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Tradable Permits in Cost–Benefit Analysis

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Abstract

There is no consensus with respect to handling of tradable permits in cost–benefit analysis. The leading (organizational/governmental) manuals in North America, Europe, Asia, and Australia handle permits in different ways or ignore them. This paper offers a brief discussion of the properties of cap-and-trade systems, and contrast these to the properties of emission charges. The paper then turns to cost–benefit rules for projects using fossil fuels in a cap-and-trade system. The focus is on small projects but the paper also briefly addresses the case where a project significantly affect prices. As a service to the reader the small project rules are contrasted to the much more familiar and standardized ways of handling emission charges in cost–benefit analysis. Finally, the consequences of market power in cap-and-trade markets are briefly addressed.

Suggested Citation

  • Johansson, Per-Olov, 2015. "Tradable Permits in Cost–Benefit Analysis," CERE Working Papers 2015:11, CERE - the Center for Environmental and Resource Economics.
    • Handle: RePEc:hhs:slucer:2015_011
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    Keywords

    Cost–benefit analysis; greenhouse gases; tradable permits; emission charges; market power.;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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