A contingent valuation study measured citizen willingness to pay (WTP) for an improvement in surface water quality in Latvia. The average respondent was willing to pay 0.7 per cent of household income for the environmental improvement, but that amount was much less than needed to finance the required investments in treatment facilities. While the income elasticity of WTP for the average resident was low (0.56), it increases as income increases, reaching 0.9 at an income level double the current average. As real incomes increase in Latvia, the demand for environmental quality by citizens can be expected to increase substantially.

Ferraro and Simpson (2002) argue that when markets are competitive, payments for environmental services (PES) are more cost-effective in achieving environmental goals than more indirect approaches such as subsidies to capital. However, when eco-entrepreneurs face non-price rationing in input or output markets, as is typical for credit in developing countries for example, we show that interventions which relax constraints can be more cost-effective than PES. One corollary of this is that such indirect approaches are preferred to PES by interveners (e.g., donors) and eco-entrepreneurs alike. Both of these outcomes are more likely when constraints are severe. This has implications for schemes with dual environment and poverty alleviation objectives.

Traditional cost-benefit analyses (CBAs) of flood risk reduction measures usually ignore distributions of damages over populations, which disadvantages the poor. Instead, a CBA based on social welfare includes individual social vulnerability through relative impacts on consumption. If vulnerabilities are high, floods are catastrophic and cause poverty, migration or indirect deaths, and risk reductions have high social welfare values. For non-catastrophic risks, social welfare values of risks are relatively higher for vulnerable low-income households. We present a framework to integrate social vulnerability into CBAs, and show how financial protection reduces social flood vulnerability and provides welfare benefits. A case study illustrates that traditional CBAs underestimate the social welfare value of flood risk reduction measures, up to a factor of 30. Data on financial protection is however scarce, which hampers estimation of the social welfare value in practice. A solution is to increase financial protection of individuals, in addition to offering physical flood protection.

This paper analyzes the optimal mix of adaptation and mitigation expenditures in a cost-effective setting, in which countries cooperate to achieve a long-term stabilization target (550 CO2-eq). It uses an Integrated Assessment Model (AD-WITCH) that describes the relationships between different adaptation modes (reactive and anticipatory), mitigation and capacity building to analyze the optimal portfolio of adaptation measures. Results show that the optimal intertemporal distribution of climate policy measures is characterized by early investments in mitigation followed by large adaptation expenditures a few decades later. Hence, the possibility of adapting does not justify postponing mitigation. Moreover, a climate change policy combining mitigation and adaptation is less costly than mitigation alone. In this sense mitigation and adaptation are shown to be strategic complements rather than mutually exclusive.

Traditional grazing grounds near Amboseli National Park (Kenya) are being rapidly converted to cropland – a process that closes important wildlife corridors. We use a spatially explicit simulation model that integrates ecosystem dynamics and pastoral decision-making to explore the scope for introducing a ‘payments for ecosystem services’ scheme to compensate pastoralists for spillover benefits associated with forms of land use that are compatible with wildlife conservation. Our break-even cost analysis suggests that the benefits of such a scheme likely exceed its costs for a large part of the study area, but that ‘leakage effects’ through excessive stocking rates warrant close scrutiny.

International climate negotiations have specified that projects under the Clean Development Mechanism (CDM) should not lead to a ‘diversion’ of official development assistance (ODA). It is however unchallenged that ODA can be used in capacity building for the CDM. Diversion can be interpreted in purpose, sectoral, and regional terms. There are possibilities to use ODA benchmarks to define diversion such as the UN 0.7 per cent target but they are unlikely to be politically acceptable. On the project level, three main options exist but none of them is perfect. The Development Assistance Committee of OECD endorses deduction of the value of emissions credits (CERs) from ODA. This however leads to a long-term pressure on the ODA level. Differentiating an ODA-financed baseline project and a ‘piggyback’ CDM option is likely to be arbitrary in many circumstances. Even if CERs do not accrue for the ODA share of the investment, still private CDM projects are crowded out due to the subsidizing of CDM projects.

The paper considers the transition of an economy from non-renewable to renewable energy. We set up a canonical growth model with damages in the household's welfare function and two energy sources – non-renewable and renewable energy. To produce renewable energy a capital stock must be built up. A socially optimal solution is considered that takes into account the negative externality from the non-renewable energy. We also study how the optimal solution can be mimicked in a market economy by policies using subsidies and tax rates. To solve the model numerically, we use Nonlinear Model Predictive Control. We study when a transition to renewable energy takes place and whether it occurs before the non-renewable resource is exhausted. In addition, we analyze the impact of the initial values of the non-renewable resource and of the capital stock on the time of paths of the variables.

