Tradable Permits THOMAS STERNER Policy Instruments for Environmental and Natural Resource Management

1. Chapter 7: Tradable Permits
THOMAS STERNER
Policy Instruments for Environmental and Natural Resource Management
Presented by Warawut Ruankham
25 April 2021, NIDA, Thailand

2. Content of Presentation
• Logical idea about the “tradable Permits”
• The theoretical foundation
• Emission Trading Programs in The United State
• Other Emission trading programs outside the U.S.
• Trading Program for Other Resources

3. Logical idea about the “tradable Permits”
• One of the policy instruments for environmental resources management
It is the way to manage;
• Emission i.e., Co2, lead-phaseout
• Harvest Capacity
• Sustainable harvest yield
Note: allowing dynamic changes in population,
technology, economic growth, mobility.
Example:
• Tradable Emissions Permits (TEPs)
• Individual Transferable Quotas (ITQs)
The total amount of tradable permit

4. The theoretical foundation of the mechanism
Coasion (Coase 1960) and Dales (1968a, 1968b)
To create the authority to sell “rights to pollute”
Let the market allocates “rights to pollute” among the firms

5. Features of tradable permits
Advantages:
• Create incentive to increase abatement
• Create incentive to lower emission and externality
Disadvantages:
• Complexity of the practical system
• Flexibility and reliability of the program
Thing to be aware: permanence, reliability (trust), and flexibility of the optimal value for total emission as
it might affect cost of firm

6. Emission Reduction Credit (ERCs) Programs
1. Emission Reduction Credit Programs
2. Ambient Permit Trading
3. Output-based Allocation
4. Cap-and-Trade Program

7. U.S. Emissions Trading Program
1. Offset Policy: allowed new firms to start up (or old
firms to expand) facility in nonattainment area,
and required them to buy “extra reduction” or
Emission Reduction Credit (ERCs) from existing
firm in the area while maintaining regional aggregate
emissions.

8. U.S. Emissions Trading Program
2. The Bubble Policy:
• Firm could reduce emissions at some location less than
would normally be required by regulation if it is
simultaneously reduced emissions more than another
locations.
• This program provided room for emissions trading.
- 5 + 5
Location A Location B

9. U.S. Emissions Trading Program
3. Netting:
• Allowed existing firms that wanted to expand or modify the
option of avoiding the stringent review process for new
sources as long as the NET increase in emissions (After
reduction of ERCs acquired) was below a certain threshold
4. Banking:
• Firms were allowed to store certified ERCs for subsequent
use in above programs –i.e., for bubbles, netting, or
offsets.
- 5 + 5

10. Ambient Permit Trading
General Idea:
• the Ambient Permit System is the best alternative for controlling spatially distributed pollutants. It
ensures that the ambient air quality targets are met at a least cost by utilizing the information on source
location and pollution dispersion pattern.
• Area must be large enough to allow trading between polluters with varying cost of abatement.
Problems:
• It may create regional or local “hot spot” (particularly high concentrations of industry and pollution)
Solution:
• Separate permit trading systems for each relevant area or by a spatially differentiated ambient permit
system (APS)
• Zonal Trading

11. Ambient Permit Trading
General Idea:
the Ambient Permit System is the best alternative for controlling spatially distributed pollutants. It
ensures that the ambient air quality targets are met at a least cost by utilizing the information on source
location and pollution dispersion pattern. Area must be large enough to allow trading between polluters
with varying cost of abatement.
Problems:
It may create regional or local “hot spot” (particularly high concentrations of industry and pollution)
Solution:
• Separate permit trading systems for each relevant area or by a spatially differentiated ambient permit
system (APS)
• Zonal Trading to avoid spatial differentiation
Note: this program encountered some practical difficulty and complexity of system

12. Output-Based Allocation (Leaded-phaseout program, 1982)
General Idea:
• Allocate “right to pollute” to all producers based on intensity (or output) rather than total amount
of pollution
• Ex: Phaseout of leaded gasoline has rights to pollute in proportion of their gasoline sale at
refinery and retails level
Note:
• This system is theoretically less efficient than a cap-and-trade permit or Pigovian tax on
externality
• Tenure security and security of property right has to be ensure

13. Cap-and-Trade Program, 1990s
Processes:
1. Regulators determine the total quantity of allowable emissions or resources harvest (the
“cap”)
2. Allocate rights among polluters (By auction, grandfathering, other mechanism)
3. Allow polluters to trade “rights”
Note:
• This system is theoretically less efficient than a cap-and-trade permit or Pigovian tax on
externality
• Tenure security and security of property right has to be ensure
Examples:
Sulfer Oxide(SO2), nitrogen oxide (NO2) emission trading program in USA

14. Other Emissions Trading Programs out side of the U.S.
Chile: (most advanced example of permit trading in developing country)
• 1992 decree that applied to sources of emission to air
-stipulated emission standard of 112 milligram per cubic meter
-trade emission reduction lower than standard rate
Europe:
• UK carbon trading scheme
• Emissions Trading Scheme (ETS) cap-and-trade system
• The Climate Change Levy Agreement (CCLA)

15. Trading Program for Other Resources
• ITQs in fishery
• Grazing right
• Water right
• Transferable development right (TDRs) for land planning