A Tradable Permit System in an Intertemporal Economy

Ken-Ichi Akao and Shunsuke Managi

Environmental & Resource Economics, 2013, vol. 55, issue 3, 309-336

Abstract: It is known that in an intertemporal competitive economy, a tradable permit system may not achieve efficiency without setting appropriate permit interest rates (i.e., rewards for holding permits). To find the rates, however, we need to know in advance the path of efficient permit prices, which is difficult to obtain. This study intends to solve this problem in two ways. First, we analyze a special case in which the permit interest rates are given by a simple rule. For example, if the marginal abatement cost of pollution emission is constant, then the appropriate rate is to equal the monetary interest rate. As is the case for global warming, if the damage is caused in the future far beyond the planning period of the environmental program, the appropriate rate coincides with the marginal self-recovery of environmental stock under certain conditions. As a second approach, we propose a tradable permit system with a permit bank, as a mechanism by which the permit interest rates are generated endogenously without governmental intervention other than the issuance of permits. However, we also show that this approach raises the problem of indeterminacy of the equilibrium. Copyright Springer Science+Business Media Dordrecht 2013

Keywords: Tradable permit system; General equilibrium; Permit interest rate; Permit bank; Indeterminacy; H23; K32; Q58 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Working Paper: A Tradable Permit System in an Intertemporal Economy: A General Equilibrium Approach (2008)
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DOI: 10.1007/s10640-012-9628-5

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