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Abstract

Credit stacking involves the sale of multiple types of environmental credits from a single, spatially defined project. The practice is controversial because environmental advocates suspect (a) producers may undermine the principle of additionality by extracting unearned profits through the sale of by-products from actions taken based on the incentives for a single credit-type, (b) society may lose the opportunity for free environmental improvements when complementary or joint production creates such by-products, or (c) broader environmental quality may decline by allowing polluters’ cheaper or easier compliance with off-set requirements, weakening incentives to avoid initiating degradation. Previous research ignores producers’ potential responses when the credit stacking policy changes. This paper offers a framework to analyze the interaction between credit stacking policy and producers’ choices—especially regarding their choice of production technology—and the implications for the relative advantages of alternative stacking policies for environmental markets.

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