Tradeable Permits in Pollution Control: Market-Based Approach

1. Lecture: 5 Development and Environmental Economics By Miss Pratiti Singha, Assistant Professor(Part Time), Department of Economics, Radhamadhab College, Silchar-06

2. Tradeable permits as an incentive approach of pollution control Tradeable permit is a system of tradable property rights for the management of environmental quality. Property rights are defined for environmental resources and offered for sale to the highest bidder. Using this method, an environmental authority could achieve a specific environmental target by limiting the pollution discharges to the target level by restricting the quantity of permits. As a market for permits emerged, a market clearing price would also emerge. This price would indicate to polluters the opportunity cost of waste emissions.

3. Coast minimization behavior would result and marginal abatement costs would be equalized. Polluters with low costs of abatement will find it relatively easy to abate pollution rather that buy more permits. On the other hand, polluters with higher costs of abatement will buy up permits rather than abating emissions. Since polluters have different costs of abatement, the market will form with low cost polluters selling permits to high cost polluters.

4. There are two basic approaches to design of a tradeabale permit system. An environmental authority can issue a quantity of permits for each receptor point defined in terms of an allowed contribution of pollution concentration at each point. This creates a separate trade or market at each receptor point. A firm would need permits for all receptor points which it affects. This is known as the Ambient Permit System (APS) and refers not to source emissions but to effects of pollution at particular points. It can achieve a least cost outcome and is simple: it needs no information on firm abatement costs. However, it can be cumbersome to polluting firms as they have to have a permit for each receptor affected. As well, pollutants with localized affects can create ‘hot spots’ that not coincide with designated receptor points.

5. The Command and Control approaches to implementing environmental policy for pollution control The Command and Control approach is the dominant form of environmental regulation in the world today. Although it can take many forms, individual polluters must try to meet the pollution challenges. The essence of commaned and control is that the regulator collects the information necessary to decide the physical actions to control pollution; The regulator then commands the polluter to take specific physical steps to control the pollution.

6. The regulator is generally quite specific as to what steps must be taken. C&C regulates can take many forms. For example, the Clear Air Act in the US requires the Environment Protection Agency to determine the minimum pollution control performance of new sources of pollution. C&C regulators may take many specific forms.

7. Many governments use different policy tools to achieve environmental quality. But for simplicity, they are being classified into two broad categories. (1) Command-and Control approach which uses pollution limits or technology based restrictions to directly regulate polluting sources. (2) Market approach-which uses incentive based policy tools to motivate abatement through market forces. Among the two, command and control approach is the more conventional approach, dominating environmental policy in most nations. However, over the time period policy makers began to look for alternatives and some countries like the US have integrated more market-based solutions in their environmental policy programmes.

8. Combining incentive-oriented control instruments with more conventional methods seems to be indicative of a trend in environmental policy. But the relative gains of market-based solutions cannot be fully appreciated without assessing the cost-effectiveness of the command and control approach. The practical basis for assessing the command-and control approach according to the cost effectiveness criterion is to determine whether society is incurring higher costs than necessary to achieve a given level of environmental quality.

9. For the sake of discussion, let us consider the abatement standard as the socially desirable outcome, perhaps motivated to protect human health. To achieve cost-effectiveness, policy makers must determine the relative costs of all control instruments that can achieve this objective and select the one that minimizes costs. Given this general premise, we can identify two command and control decisions that may violate the cost-effectiveness criterion. The first is the use of a technology-based standard and the second is the use of uniform standards.