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 face a fundamental choice: to control harmful activity through output prices (e.g., taxes), fixed quantities (e.g., caps), or input-based constraints (e.g., effort limits). These decisions must often be made under ecological and economic uncertainty. We develop a conceptual and empirical framework comparing these instruments when shocks affect both the productivity of effort and output prices. Output price instruments offer maximal flexibility, input constraints offer selective flexibility, and quantity caps are rigid. The optimal policy depends on the steepness of marginal shadow costs and the correlation of shocks. Applying our framework to the U.S. Atlantic sea scallop fishery, we use vessel-level data and a stylized simulation to compare instruments. We find that price instruments maximize aggregate value but concentrate benefits and risk overharvesting. Input-based instruments provide a middle ground—trading off efficiency for equity and limited flexibility in the face of shocks. Our results rationalize real-world policy designs and have broad relevance for climate, water, and pollution policy.