Do we really want payments for environmental services to be "additional"?
"Additionality" is big piece of jargon floating around in the academic/government literature on "payments for environmental services," or PES. Sadly, I think this word may be getting in the way of clear thinking about environmental policy.
The idea behind PES is basically the opposite of a pollution tax. The idea is to subsidize activities with positive externalities (like "environmental services") instead of or in addition to taxing negative externalities like pollution. So, we can pay people to plant forests to sequester carbon from the atmosphere and/or tax people who burn carbon-based fuels or cut down forests and thus emit CO2.
The idea behind additionality is that payments for new, carbon sequestering forests should be directed only at those who wouldn't have planted forests anyway, that are "additional." That sounds fair. But it also sounds impossible. After all, the whole idea behind pricing schemes, like PES, is to decentralize decision making to allow the most efficient way of achieving any given level of atmospheric carbon, or other environmental outcome. An efficient scheme just puts the right price on each unit of carbon, regardless of source.
The point is that we can't put a "price" on environmental services and enforce "additionality" at the same time. A ton of carbon is a ton of carbon. We cannot tell what it cost someone to provide it. So someone plants a tree in their back yard because they want the shade it provides. Suppose they also collect a payment for the carbon that tree sequesters. How can we know that they would have planted the tree anyway? Obviously, we can't. But that in no way affects the optimal policy.
Consider the converse: Should we only tax pollution that is non-additional? If so, how the heck would we do that?
The strange thing about additionality is that it's a concept that can only be implemented with perfect information. It would be much like a perfectly price-discriminating monopolist. If we want to go there, there's really no point to a pricing scheme at all, since the mechanism would effectively centralize all decision making by assigning individual-specific activities and compensation levels.
The idea behind PES is basically the opposite of a pollution tax. The idea is to subsidize activities with positive externalities (like "environmental services") instead of or in addition to taxing negative externalities like pollution. So, we can pay people to plant forests to sequester carbon from the atmosphere and/or tax people who burn carbon-based fuels or cut down forests and thus emit CO2.
The idea behind additionality is that payments for new, carbon sequestering forests should be directed only at those who wouldn't have planted forests anyway, that are "additional." That sounds fair. But it also sounds impossible. After all, the whole idea behind pricing schemes, like PES, is to decentralize decision making to allow the most efficient way of achieving any given level of atmospheric carbon, or other environmental outcome. An efficient scheme just puts the right price on each unit of carbon, regardless of source.
The point is that we can't put a "price" on environmental services and enforce "additionality" at the same time. A ton of carbon is a ton of carbon. We cannot tell what it cost someone to provide it. So someone plants a tree in their back yard because they want the shade it provides. Suppose they also collect a payment for the carbon that tree sequesters. How can we know that they would have planted the tree anyway? Obviously, we can't. But that in no way affects the optimal policy.
Consider the converse: Should we only tax pollution that is non-additional? If so, how the heck would we do that?
The strange thing about additionality is that it's a concept that can only be implemented with perfect information. It would be much like a perfectly price-discriminating monopolist. If we want to go there, there's really no point to a pricing scheme at all, since the mechanism would effectively centralize all decision making by assigning individual-specific activities and compensation levels.
There is another issue present in many discussions of additionality: the existence of a capped (regulated) sector and an unregulated sector. Some papers by JP Montero in the context of SO2 trades show that if there is hidden information about counterfactual pollution in the unregulated sector, the additionality problem can lead to social welfare loss.
ReplyDeleteThis occurs since the unregulated firms who would have low emissions anyway have a stronger incentive to sign up to sell the offsets. If this happens you don't get much reduction in the capped sector (since they buy offsets) and little reduction in the uncapped sector (since many 'reductions' are only so on paper, not in fact).
This is a potential problem with nutrient trading. Consider a case in which regulated point sources are allowed to buy offsets from unregulated agriculture. If the purchased offsets are not additional, water quality will deteriorate relative to the case in which offsets are not allowed.