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We examine the planner's dynamic regulation problem in an emission trading system (ETS) with allowance banking. The planner sets the emissions cap for the next period after the current period allowance market has cleared, but before knowing the next period's abatement cost realization. This creates a time consistency problem when banking is possible. We examine two policies to overcome the consistency problem: a commitment solution and the Markov perfect solution. We show that the endogenous price floor generated by the banking demand becomes an integral feature of the two policies. Hence, they can be best described as hybrid policies that combine elements from emissions taxes and tradable allowances. This reveals new welfare implications that have an influence on instrument choice in the traditional prices versus quantities setup. We compare the expected welfare outcomes of four different policy instruments: the commitment policy, the Markov policy, a Pigouvian tax, and a no-banking ETS. We show that allowing banking can yield welfare gains compared to tax and quantity regulation, with or without commitment.

This paper demonstrates a new approach to identifying and characterizing the optimal number of age classes in a fully regulated (i.e., normal) forest. We introduce an equilibrium condition for the normal forest requiring that it is financially justified to maintain the steady income forest configuration. We apply two valuation approaches to derive the main conclusion that the Faustmann rotation is the optimal harvest age of a normal forest. Both approaches utilize the standard Fisherian method of asset valuation. The first valuation approach imposes a steady income stream requirement, whereas the second approach is free of such a requirement. The second approach can be interpreted as enforcing market discipline on the normal forest configurations in a competitive equilibrium and picking the only normal forest that can be sustained in competitive equilibrium, namely, the forest with the number of age classes corresponding to the Faustmann rotation age. Our results also highlight an alternative way of deriving and interpreting the so-called zero-profit condition that can be applied to determining the optimal number of age classes in a regulated forest.

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Forest policies have typically relied on prescriptive standards to mitigate various nonpoint negative externalities, whereas more recent approaches have focused on the use of incentive-based policies, such as payments for environmental services (PES), to encourage activities associated with positive externalities. We provide a general review on the current state of knowledge concerning prescriptive standards and incentive-based policies in the context of nonpoint and point source externalities that are typical in industrial and nonindustrial forestry. Our specific focus is on reviewing and assessing the current and future applications of performance bonding in forest policy. We argue that bonds can be viewed either as an enforcement mechanism to achieve compliance with standards, or alternatively, as a deposit-refund instrument that imposes a tax on harmful activities while subsidizing beneficial ones in the form of a refund. Four forest policy settings are considered: best management practices (BMP) for protecting the integrity of water resources, reduced impact logging (RIL) standards in industrial concessions, fire-fuel mitigation in wildland-urban interface (WUI), and carbon sequestration in standing forests and soils. Unique challenges that the successful design of performance bonding present are used as motivation for future research.

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