Handbook of environmental economics, volume 1 environmental degradation and institutional responses

HANDBOOK OF ENVIRONMENTAL ECONOMICS
VOLUME 1


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HANDBOOK OF
ENVIRONMENTAL
ECONOMICS
VOLUME 1
ENVIRONMENTAL DEGRADATION
AND INSTITUTIONAL RESPONSES
Edited by

KARL-GÖRAN MÄLER
Swedish Academy of Sciences
and

JEFFREY R. VINCENT
University of California

2003
ELSEVIER
•

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First edition 2003
British Library Cataloguing in Publication Data
Handbook of environmental economics
Vol. 1: Environmental degradation and institutional
responses. - (Handbook in economics; 20)
1. Environmental economics
I. Mäler, Karl-Göran II. Vincent, Jeffrey R.
333.7
ISBN 0444500634
Library of Congress Cataloguing in Publication Data
A catalog record from the Library of Congress has been applied for.
ISBN: 0-444-50063-4
ISSN: 0169-7218 (Handbooks in Economics Series)
∞ The paper used

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Printed in The Netherlands.


INTRODUCTION TO THE SERIES

The aim of the Handbooks in Economics series is to produce Handbooks for various

branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer developments, from recent journal articles and discussion papers. Some original material is
also included, but the main goal is to provide comprehensive and accessible surveys.
The Handbooks are intended to provide not only useful reference volumes for professional collections but also possible supplementary readings for advanced courses for
graduate students in economics.
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PUBLISHER’S NOTE
For a complete overview of the Handbooks in Economics Series, please refer to the
listing at the end of this volume.

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CONTENTS OF THE HANDBOOK

VOLUME 1
Perspectives on Environmental Economics
Chapter 1
Geophysical and Geochemical Aspects of Environmental Degradation
BERT BOLIN
Chapter 2
Ecosystem Dynamics
SIMON A. LEVIN and STEPHEN W. PACALA

Chapter 3
Property Rights, Public Goods and the Environment
DAVID A. STARRETT
Chapter 4
Economics of Common Property Management Regimes
JEAN-MARIE BALAND and JEAN-PHILIPPE PLATTEAU
Chapter 5
Population, Poverty, and the Natural Environment
PARTHA DASGUPTA
Chapter 6
The Theory of Pollution Policy
GLORIA E. HELFAND, PETER BERCK and TIM MAULL
Chapter 7
Mechanism Design for the Environment
SANDEEP BALIGA and ERIC MASKIN
Chapter 8
The Political Economy of Environmental Policy
WALLACE E. OATES and PAUL R. PORTNEY
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Contents of the Handbook

Chapter 9
Experience with Market-Based Environmental Policy Instruments
ROBERT N. STAVINS
Chapter 10
Experimental Evaluations of Policy Instruments

PETER BOHM
Chapter 11
Technological Change and the Environment
ADAM B. JAFFE, RICHARD G. NEWELL and ROBERT N. STAVINS


DEDICATION

Allen Kneese
If anyone should be called the founding father of environmental economics, it must be
Allen Kneese. He was a pioneer as a researcher, and he was a pioneer as a research
organizer. He inspired a vast number of younger environmental economists. His studies
of water issues in the 1960s induced many, including one of the editors of this handbook,
to look at environmental problems through the eyes of an economist. His enduring fight
for the use of economic instruments in environmental policy had impacts even outside
his own country. He was the first to recognize the need for economists to learn from
other disciplines – physics, hydrology, ecology, political science – in order to enable us
to produce good and relevant policy recommendations. Allen was an editor of the NorthHolland Handbook of Natural Resource and Energy Economics. He had promised to
write an essay describing his personal perspective on the evolution of environmental
economics for this handbook. Unfortunately for all of us, he passed away after a long
illness. We dedicate these volumes to his memory.

