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Pricing mechanisms for cap and trade policies: computer-assisted smart markets for air quality

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  • Keith Willett
  • Anetta Caplanova
  • Rudolf Sivak

Abstract

The process of calculating market clearing prices for cap and trade environmental pollution policies dealing with both air and water pollution remains problematic. The permit trading processes are designed to mimic the cost minimisation outcome. In the paper we design the market process for allocating permits to achieve the same type of behaviour we observe for each decision maker in the overall cost minimisation model. We aim to develop a modelling system that would be easy and efficient to operate. We use the method which is known as a computer-assisted 'smart market' and has been used in a number of electric energy pricing situations. This approach has also been proposed and applied to some types of environmental quality and resource management policies. In the paper the theoretical structure of the 'smart market' model is provided. After the review of different models that have been used to represent permit trading situations, the smart market model structure based on the shadow prices is developed.

Suggested Citation

  • Keith Willett & Anetta Caplanova & Rudolf Sivak, 2014. "Pricing mechanisms for cap and trade policies: computer-assisted smart markets for air quality," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 57(8), pages 1240-1251, August.
    • Handle: RePEc:taf:jenpmg:v:57:y:2014:i:8:p:1240-1251
    DOI: 10.1080/09640568.2013.795887
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    References listed on IDEAS

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    1. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
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    3. Thomas H. Tietenberg, 1980. "Transferable Discharge Permits and the Control of Stationary Source Air Pollution: A Survey and Synthesis," Land Economics, University of Wisconsin Press, vol. 56(4), pages 391-416.
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    6. Atkinson, Scott & Tietenberg, Tom, 1991. "Market failure in incentive-based regulation: The case of emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 17-31, July.
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    Cited by:

    1. Anetta Caplanova & Keith Willett, 2019. "Emission Discharge Permit Trading and Persistant Air Pollutants (A Common Pool Market Application with Health Risk Specifications)," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(1), pages 19-38, February.
    2. Ghosh, Sanchari & Willett, Keith D., 2021. "Water Permit Trading for reservoir water under competing demands and downstream flows," 2021 Annual Meeting, August 1-3, Austin, Texas 313858, Agricultural and Applied Economics Association.
    3. Anetta Čaplánová & Rudolf Sivák & Keith Willett, 2021. "Dynamický model spoločného trhu s emisnými povoleniami ako spôsob riešenia problému znečisťovania perzistentnými látkami [Dynamic Model of Common-pool Emission Permit Market as a Method for Solving," Politická ekonomie, Prague University of Economics and Business, vol. 2021(3), pages 273-297.
    4. Willett, Keith D. & Ghosh, Sanchari, 2018. "An alternative market framework for water transfers when third party externalities dominate," 2018 Annual Meeting, August 5-7, Washington, D.C. 274287, Agricultural and Applied Economics Association.
    5. Syezlin Hasan & Line Block Hansen & James C. R. Smart & Berit Hasler & Mette Termansen, 2022. "Tradeable Nitrogen Abatement Practices for Diffuse Agricultural Emissions: A ‘Smart Market’ Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 29-63, May.
    6. Keith Willett & Anetta Caplanova & Rudolf Sivak, 2015. "Emission discharge permits with regulatory tiering: Numerical simulations with a computer-assisted smart market," Journal of Environmental Economics and Policy, Taylor & Francis Journals, vol. 4(3), pages 259-277, November.

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