A Tradable Permit System in an Intertemporal Economy

Kenichi Akao, Shunsuke Managi

Research output: Contribution to journalArticle

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)309-336
Number of pages28
JournalEnvironmental and Resource Economics
Volume55
Issue number3
DOIs
Publication statusPublished - 2013

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interest rate
Global warming
Pollution
Planning
Recovery
Costs
abatement cost
global warming
pollution
damage
economy
Interest rates
Tradable permits
rate

Keywords

  • General equilibrium
  • Indeterminacy
  • Permit bank
  • Permit interest rate
  • Tradable permit system

ASJC Scopus subject areas

  • Management, Monitoring, Policy and Law
  • Aerospace Engineering

Cite this

A Tradable Permit System in an Intertemporal Economy. / Akao, Kenichi; Managi, Shunsuke.

In: Environmental and Resource Economics, Vol. 55, No. 3, 2013, p. 309-336.

Research output: Contribution to journalArticle

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