Double-dipping in environmental markets

There is an increasing tendency to use markets to induce the provision of environmental services. As such markets increase in scope, potential market participants might sell multiple environmental services. The question we consider here is whether participants in such markets should be allowed to sell credits in more than one market simultaneously. Some have argued in favor of such "double-dipping", because it would make the provision of environmental services more profitable. In practice however, most programs do not allow double-dipping. We show that if the optimal level of pollution abatement is sought, then double-dipping maximizes societal net benefits. However, if pollution policies are set in a piecemeal fashion, then the caps for each market are unlikely to be optimal and, in this second-best setting, a policy prohibiting double-dipping can lead to greater social net benefits. We explore conditions under which a single-market policy is preferred, or equivalently, where piecemeal policies are likely to yield particularly inefficient outcomes.