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Environmentalists are often upset at the effect of discounting costs of future environmental damage, e.g., due to climate change. An often-overlooked message is that we should discount costs but also take into account the increase in the relative price of the ecosystem service endangered. The effect of discounting would thus be counteracted, and if the rate of price rise of the item was fast enough, it might even be reversed. The scarcity that leads to rising relative prices for the environmental good will also have direct effects on the discount rate itself. The magnitude of these effects depends on properties of the economy's technology and on social preferences. We develop a simple model of the economy that illustrates how changes in crucial technology and preference parameters may affect both the discount rate and the rate of change of values of environmental goods. The combined effect of discounting and the change of values of environmental goods is more likely to be low -or even negative -the lower the growth rate of environmental quality (or the larger its decline rate), and the lower the elasticity of substitution between environmental quality and produced goods.

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For international environmental problems involving many countries, such as, e.g., the climate problem, it is unlikely that all countries will participate in an international environmental agreement. If some countries commit themselves to cooperate, while the remaining countries act independently and in pure self-interest, it appears to be possible to achieve a Pareto improvement if the non-signatory countries reduce their emissions, in exchange for transfers from the countries which sign an agreement. However, the paper shows that the prospect of receiving a transfer for reducing one's emissions provided the country does not commit itself to cooperation, tends to reduce the incentive a country might have to commit itself to cooperation. Moreover, if the disincentive effect of such side payments is strong, total emissions will be higher in a situation with side payments than in a situation in which the signatory countries commit themselves to not give transfers to free riding countries. Copyright Kluwer Academic Publishers 1997international environmental agreement, cooperation, side payments,

We compare the effects of taxes and quotas for an environmental problem in which the regulator and polluter have asymmetric information about abatement costs, and the environmental damage depends on the stock of pollution. We thus extend, to a dynamic framework, previous studies in which environmental damages depend on the flow of pollution. As with the static analysis, an increase in the slope of the marginal abatement cost curve, or a decrease in the slope of the marginal damage curve, favors taxes. In addition, in the dynamic model, an increase in the discount rate or the stock decay rate favor the use of taxes. Taxes certainly dominate quotas if the length of a period during which decisions are constant is sufficiently small. An empirical illustration suggests that taxes dominate quotas for the control of greenhouse gasses.

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