As Congress develops new farm legislation, some are lobbying for a new partnership between U.S. taxpayers and farmers. In exchange for an annual transfer of $10 to $20billion from taxpayers to agriculture, farmers would do much more to enhance environmental quality. An attractive feature of a new partnership is that paying for an improved environment provides a clear and justifiable rationale for farm program payments, something that is lacking under current farm programs. By changing management practices and land use, farmers can provide cleaner water, cleaner air, better wildlife habitat, lower net greenhouse gas emissions, and improved long-run soil quality. Private profit maximizers largely ignore the value of these environmental goods. Hence, the goods are underprovided. Having government step in to increase their supply may increase economic efficiency. New, highly funded conservation payment programs for agriculture could achieve both the current income support objective of farm programs as well as environmental objectives if program payments are targeted to achieve environmental benefits rather than targeted to low-income producers. Significant reductions in environmental benefits will occur if payment limits or means testing is used to target payments, unless low-income farmers provide the highest environmental benefits. For many farms, the potential quantity of environmental benefits that can be produced is proportionate to farm acreage. The two basic approaches to conservation payments are (1) voluntary programs that pay farmers for specific actions they take, and (2) programs that penalize farmers with taxes or disqualification from other program benefits if prescribed actions are not followed. The first approach is preferred if agricultural income enhancement is a goal. Also, it is doubtful that the second approach is political feasible given that farmers will be asked to give up the ?no strings? income support they have enjoyed in recent years. Past conservation programs have taught us three key lessons. The first is that making payments based on environmental benefit-to-cost ratios can greatly enhance program efficiency by either cutting the cost of meeting an environmental objective or by greatly increasing the amount of environmental benefits that can be obtained from a given expenditure. Second, adequate verification, monitoring, and enforcement programs will need to be put in place if the promised environmental benefits are to be realized. And third, land set-asides are the most costly way of obtaining environmental benefits. When possible, it is more efficient to encourage productive use of land rather than to retire land. So, for example, instead of paying a farmer to remove land from production in order to reduce nitrate water pollution, a program would pay the farmer to adopt practices that reduce the risk of fertilizer runoff.

We examine the social efficiency of alternative intertemporal permit trading regimes. Banking with a 1-to-1 ratio and with a non-unitary intertemporal trading ratio (ITR) are compared with each other and with the no-banking permit trading regime. The more industry-wide shocks vary, and/or the more they are negatively correlated across time, the more efficient is a bankable permit regime. When the slope of the benefit function is greater than the slope of the damage function, banking with ITR=1+r is more efficient than a no-banking regime. Banking with ITR=1 can be more efficient than a no-banking regime. However, whether ITR=1 or ITR=1+r is better depends on the covariance structure of the shocks and the benefit and damage functions.

This study advances, and experimentally tests, a new explanation for the disparity between willingness to pay (WTP) and willingness to accept (WTA)—a dynamic neoclassical theory based on the presence of commitment costs. While to date neoclassical models have not explained the observed data patterns well, we find that the commitment cost theory is able to explain adequately the causes and severity of the WTP/WTA value disparity. In particular, using data gathered from an actual marketplace, even the most stringent of our theoretical conjectures—cases where WTP values are predicted to exceed WTA values—oftentimes are met.

Despite the interest in carbon markets or programs for which agriculture could be rewarded for storing carbon, there are still substantive questions about how such mechanisms could be designed to meet this task and be generally acceptable to the international community. One of the most problematic of these issues is the fact that, unlike reductions in emissions, carbon sinks may only temporarily hold carbon out of the atmosphere. Until policy mechanisms that appropriately incorporate the potentially temporary nature of sinks are developed, it is unlikely that agricultural sequestration will gain widespread acceptance. In this paper, the authors introduce and discuss three such mechanisms.

In a static setting, willingness to pay for an environmental improvement is equal to compensating variation. However, in a dynamic setting characterized by uncertainty, irreversibility, and the potential for learning, willingness to pay may also contain an option value. In this paper, we incorporate the dynamic nature of the value formulation process into a study using a contingent valuation method, designed to measure the value local residents assign to a north-central Iowa lake. Our results show that willingness to pay is highly sensitive to the potential for future learning. Respondents offered the opportunity to delay their purchasing decisions until more information became available were willing to pay significantly less for improved water quality than those who faced a now-or-never decision. The results suggest that welfare analysts should take care to accurately represent the potential for future learning.

