A small but growing body of literature uses overlapping generations (OLG) models to study environmental policy for long-lived problems such as climate change. An OLG model, unlike the infinitely lived representative agent model, distinguishes between impatience with respect to one’s own future utility, and attitudes toward successors’ utility. I discuss the problem of time inconsistency, the role of Markov perfection, and show that a class of OLG models can be studied using methods developed to analyze models of non-constant discounting. An example illustrates the techniques and determines the conditions underwhich, in equilibrium, there is under-investment or over-investment in natural capital.
As nutrients and sediment in agricultural watersheds continue to degrade water quality, attention is increasingly given to reverse auctions to cost-effectively address these pollutants. Typically, reverse auctions include a selection process which depends on both the monetary bid and a ranking of the environmental benefit, where the latter is often approximated using simple models, such as the Universal Soil Loss Equation (USLE). When the environmental objective is to improve water quality, the cost-effectiveness of such ranking methods cannot always be assured since simple models may poorly approximate the effects on downstream water quality. In this paper, we introduce an alternative reverse auction approach that takes advantage of richer watershed process models and optimization tools that are now much more commonly available. This “improved” reverse auction allows decision-makers to better consider the cost-effective assignment of conservation practices and to address water quality or other environmental objectives. In a spatially detailed simulation, we demonstrate how this approach can improve the design of a reverse auction for the Raccoon River Watershed in Iowa, and estimate the potential gains from using the simulation-optimization approach relative to simpler ranking methods for selecting bids. We also point out that simple bid ranking schemes may not yield sufficient nutrient reductions to achieve water quality goals but bids are easily selected to achieve any feasible water quality improvement in the “improved” auction process.
Many countries are promoting biofuels as a substitute for scarce oil. This paper develops a dynamic model of land allocation between food and energy and shows how the model can be calibrated using standard optimization techniques. Some possible implications of the trade-offs between food and energy are discussed. Specifically, we show that the effect of mandates is mainly felt through increased land conversion, which increases indirect carbon emissions. Crude oil prices do not decrease significantly because of leakages.
One of the major adaptation mechanisms to climate change is increased demand for cooling via the air conditioning of indoor environments. China’s demand for air conditioners has displayed explosive growth since 1995. This paper provides estimates of the income and short run weather sensitivity of air conditioner adoption across urban areas for 29 Chinese provincial entities. We show that the adoption decision displays significant income and weather sensitivity in the short run, with adoption being higher the year following a hot summer.
We estimate the willingness to pay (WTP) of Beijing and Shanghai residents for improving the air quality of the two cities from their levels prior to the 2008 Beijing Olympic Games to the level achieved during the Olympics. The data are obtained from a contingent valuation study conducted through face-to-face interviews in June 2008 in Beijing and Shanghai prior to the Beijing Olympics, during which time there was intensive debate about Beijing’s air quality. Residents in both cities are willing to pay more when they are more exposed to air pollution, when their disposable income increases, and when they have stronger beliefs that public opinion plays an important role in government policy making. Beijing residents are willing to pay more than Shanghai residents, due possibly to Beijing’s poorer air quality. Overall, aggregate WTP for air quality improvement accounts for about 0.53% of the 2008 GDP in Beijing and 0.22% of the 2008 GDP in Shanghai.
Weak capacity to enforce regulations and sanction violators, and an emphasis on economic growth in developing countries has led to concerns about worsening environmental conditions and the potential for these countries becoming pollution havens for multinational corporations. International environmental standards, voluntary programs, and public disclosure programs have gained popularity because they engage market participants in providing incentives for self-regulation and have the potential to substitute for the lack of domestic regulatory capacity. This paper analyzes the motivations for firms to undertake voluntary environmental management and reviews the empirical evidence on the type of firms participating in such initiatives and their effectiveness in improving environmental performance. We also consider the special case of China that has witnessed dramatic globalization following its acceptance into the World Trade Organization and participation by its firms in global supply chains. We conclude with a discussion of the effectiveness of these efforts as a substitute for weak regulatory and civic society pressures in these countries.