This paper measures the impact of climate on Mexican agriculture using a Ricardian analysis. The analysis relies on economic data from 621 individual farms that were collected in 2002. Data on climate, elevation, soils, and distance to nearest city were matched with each farm. The analysis reveals that farmland values in Mexico are sensitive to climate. On average, warmer temperatures reduce land value by 4,000 to 6,000 pesos per degree Celsius. Examining three climate scenarios for 2100, the models predict average losses of between −42% to −54% of land value in Mexico. As a percent of income, rainfed farms will suffer slightly larger damages than irrigated farms but comparisons between small and large farms are mixed.

Water scarcity is a constraint on economic activity in many regions, and improving the allocation of water is an important part of the process of economic development. Economists have advocated water markets as a way to increase efficiency and to cope with environmental problems. Unfortunately, actual water markets, including those in developed countries, usually fall far short of this ideal. The paper considers the allocation of water by markets that are only imperfectly developed, in which prices are not publicly known and in which there is no centralized trading location. These limitations impose transaction costs on buyers and sellers, that is costs associated with completing a transaction. A conceptual model of the effect of transaction costs on trading patterns is developed. Stylized results are tested using data from an informal water market in California. The paper concludes with a description of the importance of transaction costs, comments on the transition to more formal water markets, and policy recommendations.

This paper, based on a computable general equilibrium model of the Indian economy, shows that a domestic carbon tax policy that recycles carbon tax revenues to households imposes heavy costs in terms of lower economic growth and higher poverty. However, the decline in economic growth and rise in poverty can be minimized if the emissions restriction target is modest, and carbon tax revenues are transferred exclusively to the poor. India's participation in an internationally tradable emission permits regime with grandfathered emissions allocation is preferable to any domestic carbon tax option, provided the world market price of emission permits remains low. Even better would be if India participated in a global system of tradable emission permits with equal per capita emission entitlements. India would then be able to use the revenues garnered from the sale of surplus permits to speed up its economic growth and poverty reduction and yet keep its per capita emissions below the 1990 per capita global emissions level.

Identifying a demand function for air quality is a key input to calculate welfare measurements of pollution abatement policies. We defined intra-urban housing submarkets to apply a Second Stage hedonic pricing model that allowed us to identify an inverse demand function for PM10 reductions in Bogotá. The monthly benefits of compliance with the U.S. Environmental Protection Agency standard (50 μg/m3 – annual average), and the far more stringent World Health Organization standard (20 μg/m3 – annual average) are valued at US$12.16 and US$189.64 per household, respectively. These values, in turn, represent about 1.35 per cent and 21.04 per cent of the average household income. The hedonic model applied hereby shows that intra-urban housing submarkets are suitable for the identification of a demand function to be used by policy makers interested in evaluating non-marginal benefits (costs) from air quality improvements (deterioration).

The development literature has devoted considerable attention to the commons and has ignored the wider economic context of the commons. I develop a model of two kinds of agents (naïve and sophisticated) using two kinds of assets (safe and unsafe) to illustrate the possibility of resource degradation in the commons in the absence of free riding, shirking, and general theft among members of the village and its associated commons. This model makes it possible to understand that degradation of the commons arises from factors outside of the commons rather than arising from ‘perverse’ property rights and selfish behavior within the commons. This approach suggests a needed reformulation of development assistance away from prescriptions for the commons. Instead, development assistance must be refocused on the more serious challenge of institutional incoherence in the larger economy of which the village and its commons are but a part.

During the last 20 years, the mining sector in Peru has been experiencing sustained growth. Using census, administrative, nationally and regionally representative data we compare districts in the Peruvian Highlands with a recent mining development with suitable counterfactuals. We find that the new mining activities attract migration inflows, and have some positive effects over educational indicators, and that these impacts, on average, are smaller in districts with lower levels of corporate social expenditure. However, the results of this study suggest that the local potential welfare impact of the mining boom is largely untapped and corporate social responsibility has had a limited role in improving this effect.

