A Welfare Analysis of Conservation Easement Tax Credits

• Agricultural Economics Workshop
• Departmental Seminar

Date and Location

Tuesday, November 25, 2014, 4:10 PM - 5:30 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

The use of conservation easements to protect farmland, wetlands and forests has grown rapidly in recently years, especially in North America. This paper uses a dynamic real option framework to theoretically examine the market efficiency of a conservation easement when a participating landowner is compensated for forfeiting the development rights of his or her land with a combination of a cash payment from a land trust and an income tax credit. If the land trust sets a competitive easement price then a positive real option for delaying the development decision is shown to result in an inefficiently high probability of a successful easement outcome. In the more realistic case where the land trust has market power the probability of a successful easement outcome may be inefficiently low (if the market power effect dominates) or inefficiently high (if the real option effect dominates). The marginal effectiveness of the tax credit depends on the degree of pricing pass-through, ranging from high effectiveness in the case of a budget constrained or zero-price land trust, to low effectiveness in the case of high environmental value and thus inelastic easement demand by the landowner