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The Environmentally Optimal Trading Ratio

  • Woodward, Richard T.

In the standard economic model of cap and trade policies, the regulator is assumed to place zero value on pollution reductions below the cap. This paper considers an alternative case, where the policy makers can manipulate the rules of the program to achieve improved environmental performance. This is achieved by manipulating the trading ratio, the units of pollution credits that are obtained for each unit of pollution reduction. Using a parsimonious model of a transferable discharge permits program, we identify the environmentally optimal trading ratio that maximizes the environmental gains of trading. The model suggests an alternative explanation why non-unitary trading ratios are common and is a counterpoint to the cost-minimizing model that predominates in economics. We conclude by recommending that a middle-ground should be sought, where both environmental gains and cost efficiencies are given weight.

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File URL: http://purl.umn.edu/20491
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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2001 Annual meeting, August 5-8, Chicago, IL with number 20491.

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Date of creation: 2001
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Handle: RePEc:ags:aaea01:20491
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  1. McKitrick, Ross, 1999. "A Derivation of the Marginal Abatement Cost Curve," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 306-314, May.
  2. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  3. Randall, Alan & Taylor, Michael A., 2000. "Incentive-Based Solutions To Agricultural Environmental Problems: Recent Developments In Theory And Practice," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(02), August.
  4. Richard D. Horan, 2001. "Differences in Social and Public Risk Perceptions and Conflicting Impacts on Point/Nonpoint Trading Ratios," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 934-941.
  5. Shortle, James S., 1987. "Allocative Implications Of Comparisons Between The Marginal Costs Of Point And Nonpoint Source Pollution Abatement," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 16(1), April.
  6. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
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