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Emission discharge permits with regulatory tiering: Numerical simulations with a computer-assisted smart market

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  • Keith Willett
  • Anetta Caplanova
  • Rudolf Sivak

Abstract

Permit trading for a cap and trade policy where the property right traded is an emission discharge permit (EDP) and with 'hot spots' can be addressed in a cost-effective manner in a framework combining regulatory tiering and a 'computer-assisted' smart market model. A smart market model is an optimisation-based framework used to compute permit trading solutions and the actual calculation of permit trades is based on a linear programming model. The model objective function is defined as the aggregate net benefit function for the market traders subject to a well-defined constraint set. The key characteristic of the smart market model is that all EDP trades are with a common pool and no bilateral trades are allowed to occur. The 'hot spot' problem is addressed by adding a set of regional pollutant constraints to the smart market model constraint set. In the paper, we design and implement a smart market model with regulatory tiering. The property right traded is an EDP and the regulatory tiering component is introduced into the smart market model constraint set as a set of regional pollutant constraints. Using a linear programming model, a set of experiments are extracted from numerical simulations to demonstrate the smart market usefulness for dealing with the specific environmental problems from the policy perspective.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:teepxx:v:4:y:2015:i:3:p:259-277
    DOI: 10.1080/21606544.2014.987181
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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.
    2. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    3. 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.
    4. Scott E. Atkinson, 1983. "Marketable Pollution Permits and Acid Rain Externalities," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 704-722, November.
    5. Amy W. Ando & Donna Ramirez Harrington, 2006. "Tradable Discharge Permits: A Student-Friendly Game," The Journal of Economic Education, Taylor & Francis Journals, vol. 37(2), pages 187-201, April.
    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. 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.
    3. 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.

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