1. Incentive Based Strategies: Transferable Discharge Permits
Lecture 20

2. While Taxes on emissions is an interaction between polluters and public authorities
Transferable Discharge Permit (TDP) works in a more decentralized fashion
Working through the interaction of polluters themselves

3. General Principles Property Rights?
TDP: Every permit entitles its holder to emit one unit of pollutant over a period of time
Begins by a centralized decision
Upper limit on a quantity of effluent
TDP are transferable

4. Current sulfur emissions are 150000 tons/month 100000 tons/month
A power plant:
7000 tons/year
Permit is for 5000 tons/year
Reduce emissions to 5000 tons/year
Buy more permits
Reduce emissions to 4000 tons/month and sell the excess permits

5. There are gains from trade for the two polluters in trading a permit
Firm A: Sell at $1200 and Firm B: Buy at anything less than $4000
In the trading of permits, and the adjustment of emissions in accordance with their permit holdings, these sources would be led to an outcome that satisfies the EMP

6. For satisfying equi-marginal principle, the permits shall be traded among different sources
This requires a market for permits where tradable prices are publicly known
Permits would flow from sources with relatively lower MAC to those with high abatement costs
MAC1 = MAC2 = MAC3 = MAC N
Subsequent market transactions will redistribute them in accordance with the relative marginal abatement costs of polluters whatever the original distribution may have been

7. The central authorities don’t need to know the MAC functions
Trading of permits doesn’t alter total amount of emissions
Make the policy equitable by distributing permits appropriately  Allocation formula
Size of the firm
Amount of firms present and the aggregate emissions occurring
How much effort has already been put in to reduce emissions
Careful of perverse incentives
Source of revenue for public agencies by auctioning rights

8. Establish Trading Rules
Public agency should establish some clear and simple rules and then allow trading to proceed
Who may trade?
Only potential traders or any other agencies – such as environmental protection groups at regional or national level
Higher the public intervention, greater would the inefficiency in the efficient flow of permits, uncertainty among traders and transaction costs
Size of trading areas

9. Factors that affect the damage functions of each emission point
Non Uniform Emissions
Factors that affect the damage functions of each emission point
Distance
MAC functions
Different transfer coefficients

10. Source B is twice as damaging as source A, then former should buy two permits to get one!
Zoned system; each zone relatively same damage function
Make trading restricted to respective zones or make transfer coefficients for each zone
Trading on one-to-one basis is not applicable

11. TDP and competition problem
Markets work best under competitive economic environment
Efficient interactions would lead to the right price of permit
If the firms are few, trading zones should be set as widely as possible  include large number of buyers and sellers
Traders might as well be widely dispersed, but polluters should not be!!
Trading areas be restricted or defined broadly?
Remember, potential traders are polluters!

12. TDP and Enforcement
Check that sources are not emitting more than the amount of TDP they possess
Number of permits
Amount of emissions done
Administrative agencies could keep a track of market transactions
Self reporting of permit buyers
Market for permits

13. TDP and incentives for R&D
Reduce emissions by engaging in R&D program and hence save (a + c)

14. Problems of TDP Benefits Based on the efficiency of markets
What is the allocation formula
Monitor and enforce compliance
Benefits
Substantially lower costs of implementation
Give incentives to the polluters to reduce level of emissions…
Achieving e* is not the aim of polluters but that of policymakers