| Sumario: | I develop a model of environmental trade ratios with asymmetric information to explain why current policies fail to achieve goals of no‐net‐impact on the environment, as well as demonstrating that it may be impossible to achieve these goals. Environmental trade ratios (e.g., wetland mitigation ratios or carbon offset discounting) typically have the goal of no‐net environmental impact; however, these goals are not always met. First, I demonstrate that it is sometimes impossible for trade ratios to achieve no‐net‐impact on the environment. Second, I provide sufficient conditions for the existence of a neutral trade ratio. Next, I show that naïve methods for setting ratios (which do not consider market responses) will fail to meet policy goals. Finally, I demonstrate how a simple updating procedure can adjust ratios toward no‐net‐impact even when policy makers have minimal information.
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