Green permits

Green Permits Transferable discharge permits create an economic incentive to reduce pollution and exhibit many other advantages over the current command and control pollution regulation system. However, ‘green permits’ on a large scale would be difficult to allocate fairly, and the efficient economic outcome may not be the socially desirable outcome. Introduction to Green Permits 1. Green Permits as an incentive to reduce pollution: cost to pollute- tie up money induces costs/benefits of pollution to owner of permits a. polluter pays incentives for research and development 2. Green Permit benefits over Command and Control under CAC delay is profitable new technology must develop to ever-changing EPA standards fixed cost of pollution -free if under guidelines no incentive to reduce each pollution written into law b. who determines value of each pollutant c. special interest groups ruling majority 1. Problems with Green Permits initial allocation c. auction off - generate revenue but create barriers d. give away - harm firms already environmentally friendly trading rules leading to socially undesirable outcome a. anybody trade - geographic concentration problem b. mixing problem - receptor sites and ambient standards 4. Green Permits as a market failure can’t have failed without trying on large scale example - rapid phaseout of lead gasoline References: Develin, Rose, Grafton, Quentin. Marketable emission permits:efficiency, profitability and substitutability. Canadian Journal of Economics, Ap(96). Vol.29,260-264 Rothschild, Micheal. (1992) Green Markets. Upside. Bionomics Institute Field, Barry, Olewiler, Nancy. Environmental Economics (First Canadian Edition). Toronto: McGraw Hill. 1994 Cost-effectiveness has emerged as a major consideration in the design of environmental policies. Cost-effectiveness means that with prudent policy design, the same level of environmental improvement can be achieved at a lower cost, which implies real cost savings for the affected polluters. Alternatively, a higher level of environmental quality can be achieved at the same cost, which implies a real gain for the population affected by pollution. Cost-effectiveness thus generates win-win opportunities between polluters and the community at large and has emerged as a concept that can bring the battling parties in the political controversy about pollution control policies together to one table. While charges fix the cost of pollution control but leave the total level of emissions to be determined by the market, a system of tradable permits fixes the total amount of emissions from all sources but leaves the price of pollution and the allocation of the total emissions to individual sources to the market. The regulator issues emission permits in the amount of total acceptable pollution, which are then made tradable between emitting sources. Permits can either be reissued periodically for a specific period of time or be issued in perpetuity often with a built in reduction schedule. In a free standing permit system, every polluter needs a permit for any amount of emissions. Alternatively, a permit system can be added to an existing standard. In this case, new polluters or polluters which want to exceed the existing standard would need to buy compensating emission reductions below the standard from other polluters. In a free-standing permit system, the initial allocation of permits can be either auctioned to the highest bidders or issued free of charge in proportion to historic emissions or some other allocation formula. There are various design variants to permit trading system to ensure that the emissions from trading sources are indeed comparable. For example, trade for atmospheric emissions can be restricted to limit trading that would increase emissions in already heavily polluted areas. Alternatively, a pollution permit can be designed such that it would allow different quantities of emissions in different geographic zones to reflect different ambient conditions, and thus different damage costs. Traditionally, government regulation has focused on so called "command-and-control" (CAC) instruments which determine emission standards for every polluting source, either uniformly for all sources or differentiated by source. In either case, the polluter has no choice but to comply with the mandated emission standard. In contrast, economic instruments (EI) or market-based instruments (MBI) change the incentives of polluters without determining a specific level of required pollution control for each polluting source. In theory, economists have shown very significant cost savings that can be achieved by using EI instead of CAC regulation. The key saving from EI results from the fact that EI can more