Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration

Per-Olov Johansson ()
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Per-Olov Johansson: CERE and HHS, Postal: Department of Economics, Umeå University, S-901 87, Umeå, Sweden, http://www.cere.se/

No 2016:14, CERE Working Papers from CERE - the Center for Environmental and Resource Economics

Abstract: There are different views with respect to the treatment of tradable permits for greenhouse gases in cost-benefit analysis. This note aims at illustrating numerically within a simple general equilibrium model how to treat tradable permits in economic evaluations of projects. The note looks at a cost-benefit rule for a large project providing a public good interpreted as a shortcut for infrastructure, using a fossil fuel and a renewable as inputs. The paper also evaluates a small or marginal project involving the same output and inputs. In addition, it illustrates the Samuelson condition for the optimal provision of the public good. The note is a supplement to CERE Working Paper No 2015:11 and SSE Working Paper in Economics No 2015:3. The model used here may also be useful in advanced courses to illustrate general equilibrium cost-benefit analysis.

Keywords: Cost-benefit analysis; greenhouse gases; tradable permits; general equilibrium; Samuelson condition; numerical illustration (search for similar items in EconPapers)
JEL-codes: H21 H23 H41 H43 I30 L13 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2016-05-11
New Economics Papers: this item is included in nep-cmp, nep-ene, nep-env, nep-ore, nep-ppm and nep-pub
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