditional reciprocities are the foundation for cooperation amongst thewater users. The villagers were satisfied with the outcomes of water use under the common propertysystem, as they evaluate their satisfaction on the basis of sustainable livelihood security rather thanshort-term benefits. This paper will evaluate the performance outcomes of the water managementtransfer, to the extent that they are so far evident, in terms of system hydraulic and agriculturalperformance. It will also explore the motives of the national irrigation agency, Bureau of WaterResource(BWR), in undertaking the transfer program, the motives of farmers in taking onmanagerial responsibility between BWR and FWA, and the extent to which farmers' associationshave acquired actual control over the water resource in the short term. The conflicts encountered inimplementing water management transfer in the North-China Plain have been examined. Discussionand conclusions have been based on case studies undertaken in Hebei, Henan and ShandongProvinces.

REGIONAL STUDIES I

Session 1D8 THREATENED SPECIES AS PUBLIC GOOD AND PUBLIC BADS – ANAPPLICATION TO WILD PREDATORS IN SWEDEN

Room 4 Göran Bostedt (Swedish University of Agricultural Sciences)

This paper discusses Pareto efficient allocations of an environmental commodity, which is both apublic good and a public bad, with special reference to the Scandinavian problem of conservingwild predators that are killing semi-domesticated reindeer. The paper begins by outlining thisconflict. This is followed by a theoretical analysis employing a diagrammatic tool called the Kolmtriangle, which is an analogue of an Edgeworth box in an economy with a public good. Using asimple model, where one of the agents is involountarily contributing to a public good, incentives forbargaining, Pareto improving reallocations and the shape of the Pareto set are discussed. The paperconcludes with an analysis of income-loss compensations and the incentives for illegal hunting ofpredators.

Documents

ENVIRONMENT AND DEVELOPMENT I: DEFORESTATION · ENVIRONMENT AND DEVELOPMENT I: DEFORESTATION Session 1B1 CAN NEO-CLASSICAL ECONOMICS SAVE THE TROPICAL FORESTS? Room 6 R. K. Turner