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PREFACE TO THE HANDBOOK

Elsevier published a 3-volume Handbook of Natural Resource and Energy Economics
in 1985 (the first two volumes) and 1993 (the third volume). Why is it now publishing
a 3-volume Handbook of Environmental Economics? Is it not true that economic development in Europe and North America during the last thirty years has proved that there
is no resource scarcity? After all, prices of minerals have not increased (in real terms),
despite the enormous economic expansion that has occurred in these regions. Moreover,
air quality has improved substantially in Europe and North America. Are not all environmental problems solved? Many “experts” argue that this is the case, and if they were
right, there would be no need for a new handbook!
However, here there is a paradox. On the one hand aggregate data seem to indicate
that we have overcome most environmental problems. On the other hand, if we look at
a micro level, it is easy to find contrary evidence.
Most environmental problems share the following two characteristics: they are intertemporal, and they are local. Soil erosion may cause severe economic losses in the
future, but a long time might pass before the soil is so much eroded that its productivity is affected. And when its productivity is affected, the economic damage will fall
primarily on the nearby village of farmers and might be barely felt on a national or international level. Thus, there will be no sign of economic damage until later, and because
of the lack of appropriate information and the lack of appropriate property rights, there
will be no immediate impacts on agricultural products and their prices.
This parable about soil erosion possibly applies to most environmental problems,
which are often invisible unless we look for them. Human-induced climate change is a
case in point. Without knowledge of thermodynamics, humans would not have launched
the research that uncovered empirical evidence of global warming.
Of course, there are examples of continued environmental deterioration at the aggregate level. Global climate change is perhaps the most dramatic one. Another is the depletion of the world’s marine fisheries. But some problems, e.g., biodiversity, are mainly
analysed and discussed from a global perspective when the real problem is arguably on a
local level. Reduction of biodiversity implies a reduction in ecological resilience, which
increases the risk that local human communities will lose essential ecosystem services.
These points are relevant for both rich and poor countries, but if we focus our interest
on the poor countries, the magnitude of welfare losses due to environmental degradation
is even greater. Urban pollution, soil erosion, reduction both in the quality and quantity
of potable water, etc. are the rule, not the exception, in these countries.
Economics, which is about the management of scarce resources, offers the tools
needed for a rational analysis of environmental problems. The rapid development of
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economic theory and methods as applied to the environment is the first reason a new
handbook is needed. Several chapters in the earlier Elsevier handbook are outdated.
The most obvious example pertains to valuation methods, which economists use to measure environmental changes in monetary terms. The Handbook of Natural Resource and
Energy Economics had two chapters on valuation, one on theory and one on methods
applicable to recreation demand. In contrast, and as a consequence of the explosion of
valuation research since the 1980s, the new handbook devotes an entire volume, Volume 3, “Valuing Environmental Changes”, to valuation theory and methods. Valuation
research has extended into areas, such as experimental economics, that were scarcely
imagined in 1985.
Another example is market-based instruments for controlling pollution. An influential chapter by Peter Bohm and Clifford Russell in the earlier handbook made the case
for using economic principles to guide the design of pollution policies. Although examples of economic approaches for controlling pollution, such as effluent charges and
emissions trading programs, existed in the 1980s, they were so few and so new that experience with them could barely be evaluated. Now, many countries have experimented
with pollution charges of various types, and at least one (the United States) has created
emissions trading programs at the national level. Economists have analysed the experience with these programs, and the new handbook presents the lessons of their research.
The more important reason for the new handbook, however, is the emergence of entirely new lines of research that either did not exist 10–20 years ago or were so sparsely
investigated as to preclude chapter-length reviews. Economic research on the environment today includes much more than studies that estimate the value of particular nonmarket environment goods or the cost-effectiveness of particular pollution control instruments.
Some of the new research is new because it applies microeconomic theory much more
carefully to understand institutional aspects of environmental management (or mismanagement). Volume 1 of this handbook, “Environmental Degradation and Institutional
Responses”, presents much of the new research in this area, especially as it applies
to environmental degradation at a local level. It includes chapters on common property
management regimes; population, poverty, and the environment; mechanism design and
the environment; and experimental evaluations of environmental policy instruments –
chapters that have no counterparts in the earlier handbook.
Other research is new because it examines environmental externalities and public
goods at larger economic scales: an entire national economy, several countries in a given

region, or all the countries of the world. Volume 2, “Economywide and International Environmental Issues”, summarizes advances in this area. New areas of research that are
covered in it include environmental policy in a second-best economy (the “double dividend” literature), empirical studies on economic growth and the environment (the “environmental Kuznets curve” literature), national income accounts and the environment,
international trade and the environment, and international environmental agreements.
One chapter in the Volume 3 of the earlier handbook touched on environmental applica-


