A Welfare Analysis of Conservation Easement Tax Credits

The use of conservation easements to protect vulnerable land is growing rapidly, but there is growing public concern about the social cost of easement tax credit programs that promote the use of easements. Landowners who agree to an easement sell or donate their development rights to a conservation agency and receive a tax credit on the "gifted" amount. The tax credit is intended to reduce underinvestment in land preservation by conservation agencies that operate with tight budgets. Using a model that combines asymmetric information and real options, this paper shows that the tax credit program is least effective for land with the highest environment value and, for a sufficiently high value, may decrease rather than increase the probability of an easement outcome. The failure of the conservation agency to internalize the land's development value can result in the agency agreeing to accept a welfare-worsening donated easement.