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The Environmentally Optimal Trading Ratio

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  • Woodward, Richard T.

Abstract

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.

Suggested Citation

  • Woodward, Richard T., 2001. "The Environmentally Optimal Trading Ratio," 2001 Annual meeting, August 5-8, Chicago, IL 20491, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea01:20491
    DOI: 10.22004/ag.econ.20491
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    References listed on IDEAS

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    1. 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(01), pages 1-7, April.
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    4. 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, Cambridge University Press, vol. 32(2), pages 221-234, August.
    5. Arun S. Malik & David Letson & Stephen R. Crutchfield, 1993. "Point/Nonpoint Source Trading of Pollution Abatement: Choosing the Right Trading Ratio," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(4), pages 959-967.
    6. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, January.
    7. 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.
    8. Dana L. Hoag & Jennie S. Hughes-Popp, 1997. "Theory and Practice of Pollution Credit Trading in Water Quality Management," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 19(2), pages 252-262.
    9. 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(2), pages 1-14, August.
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    Cited by:

    1. Isla Globus‐Harris, 2020. "An Impossible Goal: When Trade Ratios Cannot Achieve No‐Net‐Loss," Southern Economic Journal, John Wiley & Sons, vol. 86(4), pages 1372-1392, April.

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