Preface to the Handbook

xiii

tions of computable general equilibrium models and the economics of climate change,
but both topics receive much more extensive coverage in Volume 2 of this handbook.
Due to the expansion of economic research on the environment, in one sense the
scope of this handbook is, ironically, narrower than that of its predecessor. This difference is signalled by the change in title: the Handbook of Environmental Economics, not
volumes 4–6 of the Handbook of Natural Resource and Energy Economics. Unlike the
earlier handbook, this handbook does not include chapters on the supply of and demand
for energy resources, minerals, timber, fish, and other commercial natural resources.
Instead, this handbook focuses on environmental goods and services that, due to property rights failures stemming from externalities and public goods, are not allocated efficiently by markets. Indeed, these environmental resources often lack markets altogether.
They include air and water quality, hydrological functions of forests and wetlands, soil
stability and fertility, the genetic diversity of wild species, natural areas used for recreation, and numerous others. They are in principle renewable, but in practice they are
often subject to excessive degradation and depletion, sometimes to an irreversible degree.
Commercial natural resources appear in this new handbook only in an incidental
way. For example, the development of comprehensive measures of national income and
wealth requires consideration of all forms of capital, including all forms of natural capital. So, the chapter on national accounts and the environment discusses adjustments to
conventional measures of national income and wealth for not only the degradation of
environmental quality but also the depletion of stocks of commercial natural resources.
Commercial extraction and utilization of natural resources are also sources of many of
the environmental externalities discussed throughout the handbook. A prime example
is damage from emissions of greenhouse gases, which are released primarily by the
burning of fossil fuels.

For these reasons, this handbook is best regarded as a complement to the Handbook
of Natural Resource and Energy Economics, not a replacement for it. This handbook is
intended to be an updated reference on environmental economics, not natural resource
economics.
This handbook does share two important features with the earlier one, which we have
attempted to accentuate. First, both handbooks draw upon research conducted by not
only economists but also natural and social scientists in other disciplines. The chapters
in this handbook on common property management regimes and population, poverty,
and the environment draw extensively on the anthropological literature, while the chapter on political economy of environmental policy draws on studies by political scientists
and legal scholars. Some chapters in this handbook are written by noneconomists, from
the earth sciences, ecology, and psychology. External reviewers of chapter drafts were
drawn from an even broader range of disciplines.
Second, both handbooks emphasize dynamic considerations. Natural resource economics is inherently about efficient allocations over time, but many textbooks present
environmental economics in an entirely static context: the valuation of current use
of an environmental resource, or the short-run cost-effectiveness of market-based in-


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struments compared to command-and-control instruments. In fact, environmental economics, properly done, must consider several dynamic issues, which the chapters in this
handbook highlight.
One is the dynamics of natural systems. The build-up of greenhouse gases in the atmosphere reminds us that pollution involves stocks as well as flows. The same is true
for environmental resources other than air quality. Research by natural scientists has
revealed that the dynamics of natural systems can be far from continuous and smooth;
they can be nonlinear, complex, and chaotic, subject to abrupt and irreversible (or effectively irreversible) “flips” from one state to another. The first two chapters in Volume 1
highlight the dynamics of natural systems, which economists ignore at the risk of constructing economic models with feet of clay. These chapters complement the excellent
chapter on dynamics of natural resources by James Wilen in the earlier handbook.
A second dynamic consideration follows immediately from the stock nature of environmental resources: optimal management of environmental resources is no less intertemporal than the optimal management of commercial natural resources. Indeed, the

time frame for economic studies of climate change is much longer – centuries instead
of decades – than the time frame typically considered in studies on the optimal management of mineral reserves or timber stocks. Hence, although the same questions arise –
what welfare function should we use? what discount rate? – answering these questions
is harder and more consequential. Several chapters in Volume 2 address these dynamic
welfare issues.
Third, a static perspective could cause environmental economists to overlook important impacts of environmental regulations on technological change – and the impact
of environmental degradation on empirical estimates of rates of technological change.
Chapters in this handbook address these issues. In particular, a chapter in Volume 1
looks exclusively at the impacts of environmental regulations on technological change.
This issue was treated only in passing in the earlier handbook.
A final important dynamic area concerns institutional evolution. Like other fields of
economics, environmental economics has been heavily influenced by the “New Institutional Economics”. Several chapters in both Volumes 1 and 2 of this handbook examine
the forces that shape institutional responses to environmental change at local, national,
and international scales. Interactions with fertility decisions are especially important at
a local level, and so this handbook contains a chapter on population, poverty, and the
environment.
Having noted above a way in which the scope of this handbook is narrower than that
of its predecessor, we conclude by noting a way that it is broader. The Handbook of
Environmental Economics places more emphasis on the application of economics to environmental policy issues in developing countries. Environmental economics was born
and raised in universities and research institutes in rich, industrialized countries with
well-developed political, legal, and market institutions. Most people in the world live in
very different circumstances: poverty, restricted civil and political liberties, and traditional property rights that are backed up only weakly, if at all, by the legal system. By


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xv

and large, they also live in more degraded natural surroundings – which, as economists
might surmise, is no coincidence.

