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Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration

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Abstract

There are different views with respect to the treatment of tradable permits for greenhouse gases in cost-benefit analysis. This note aims at illustrating numerically within a simple general equilibrium model how to treat tradable permits in economic evaluations of projects. The note looks at a cost-benefit rule for a large project providing a public good interpreted as a shortcut for infrastructure, using a fossil fuel and a renewable as inputs. The paper also evaluates a small or marginal project involving the same output and inputs. In addition, it illustrates the Samuelson condition for the optimal provision of the public good. The note is a supplement to CERE Working Paper No 2015:11 and SSE Working Paper in Economics No 2015:3. The model used here may also be useful in advanced courses to illustrate general equilibrium cost-benefit analysis.

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  • Johansson, Per-Olov, 2016. "Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration," CERE Working Papers 2016:14, CERE - the Center for Environmental and Resource Economics.
    • Handle: RePEc:hhs:slucer:2016_014
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    Keywords

    Cost-benefit analysis; greenhouse gases; tradable permits; general equilibrium; Samuelson condition; numerical illustration;
    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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