This paper analyzes the economy-wide gains obtainable from the allocation of surface irrigation water to its most productive use, and evaluates a decentralized mechanism for achieving this result in a spatially heterogeneous environment. The focus country for the analysis is Morocco. The analysis is based on a general equilibrium model that, in addition to the rest of the economy, captures 82 agricultural production activities, 66 of which are in seven separately identified water districts that span the entire country. The results suggest that a decentralized water trading mechanism could increase agricultural output by 8.3 per cent, affect the rental rates of other agricultural inputs at the national level, including labour, and have economy-wide effects that entail a decline in the cost of living, an increase in aggregate consumption, and expansion of international trade.

The entire agricultural supply chain, from crop production to food consumption, is expected to suffer significant damages from climate change. This paper empirically investigates the effects of warming on agricultural labor supply through variation in dietary intake in rural Uganda. We examine labor supply, food consumption, and overall social welfare under various climate change scenarios. First, we combine nationally representative longitudinal survey data with high-resolution climatic data using an instrumental variable approach. Controlling for calorie intake, our study shows that warming has a non-linear impact on agricultural labor supply, with the number of hours worked being optimized at an optimal temperature of 21.3°C. Using these econometric estimates to parametrize an overlapping generations model, we find that under RCP8.5, output per adult decreases by 20 per cent by the end of the century due to the combined effect of climate change on food consumption and labor supply.

Deforestation and forest degradation represent an important part of global CO2 emissions. The identification of the multiple drivers of land-use change, past and present forest cover change and associated carbon budget, and the presence of locally adapted systems to allow for proper monitoring are particularly lacking in sub-Saharan Africa (SSA). Any incentive system to reduce emissions from deforestation and forest degradation (REDD+) will have to overcome those limits. This paper reviews the main challenges to implementing effective REDD+ mitigation activities in SSA. We estimate that SSA is currently a net carbon sink of approximately 319 TgCO2 yr−1. Forest degradation and deforestation put the forest carbon stock at risk (mean forest carbon stock is 57,679 TgC). Our results highlight the importance of looking beyond the forest sector to ensure that REDD+ efforts are aligned with agricultural and land-use policies.

Studies of compliance with fishing regulations have been based on fishery crimes where the offender faces a one-period decision problem of maximizing an expected utility. Moreover, the returns from the crimes are uncertain because the offender may lose them if caught. This paper extends these models by considering a fishery crime that generates a flow of returns until the offender is caught and then punished. Consequently, it incorporates into the existing model the influence of dynamic deterrence in which the discount rate affects violation levels. The predictions of the model are tested on data from an artisanal fishery in Ghana.

This paper examines whether green Official Development Aid (ODA) has a significant role in mitigating carbon emissions in recipient countries, and if institutional quality matters for the effectiveness of green ODA. For 86 green ODA recipient countries over the period 2003–2014, we explore the nexus between green ODA, institutions and carbon emissions. By using a two-step system generalized method of moment (GMM), we find that green ODA overall has no direct association with the mitigation of carbon emissions. However, when institutional quality indices are included, we found a significant effect of institutional quality on the effectiveness of green ODA. In general, green ODA is associated with higher carbon emissions in countries with poor institutions. In particular, green ODA is effective in mitigating carbon emissions when channeled to countries that enjoy higher economic freedom as well as more freedom from corruption. Results are mixed for the rule of law.

This paper explores the potential impacts of payments for agricultural soil carbon sequestration on poverty of farm households and on the sustainability of agricultural systems, using economic theory combined with evidence from three case studies in Kenya, Peru, and Senegal. The case studies indicate that the likely impact of carbon contracts will be to raise rural incomes and reduce the rate of soil carbon loss. In some cases, carbon contracts may be able to stabilize soil carbon stocks at a higher level than would otherwise be economically feasible. These findings suggest that carbon payments could have a positive impact on the sustainability of production systems while also reducing poverty. The analysis indicates that payments for environmental services are most likely to have a positive impact when they are implemented in an enabling economic and institutional environment.

A decade has passed since Wasting Assets, a study of Indonesia by Robert Repetto and colleagues at the World Resources Institute, drew widespread attention to the potential divergence between gross and net measures of national income. This was by no means the first ‘green accounting’ study. Martin Weitzman, John Hartwick, and Partha Dasgupta and Geoffrey Heal had all conducted seminal theoretical work in the 1970s. But the World Resources Institute study demonstrated that data were adequate even in a developing country to estimate adjustments for the depletion of some important forms of natural capital and that the adjustments could be large relative to conventional, gross measures of national product and investment. The adjusted, net measures suggested that a substantial portion of Indonesia's rapid economic growth during the 1970s and 1980s was simply the unsustainable ‘cashing in’ of the country's natural wealth.