We believe environmental economics can play an especially important role in improving the welfare of this destitute majority. Environmental economists know more
about institutional failures than do most economists, so the resources of their discipline
should be especially valuable when directed toward the problems of poor countries. For
this reason, we commissioned for this handbook chapters specifically on developing
country issues. We also asked the authors of all the other chapters to search for examples of studies on developing countries.
The authors were helped by the fact that an increasing share of the pages of leading
field journals like the Journal of Environmental Economics and Management, Environmental and Resource Economics, Land Economics, and Resource and Energy Economics are occupied by articles based on studies conducted in developing countries, and
by the relatively recent launch of a new journal, Environment and Development Economics, that provides an outlet specifically for such research. We find it heartening that
most development economics textbooks – and the latest volume of the North-Holland
Handbook of Development Economics – now include chapters on the environment, and
that most environmental economics textbooks now include chapters on the developing
world. We hope the Handbook of Environmental Economics will accelerate this integration of development and environmental economics.
In drawing attention to the relevance and significance of environmental economics to
developing countries, we are also confirming the prescience of Allen Kneese, who was
one of the editors of the Handbook of Natural Resource and Energy Economics. More
than a decade before the Brundtland Commission popularised the phrase “sustainable
development”, Allen published a paper with Robert Ayres titled “The sustainable economy” (Frontiers in Social Thought – Essays in Honor of Kenneth E. Boulding, Elsevier
Science Publishers, 1976). To our knowledge, this paper was the first in the environmental economics literature to include the word “sustainable” in its title, and one of the
first to examine the differences between developed and developing countries. As in so
many other ways, Allen was a pioneer.

Acknowledgements
Our greatest thanks go to Christina Leijonhufvud, without whose administrative support
the handbook project would have foundered. Anna Sjöström stepped in and solved multiple problems related to the figures for one of the chapters. Benjamin Vincent relieved
much of the tedious work related to indexing the chapters.
Our institutions – the Beijer Institute of Ecological Economics (Mäler) and the Harvard Institute for International Development, Kennedy School of Government, and
Graduate School of International Relations & Pacific Studies at the University of California, San Diego (Vincent) – provided congenial and supportive bases of operation.


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Finally, a series of diligent external reviewers – Jack Caldwell, Steve Carpenter, Bill
Clark, Larry Goulder, Ted Groves, Daniel Kahneman, Charles Plott, Stef Proost, Steve
Schneider, Brian Walker, Jörgen Weibull – helped ensure the relevance, comprehensiveness, and accuracy of the material presented in the chapters. Any shortcomings that
remain are, of course, our responsibility.
KARL-GÖRAN MÄLER and JEFFREY R. VINCENT
Stockholm, September 17, 2002


CONTENTS OF VOLUME 1

Introduction to the Series

v

Contents of the Handbook

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Dedication

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Preface to the Handbook

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Perspectives on Environmental Economics

1

Chapter 1
Geophysical and Geochemical Aspects of Environmental Degradation
BERT BOLIN
Abstract
Keywords
1. Introduction
2. The environmental system
2.1. Key characteristics
2.2. Complexity and uncertainty
2.3. A few principal considerations

3. Air quality and air pollution
3.1. Atmospheric composition
3.2. Structure and mixing of the atmosphere
3.3. The fundamental role of water vapor in the atmosphere
3.4. Human-induced changes of atmospheric composition, air pollution
3.5. An integrated approach to the air pollution problem

4. Depletion of the ozone layer
4.1. The natural distribution of ozone in the stratosphere
4.2. Human impacts on the stratospheric ozone layer
4.3. Measures to protect the ozone layer against destruction

5. Water pollution and water management
5.1. The global hydrological cycle
5.2. The human need for water
5.3. Floods and droughts

5.4. Water quality
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6. Acidification of fresh waters and soils
6.1. The basic issue
6.2. The present global status
6.3. Preventive actions

7. Climate change and global warming
7.1. The heat balance of the Earth
7.2. Past changes of the global climate
7.3. Key biogeochemical features of the climate system
7.4. Has the recent climate change been caused by human activities?
7.5. Expected future changes of the global climate

