Karl M. Aspelund

Regulators often impose trade restrictions in environmental permit markets, lowering gains from trade in order to redistribute to groups that do not directly benefit from permit trade, such as labor in regulated firms. I evaluate the efficiency and distributional impacts of two common trade restrictions in Iceland’s fisheries permit market: segmented trading by firm size and individual production requirements. Using detailed harvest and permit trading data linked to administrative records on worker employment and earnings, I conduct a difference-in-differences analysis showing that permit trade increases the harvest share of productive boats by 15 percentage points, shifts income from lower- to higher-income workers, and reduces aggregate labor demand by 12%. I further demonstrate that the trade restrictions, designed to counteract these labor impacts, are binding and lower productivity. To quantify the trade-offs from each restriction, I develop a model of fishery production and permit trading to simulate profits, labor demand, and worker earnings in permit market equilibria without the restrictions. The comparison reveals distinct benefits for each restriction: Per dollar of foregone profit, segmentation increases labor demand 20 times more than the production requirement, while the production requirement redistributes 14% more income to low-income workers than segmentation. Implementing both restrictions creates more jobs and higher-paying ones and even outperforms the production requirement alone.

Market mechanisms aim to reduce environmental degradation at low cost, but they are undermined when participants' conservation actions are not marginal to the incentive — or "additional" — as the lowest-cost participants may not offer the highest social value. We investigate this challenge in the Conservation Reserve Program’s auction mechanism for ecosystem services, linking bids to satellite-derived land use. Three-quarters of marginal auction winners are not additional. The heterogeneity in counterfactual land use introduces adverse selection. We develop a model of bidding and additionality to quantify welfare implications. Alternative auctions increase efficiency by using scoring rules that incorporate expected land use impacts.

Environmental regulators must meet sustainability targets in the face of ecological and economic shocks that affect different areas, producers, and times unevenly. While alternative instruments such as taxes, quotas, closures, or input regulations can deliver the same expected stock path, they differ in how they expose participants to volatility in harvests and profits. Diminishing returns to harvests today, inequality concerns, and the shadow value of future stocks make differences in volatility welfare-relevant. We develop a framework, nesting canonical results from the prices versus quantities literature, to evaluate when and how instrument design matters under uncertainty, showing how instrument choices in different areas can be understood as a portfolio where regulators can choose levels of risk over overall harvests or certain distributional outcomes. The framework explains why policies that look second-best in a deterministic setting, such as input restrictions or long closures, can be preferred once their stabilizing properties are recognized. We illustrate with detailed ecological and harvest data from the U.S. Atlantic scallop fishery, showing how alternative policy mixes change welfare outcomes under different degrees of inequality aversion.