Designing an Environmental Mitigation Banking Institution for Linking the Size of Economic Activity to Environmental Capacity

Abstract

While institutions are a key determinant of economic behavior and new institutions are often formed as a part of an economic policy, a systematic way to design these institutions and test their potential performance before they are created does not exist. I have attempted in this paper to create and test such a design for an environmental mitigation banking system using system dynamics modeling and computer simulation. Experimentation with my model suggests that a mitigation banking institution established in the market with the mandate of adding value to environment is able to balance human activity with environmental capacity and yield an optimal price for the mitigation credits without inputs from engineering methods connecting price to cost of mitigation. The delays associated with engineering calculations, when they are used to determine price, would curtail human activity by stifling its multiplier effects. Subsidization of mitigation banking would indirectly support human activity by reducing the price of credits, but for the same budget, direct subsidies support human activity more than the market-based subsidies. Connecting credit requirements to environmental conditions introduces instability in all cases due to the delays involved in this process. The experimental method used to test the efficacy of the mitigation banking system in this paper is seen in general to be a valuable process for mobilizing the powerful concept of institutional change for creating operational plans.