8. Environmental stresses and sustainability
References
Chapter 2
Ecosystem Dynamics
SIMON A. LEVIN and STEPHEN W. PACALA
Abstract
Keywords
1. Introduction
2. The nature of communities and ecosystems
3. Terrestrial ecosystem patterns
Climate and vegetation: Laminar flow in a turbulent ecological matrix
Climate and biomes
Primary production and climate
Models of ecosystem physiology

4. Ecosystem assembly

Succession
Spatial scale and biodiversity
Forest simulation models

5. Ecosystems as self-organizing systems
Population dynamics
System “flips”

6. Biodiversity and ecosystem functioning, and relations to ecosystem services
Biodiversity and ecosystem functioning
Measurement of biodiversity
Valuing biodiversity

7. Linkages to global biogeochemical cycling: The global carbon cycle
A model of carbon dynamics

8. The evolution of interactions and ecosystems, and the maintenance of ecosystem services: From Darwin to Gaia
Acknowledgements
References

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Chapter 3
Property Rights, Public Goods and the Environment
DAVID A. STARRETT
Abstract
Keywords
1. Introduction
2. Taxonomy of property rights
3. Scope and limitations of private property
3.1. The problem of open access
3.2. Potential conflict with equity

4. Publicness and the need for collective rights
5. Outcomes under decentralized decision making
5.1. Static interaction
5.2. Repeated interactions through time

6. The Coase theorem and limitations
6.1. Costless communications and implementation
6.2. Commitment requirement
6.3. Perfect information requirement

7. Methods and rules for managing collective property rights
7.1. Self-organizing systems
7.2. Correction for externality

8. Conclusions
References

Chapter 4
Economics of Common Property Management Regimes
JEAN-MARIE BALAND and JEAN-PHILIPPE PLATTEAU
Abstract
Keywords
1. Introduction
1.1. Motivation and outline of the chapter
1.2. Common property management regime
1.3. Methodological considerations
1.4. Two polar cases: Collective regulation is doomed or indispensable

2. Simple models of non-cooperative behavior and some implications for
cooperative behavior
2.1. The first model: The appropriation problem
2.2. The second model: Voluntary contributions to a pure public good
2.3. The third model: Voluntary contributions to a common good
2.4. Variants of the third model
2.5. Some lessons of the non-cooperative framework for collective regulation

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3. Impediments to the design and implementation of efficient common
property management systems
3.1. Information on resource characteristics
3.2. The state as a major actor

4. Conclusions
4.1. Incentive systems, decentralization, and co-management
4.2. Summary of the main points

Acknowledgements
Appendix. The endogeneity problem in collective action studies
References
Chapter 5
Population, Poverty, and the Natural Environment
PARTHA DASGUPTA
Abstract
Keywords
Prologue
1. Plan of the chapter
2. Framing links between population, resources, and welfare
2.1. Demography and economic stress in environmental and resource economics
2.2. Population and resources in modern growth theories
2.3. Population and resource stress in development economics

3. Why the neglect?
3.1. Isolated households
3.2. Cross-country statistics on the effects of population growth on the standard of living

3.3. Global statistics on living standards
3.4. Negative cross-country link between income and fertility

4. Why the neglect is wrong
4.1. GNP per head and environmental quality
4.2. GNP growth versus wealth accumulation
4.3. Weak link between income and fertility within poor countries
4.4. Aggregation can mislead

5. Population, poverty, and natural resources: Local interactions
6. Education and birth control
6.1. Women’s education and fertility behavior
6.2. Family planning

7. The household and gender relations
8. Motives for procreation
9. Reproductive and environmental externalities
9.1. Cost-sharing
9.2. Conformity and “contagion”
9.3. Interactions among institutions
9.4. Household labour needs and the local commons

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10. Institutional reforms and policies
Acknowledgements
Appendix. The village commons and household size
A.1. The single household
A.2. Social equilibrium
A.3. The optimum village
A.4. The effect of increased resource scarcity

References
Chapter 6
The Theory of Pollution Policy
GLORIA E. HELFAND, PETER BERCK and TIM MAULL
Abstract
Keywords
Introduction
1. A simple model with a Pigouvian tax
2. The effluent-generating process
2.1. The physical science of polluting
2.2. The economics of polluting

3. Economic reasons for excess effluent
3.1. Property rights and Coase
3.2. Public goods

4. The damage function
4.1. Multiple individuals damaged by pollution
4.2. Multiple effluents and ambient quality
4.3. Effluent transport and spatial heterogeneity in ambient quality
4.4. Effluent disposal in multiple media
4.5. Damage avoidance

