Double-dipping in Environmental Markets under Two Second Best Scenarios

As policy makers explore the creation or modification of environmental markets for pollutants that have complementarities, they must take into account the way these complementarities affect the design and results of their policies. Given the attainment of several environmental outcomes from a single conservation practice, landowners could potentially be compensated in multiple markets that pay for environmental improvements. This concept of allowing payments stemming from a single action that has several benefits is known as double-dipping or stacking in the literature. The major contribution of this paper is to explicitly model the setup of prices and quantities under a second best setting and to subsequently compare a price policy allowing double-dipping to two policies: a quantities policy and a price policy prohibiting double-dipping. We aim at understanding when each of these policy designs is more efficient under two second-best scenarios. The first scenario we study is the case of two uncoordinated policy makers who do not take into account the other’s environmental program. The second scenario we study is when complementarity is ignored in the policy design. The paper points to specific market characteristics that favor one policy over the others, which further expands our understanding about the implications of allowing double-dipping in environmental markets.