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The Efficiency, Equity and Politics of Emission Permit Trading

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  • Wooders, M.
  • Zissimos, B.

Abstract

This paper illustrates that an international permit trading system may hurt relatively poor countries by making associated economic activities unaffordable. A model is constructed in which the free market solution is Pareto inefficient as a result of pollution. The introduction of tradable permits allows pollution to be internalised, and brings about an increase in the total social surplus. But when incomes vary, this may not lead to a Pareto improvement; those in poor countries stop the polluting activity because they cannot afford to do otherwise.

Suggested Citation

  • Wooders, M. & Zissimos, B., 2001. "The Efficiency, Equity and Politics of Emission Permit Trading," The Warwick Economics Research Paper Series (TWERPS) 586, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:586
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp586.pdf
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    References listed on IDEAS

    as
    1. Farrow, Scott, 1995. "The dual political economy of taxes and tradable permits," Economics Letters, Elsevier, vol. 49(2), pages 217-220, August.
    2. Copeland, Brian R. & Taylor, M. Scott, 2005. "Free trade and global warming: a trade theory view of the Kyoto protocol," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 205-234, March.
    3. Charles Howe, 1994. "Taxesversus tradable discharge permits: A review in the light of the U.S. and European experience," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 4(2), pages 151-169, April.
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    6. Severin Borenstein, 1988. "On the Efficiency of Competitive Markets for Operating Licenses," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 357-385.
    7. Hammond, Peter J. & Kaneko, Mamoru & Wooders, Myrna Holtz, 1989. "Continuum economies with finite coalitions: Core, equilibria, and widespread externalities," Journal of Economic Theory, Elsevier, vol. 49(1), pages 113-134, October.
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    More about this item

    Keywords

    TRADE ; EFFICIENCY ; POVERTY ; POLLUTION;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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