Incentive Based Strategies Transferable Discharge Permits Lecture 20
Incentive Based Strategies: Transferable Discharge Permits Lecture 20
• While Taxes on emissions is an interaction between polluters and public authorities • Transferable Discharge Permit (TDP) works in a more decentralized fashion • Working through the interaction of polluters themselves
• General Principles – Property Rights? – TDP: Every permit entitles its holder to emit one unit of pollutant over a period of time – Begins by a centralized decision – Upper limit on a quantity of effluent – TDP are transferable
• Current sulfur emissions are 150000 tons/month • 100000 tons/month A power plant: 7000 tons/year Permit is for 5000 tons/year Reduce emissions to 5000 tons/year Buy more permits Reduce emissions to 4000 tons/month and sell the excess permits
There are gains from trade for the two polluters in trading a permit Firm A: Sell at $1200 and Firm B: Buy at anything less than $4000
• For satisfying equi-marginal principle, the permits shall be traded among different sources • This requires a market for permits where tradable prices are publicly known MAC 1 = MAC 2 = MAC 3 = MAC N • Permits would flow from sources with relatively lower MAC to those with high abatement costs
• The central authorities don’t need to know the MAC functions • Trading of permits doesn’t alter total amount of emissions • Make the policy equitable by distributing permits appropriately Allocation formula • Size of the firm • Amount of firms present and the aggregate emissions occurring • How much effort has already been put in to reduce emissions • Careful of perverse incentives • Source of revenue for public agencies by auctioning rights
• Establish Trading Rules – Public agency should establish some clear and simple rules and then allow trading to proceed – Who may trade? • Only potential traders or any other agencies – such as environmental protection groups at regional or national level – Higher the public intervention, greater would the inefficiency in the efficient flow of permits, uncertainty among traders and transaction costs – Size of trading areas
• Non Uniform Emissions • Factors that affect the damage functions of each emission point – Distance – MAC functions • Different transfer coefficients
• Source B is twice as damaging as source A, then former should buy two permits to get one! • Zoned system; each zone relatively same damage function • Make trading restricted to respective zones or make transfer coefficients for each zone • Trading on one-to-one basis is not applicable
• TDP and competition problem – Markets work best under competitive economic environment – Efficient interactions would lead to the right price of permit – If the firms are few, trading zones should be set as widely as possible include large number of buyers and sellers – Traders might as well be widely dispersed, but polluters should not be!! – Trading areas be restricted or defined broadly?
• TDP and Enforcement – Check that sources are not emitting more than the amount of TDP they possess • Number of permits • Amount of emissions done – Administrative agencies could keep a track of market transactions • Self reporting of permit buyers – Market for permits
• TDP and incentives for R&D Reduce emissions by engaging in R&D program and hence save (a + c)
• Problems of TDP – Based on the efficiency of markets – What is the allocation formula – Monitor and enforce compliance • Benefits – Substantially lower costs of implementation – Give incentives to the polluters to reduce level of emissions… – Achieving e* is not the aim of polluters but that of policymakers
- Slides: 14