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Tradable Permits versus Tradable Credits: A Survey and Analysis

Author

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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.

Suggested Citation

  • Nentjes, Andries & Woerdman, Edwin, 2012. "Tradable Permits versus Tradable Credits: A Survey and Analysis," International Review of Environmental and Resource Economics, now publishers, vol. 6(1), pages 1-78, January.
  • Handle: RePEc:now:jirere:101.00000047
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    File URL: http://dx.doi.org/10.1561/101.00000047
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    Cited by:

    1. Krutilla, Kerry & Alexeev, Alexander, 2014. "The Political Transaction Costs and Uncertainties of Establishing Environmental Rights," Ecological Economics, Elsevier, vol. 107(C), pages 299-309.

    More about this item

    Keywords

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

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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