Tradable Permits versus Tradable Credits: A Survey and Analysis

Andries Nentjes and Edwin Woerdman

International Review of Environmental and Resource Economics, 2012, vol. 6, issue 1, 1-78

Abstract: This article compares tradable permits with tradable credits, two distinct economic instruments of environmental policy. It is demonstrated that under credit trading, which is an addition to (relative) emission standards, residual emissions are free of cost. Under permit trading (cap-and-trade), residual emissions always have a cost. The economic consequences of this difference are surveyed and analyzed with regard to various issues, including economic efficiency, political acceptance, incentives for adopting clean technologies, and incentives for legal compliance. The review concludes that permit trading is less costly to society than credit trading, but imperfect markets for output may change this ranking. The article reveals several gaps in the literature and formulates some new hypotheses for future research.

Keywords: Emissions trading; Cap-and-trade; Credit trading; Economic incentives; Instrument choice; Environmental law and economics (search for similar items in EconPapers)
JEL-codes: D21 D62 K32 Q58 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jirere:101.00000047

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