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Tradable Permits versus Tradable Credits: A Survey and Analysis

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  • Nentjes, Andries
  • Woerdman, Edwin

Abstract

This article compares tradable permits with tradable credits, two distinct economic instruments of environmental policy. It is demonstrated that under credit trading, which is an addition to (relative) emission standards, residual emissions are free of cost. Under permit trading (cap-and-trade), residual emissions always have a cost. The economic consequences of this difference are surveyed and analyzed with regard to various issues, including economic efficiency, political acceptance, incentives for adopting clean technologies, and incentives for legal compliance. The review concludes that permit trading is less costly to society than credit trading, but imperfect markets for output may change this ranking. The article reveals several gaps in the literature and formulates some new hypotheses for future research.

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File URL: http://dx.doi.org/10.1561/101.00000047
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Bibliographic Info

Article provided by now publishers in its journal International Review of Environmental and Resource Economics.

Volume (Year): 6 (2012)
Issue (Month): 1 (January)
Pages: 1-78

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Handle: RePEc:now:jirere:101.00000047

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Web page: http://www.nowpublishers.com/

Related research

Keywords: Emissions trading; Cap-and-trade; Credit trading; Economic incentives; Instrument choice; Environmental law and economics;

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