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The optimal size of a permit market

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  • Krysiak, Frank C.
  • Schweitzer, Patrick

Abstract

Regulating the emissions of non-uniformly mixed pollutants with a permit market carries the risk of hot spot formation, which can be reduced by dividing the regulation area into trading zones. The trading zone approach has been extensively discussed for the full-information case. We consider incomplete information concerning the emitters' abatement costs, their locations, and pollution dispersion. We derive the optimal number of trading zones and the optimal number of permits per zone and analyze under which conditions a system of independent trading zones is superior to other policy measures. Our results show that appropriately sized permit markets are well-suited to regulating non-uniformly mixed pollutants under informational constraints if firms are not too heterogeneous. Only for substantial heterogeneity and a highly non-linear damage function can it be optimal to use command-and-control strategies.

Suggested Citation

  • Krysiak, Frank C. & Schweitzer, Patrick, 2010. "The optimal size of a permit market," Journal of Environmental Economics and Management, Elsevier, vol. 60(2), pages 133-143, September.
    • Handle: RePEc:eee:jeeman:v:60:y:2010:i:2:p:133-143
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    2. Estay, Manuel & Stranlund, John K., 2022. "Entry, location, and optimal environmental policies," Resource and Energy Economics, Elsevier, vol. 70(C).
    3. Chung, Sung H. & Weaver, Robert D. & Friesz, Terry L., 2012. "Oligopolies in pollution permit markets: A dynamic game approach," International Journal of Production Economics, Elsevier, vol. 140(1), pages 48-56.
    4. François DESTANDAU & Anne ROZAN & Sandrine SPAETER, 2014. "Supra-Regional vs. Regional Regulators in the Water Pollution Mitigation: Optimal Exemption Policies," Working Papers of BETA 2014-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Pu-yan Nie, 2012. "A monopoly with pollution emissions," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 55(6), pages 705-711, September.
    6. François Destandau & Youssef Zaiter, 2022. "Cost-benefit analysis of nitrate abatement in the Souffel catchment (France): Sensitivity study of the damage and spatialization of the abatement effort," Post-Print hal-03658461, HAL.
    7. Werner Antweiler, 2017. "Emission trading for air pollution hot spots: getting the permit market right," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 19(1), pages 35-58, January.

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