With the release of the Intergovernmental Panel on Climate Change's (IPCC) revised forecast predicting even greater global warming effects than previously believed, the interest in methods to reduce the atmospheric concentration of greenhouse gases (GHG) is almost certain to grow. Agriculture is unique in that it has the potential to generate greenhouse gases (Schneider and McCarl, 1999), as well as to sequester (or store) large amounts of carbon and other

We examine the social efficiency of alternative intertemporal permit trading regimes. The role of uncertainty and information asymmetry is discussed. For banking to be welfare improving, uncertainty itself does not matter, while information asymmetry does. Three effects of banking are identified: externality effect, information effect, and total permit effect. In the absence of total permit effect, banking is welfare improving if information effect is positive and dominates the externality effect. The relative efficiency of banking regimes with different intertemporal trading ratios is affected by the slope of the benefit and damage functions and the covariance of the shocks.

On October 12–13, a workshop funded by the National Science Foundation was held at Iowa State University in Ames, Iowa with a goal of identifying research needs related to coupled economic and biophysical models within the FEW system. Approximately 80 people attended the workshop with about half representing the social sciences (primarily economics) and the rest from the physical and natural sciences. The focus and attendees were chosen so that findings would be particularly relevant to SBE research needs while taking into account the critical connectivity needed between social sciences and other disciplines.

We have identified several major gaps in existing scientific knowledge that present substantial impediments to understanding the FEW system. We especially recommend research in these areas as a priority for future funding:

1. Economic models of decision-making in coupled systems

Deliberate human activity has been the dominant factor driving environmental and land-use changes for hundreds of years. While economists have made great strides in modeling and understanding these choices, the coupled systems modeling literature, with some important exceptions, has not reflected these contributions. Several paths forward seem fruitful. First, baseline economic models that assume rationality can be used much more widely than they are currently. Moreover, the current generation of IAMs that include rational agents have emphasized partial equilibrium studies appropriate for smaller systems. To allow this approach to be used to study larger systems, the potential for (and consequences of) general equilibrium effects should be studied as well.

Second, it is important to address shortcomings in these models of economic decision-making. Valuable improvements could be gained from developing coupled models that draw insights from behavioral economics. Many decision-makers deviate systematically from actions that would be predicted by strict rationality, but very few IAMs incorporate this behavior, potentially leading to inaccurate predictions about the effects of policies and regulations. Improved models of human adaptation and induced technological change can also be incorporated into coupled models. Particularly for medium to long-run models, decisions about adaptation and technological change will have substantial effects on the conclusions and policy implications, but more compelling methods for incorporating these changes into modeling are sorely needed. In addition, some economic decisions are intrinsically dynamic yet few coupled models explicitly incorporate dynamic models. Economic models that address uncertainty in decision making are also underutilized in coupled models of the FEW system.

2. Coupling models across disciplines

Despite much recent progress, established models for one component of the FEW system often cannot currently produce outcomes that can be used as inputs for models of other components. This misalignment makes integrated modeling difficult and is especially apparent in linking models of natural phenomena with models of economic decision-making. Economic agents typically act to maximize a form of utility or welfare that is not directly linked to physical processes, and they typically require probabilistic forecasts as an input to their decision-making that many models in the natural sciences cannot directly produce.

We believe that an especially promising approach is the development of “bridge” models that convert outputs from one model into inputs for another. Such models can be viewed as application-specific, reduced-form distillations of a richer and more realistic underlying model. Ideally, these bridge models would be developed in collaborative research projects involving economists, statisticians, and disciplinary specialists, and would contribute to improved understanding in the scientific discipline as well.

3. Model validation and comparison

There is little clarity on how models should be evaluated and compared to each other, both within individual disciplines and as components of larger IAMs. This challenge makes larger integrated modeling exercises extremely difficult. Some potential ways to advance are by developing statistical criteria that measure model performance along the dimensions suitable for inclusion in an IAM as well as infrastructure and procedures to facilitate model comparisons. Focusing on the models’ out-of-sample distributional forecasting performance, as well as that of the IAM overall, is especially promising and of particular importance.

Moreover, applications of IAMs tend to estimate the effect of hypothetical future policy actions, but there have been very few studies that have used these models to estimate the effect of past policy actions. These exercises should be encouraged. They offer a well-understood test bed for the IAMs, and also contribute to fundamental scientific knowledge through better understanding of the episode in question. The retrospective nature of this form of analysis also presents the opportunity to combine reduced-form estimation strategies with the IAMs as an additional method of validation.

Examining the value of carbon sequestration in a dynamic model, the authors demonstrate that unless the sequestration is permanent, it is only a fraction of the value of emission abatement. The magnitude of the fraction increases in the duration of sequestration, the natural decay rate of carbon, and the discount rate. The authors also show that sinks should be used as early as possible in order to optimally reduce the carbon stock. Finally, the authors propose and assess three mechanisms for efficiently introducing sequestration into a carbon permit trading market: a pay-as-you-go system, a variable-length-contract system, and a carbon-annuity-account system. All are efficient, but all may not be equally feasible to implement.