Efficient Policies for Environmental Protection: An Econometric Analysis of Incentives for Land Conversion and Retention

Article excerpt

This study investigates the costs of subsidies for land retention and conversion, in addition to a policy that combines these incentives. A Markov model of forest and agricultural land use is estimated for the U.S. South Central region and used to simulate retention and conversion policies. Results suggest a conversion policy is less costly for increasing forest area, and a retention policy is less costly for increasing agricultural land area. The costs of separate subsidies can be up to 300% higher than the costs of combined incentives. However, when administrative costs are taken into account, conversion policies are likely to be less costly.

Key words: carbon sequestration, conservation, land use, land-use policy, Markov processes

Introduction

Private land-use decisions often give rise to significant external costs such as nonpoint source pollution, and external benefits such as habitat for wildlife. One role of land-use policies is to narrow the divergence between privately and socially optimal land allocations by modifying the economic incentives faced by private landowners. In the United States, these policies are most often designed to increase the relative net returns to land in the socially desired use and, in general, take one of two forms: (a) policies encouraging landowners to convert their land to the desired use, and (b) policies encouraging landowners to retain land in the desired use.

Policies that encourage conversion include the Conservation Reserve Program (CRP), the Environmental Quality Incentives Program, and the Wetlands Reserve Program administered by the U.S. Department of Agriculture (USDA). The CRP, for example, offers subsidies to landowners to convert marginal cropland to grassland or trees for a period of 10 years in order to reduce soil erosion and provide other environmental benefits. A prospective policy receiving much attention is large-scale tree planting designed to sequester carbon and ameliorate the effects of climate change. Many researchers have analyzed programs providing subsidies for the conversion of agricultural land to forests (e.g., Moulton and Richards; Adams et al.; Parks and Hardie; Plantinga, Mauldin, and Miller).

A variety of federal and state policies are designed to retain land in forests, wetlands, and agriculture. For example, the Tax Reform Act of 1986 limits tax deductions for wetlands drainage expenses. All states have some form of preferential tax treatment for forest and agricultural land (e.g., current use value assessment) which serves to increase the value of land in these uses relative to alternative uses such as development. Additional examples of retention policies are the Water Bank Program, Swampbuster, Section 404 of the Clean Water Act, the Forestry Incentives Program, and conservation easements.

The primary objective of this study is to investigate the costs of achieving given landuse policy goals with incentives for land conversion and retention. A number of analyses have examined the costs of actual and hypothetical land-use policies (e.g., Reichelderfer and Boggess; Parks and Hardie; Parks, Kramer, and Heimlich; U.S. Government Accounting Office). In their evaluations, however, these studies focus either on incentives or on disincentives for land conversion. Few analyses have compared the costs of the two approaches (an exception is Newell and Stavins).

If the decision rules for land conversion and retention are identical, then the two approaches should entail the same costs. Conversely, if there are asymmetries in factors such as conversion costs and uncertainty regarding future net returns, then, in general, the decision rules will differ. In this case, there may be important differences in the costs of achieving environmental objectives with incentives for land conversion and retention. It follows from first principles that the cost of a policy combining conversion and retention incentives will be less than or equal to the cost of either policy applied separately. …