5. The objective function
5.1. Monetary measures of damage
5.2. Health-based standards
5.3. Cost-effectiveness: least cost achievement of a policy target
5.4. Political goals
5.5. Distribution and environmental justice
5.6. Nonconvexities
5.7. Dynamic considerations in pollution control
5.8. Summary

6. Alternative regulatory instruments
6.1. Non-tax instruments applied to effluent
6.2. Distributional effects of instruments applied to effluent
6.3. Regulatory instruments applied to goods other than effluent
6.4. General-equilibrium effects of pollution policies

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7. Imperfect information
7.1. Uncertainty about the benefits and costs of pollution control
7.2. Control of nonpoint pollution sources
7.3. Imperfect monitoring and enforcement

8. Non-regulatory strategies
8.1. Voluntary programs
8.2. Using courts to enforce rights

9. Conclusion
Acknowledgements
References
Chapter 7
Mechanism Design for the Environment
SANDEEP BALIGA and ERIC MASKIN
Abstract
Keywords
1. Introduction
2. The model

3. Complete information
3.1. Nash implementation
3.2. Other notions of implementation

4. Incomplete information
4.1. Dominant strategies
4.2. Bayesian equilibrium

Acknowledgements
References
Chapter 8
The Political Economy of Environmental Policy
WALLACE E. OATES and PAUL R. PORTNEY
Abstract
Keywords
1. On theories of regulation: Some preliminaries
2. On the empirical study of the political economy of environmental regulation:
A few more preliminaries
3. Toward a positive theory of environmental regulation
3.1. The early literature
3.2. The theory of interest groups and environmental outcomes
3.3. The range and interaction of environmental interest groups

4. Empirical studies of the political economy of environmental protection

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Contents of Volume 1

5. Environmental federalism
5.1. The assignment of environmental management to different levels of government
5.2. The issue of a “race to the bottom”
5.3. Environmental federalism in practice: Some evidence

6. Concluding observations on some recent trends
Acknowledgements
References
Chapter 9
Experience with Market-Based Environmental Policy Instruments
ROBERT N. STAVINS
Abstract
Keywords
1. What are market-based policy instruments?
1.1. Definition
1.2. Characteristics of market-based policy instruments
1.3. Categories of market-based instruments
1.4. Scope of the Chapter

2. Charge systems
2.1. Effluent charges
2.2. Deposit-refund systems
2.3. User charges
2.4. Insurance premium taxes
2.5. Sales taxes
2.6. Administrative charges

2.7. Tax differentiation

3. Tradeable permit systems
3.1. Credit programs
3.2. Cap-and-trade programs

4. Reducing market frictions
4.1. Market creation for inputs/outputs associated with environmental quality
4.2. Liability rules
4.3. Information programs

5. Reducing government subsidies
6. Lessons that emerge from experience
6.1. Lessons for design and implementation
6.2. Lessons for analysis
6.3. Lessons for identifying new applications
6.4. Conclusion

Acknowledgements
References

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Contents of Volume 1

Chapter 10
Experimental Evaluations of Policy Instruments
PETER BOHM
Abstract
Keywords
Introduction
1. Property-rights allocation as an instrument to eliminate the need for
environmental policy
2. Comparing environmental policy options
3. Testing designs of emissions trading
3.1. The EPA auction mechanism
3.2. Electric bulletin board trading vs. double auctions
3.3. Implications of futures markets for permits and permit banking

4. Market power and domestic emissions trading
4.1. Market power and double auctions
4.2. Market power in vertical markets

5. Experiments with international emissions trading
5.1. Gains from international emissions trading
5.2. Comparing bilateral trading and double auction
5.3. Market power in international emissions trading

5.4. Attracting countries to participate in international emissions trading

6. Concluding remarks
Acknowledgements
References
Chapter 11
Technological Change and the Environment
ADAM B. JAFFE, RICHARD G. NEWELL and ROBERT N. STAVINS
Abstract
Keywords
1. Introduction
2. Fundamental concepts in the economics of technological change
2.1. Schumpeter and the gale of creative destruction
2.2. Production functions, productivity growth, and biased technological change
2.3. Technological change and endogenous economic growth

3. Invention and innovation
3.1. The induced innovation approach
3.2. Effects of instrument choice on invention and innovation
3.3. Induced innovation and optimal environmental policy
3.4. The evolutionary approach to innovation

4. Diffusion
4.1. Microeconomics of diffusion
4.2. Diffusion of green technology

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