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 easily achieve equal marginal abatement costs across pollution sources. This means that soures which can reduce pollution at a lower cost will reduce pollution more than those sources which would occur higher costs for reducing pollution by the same amount. Clearly, if pollution is reduced at the sources where the costs are lower, total social costs of pollution control will be less. EIs leave the polluters with choices about the level of pollution abatement at the individual source and about the technology used to achieve pollution control. Together with the economic incentives of polluters to minimize their costs, this flexibility means that pollution control can be achieved at the lowest cost. The real cost savings from the use of EI will depend on “how bad” actual CAC regulation is. A bad CAC regulator imposes uniform standards across all sources. A good CAC regulator would take the abatement costs of different sources into account when setting the standards for specific sources. A good CAC regulator would thus try to imitate the results of regulation with EI. However, there are good reasons to believe that even a very sophisticated CAC regulator would not achieve the same cost savings that can be achieved through EI regulation. The first reason is that regulators will always have less information than the polluters about all possibilities for pollution abatement and their costs. The second reason is that EI create a dynamic incentives for polluters to find cheaper ways of pollution control beyond the levels determined by the applicable standards. The term economic instruments refers to a set of different regulations that attempt to create markets for environmental protection, or at least integrate environmental costs in market prices while leaving polluters the choice about their individual pollution abatement levels and their technology. Table 1 shows a taxonomy of policy instruments for pollution control distinguishing between EI, CAC and direct government provision, on the one hand, and direct instruments that are tied directly to emission levels versus indirect instruments that address pollution through the inputs or outputs to the processes that generates pollution, on the other hand.