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Tradeable permits, missing markets, and technology

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  • R. Devlin
  • R. Grafton

Abstract

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the “optimal” number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy. Copyright Kluwer Academic Publishers 1994

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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 4 (1994)
Issue (Month): 2 (April)
Pages: 171-186

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Handle: RePEc:kap:enreec:v:4:y:1994:i:2:p:171-186

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Web page: http://www.springerlink.com/link.asp?id=100263

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Keywords: Pollution; permit markets; technology; Jel Classification. Q38;

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  1. Tietenberg, T H, 1990. "Economic Instruments for Environmental Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 17-33, Spring.
  2. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September.
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  8. Atkinson, Scott & Tietenberg, Tom, 1991. "Market failure in incentive-based regulation: The case of emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 17-31, July.
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  12. Marin, Alan, 1991. "Firm incentives to promote technological change in pollution control: Comment," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 297-300, November.
  13. Malueg, David A., 1990. "Welfare consequences of emission credit trading programs," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 66-77, January.
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  15. Robert E. Kohn, 1986. "The Rate of Emission and the Optimal Scale of the Polluting Firm," Canadian Journal of Economics, Canadian Economics Association, vol. 19(3), pages 574-81, August.
  16. Dupont, Diane P., 1990. "Rent dissipation in restricted access fisheries," Journal of Environmental Economics and Management, Elsevier, vol. 19(1), pages 26-44, July.
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Cited by:
  1. Don Fullerton & Inkee Hong & Gilbert E. Metcalf, 2001. "A Tax on Output of the Polluting Industry Is Not a Tax on Pollution: The Importance of Hitting the Target," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 13-44 National Bureau of Economic Research, Inc.
  2. Simon Niemeyer, 1998. "Consumer-based carbon reduction incentives," Working Papers in Ecological Economics 9805, Australian National University, Centre for Resource and Environmental Studies, Ecological Economics Program.
  3. Armin Schmutzler, 1996. "Pollution control with imperfectly observable emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 7(3), pages 251-262, April.
  4. Stefan Baumgärtner & Frank Jöst, 2000. "Joint Production, Externalities, and the Regulation of Production Networks," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(2), pages 229-251, June.
  5. Grafton, Quentin R. & Devlin, Rose Anne, 1994. "Les permis d’émission et les charges : efficacité et substituabilité," L'Actualité Economique, Société Canadienne de Science Economique, vol. 70(2), pages 159-176, juin.
  6. Piotr Nowak & Maciej Romaniuk, 2009. "Applying fuzzy parametersin pricing financial derivatives inspiredby the kyoto protocol," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 4, pages 77-91.
  7. Grischa Perino, 2006. "The Merits of New Pollutants and How to Get Them When Patents Are Granted," Working Papers 0426, University of Heidelberg, Department of Economics, revised Jul 2006.
  8. Christoph Lieb, 2004. "The Environmental Kuznets Curve and Flow versus Stock Pollution: The Neglect of Future Damages," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(4), pages 483-506, December.

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