Marketable Permit Essay ⋆ Environment Essay Examples ⋆ EssayEmpire

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Marketabl e permits are instruments aimed at reducing pollution on an individual level. The permits represent a quota of pollutant that the permit-holding individual or organization is allowed legally to emit, and may also be bought or exchanged with other permit-holders for financial considerations. The laws of supply and demand apply to such exchanges, with a national or international regulatory scheme monitoring observance of permit limits and, when necessary, reducing the total number of permits in circulation to cut down on pollution. Many firms find this system a powerful incentive to make their operations cleaner and more efficient because they will not exceed their permitted levels of emissions, and because the unused permit or some portion of it becomes a commercially valuable asset.

This system combines two other approaches that have been tried but, in some circumstances, found wanting. The “command and control” system relies on strong governmental control of pollution and the imposition of penalties on perpetrators. This system can only be successful when state governments take pollution control issues seriously and have the capacity to monitor and police levels of pollution emitted. The U.S. George W. Bush administration has not taken pollution and its implications seriously, and has not signed the Kyoto Protocol aimed at pollution control.

The second approach is to rely on market-based transactions to limit pollution, but this is impractical because those suffering most from pollution are rarely those who cause it, and because market operations are prone to failure unless strongly regulated so that abuses are prevented. By issuing permits, governments can control the marketplace, but also permit some market transactions to take place. Consequently, attempts to create monopolies or in other ways rig the market should be spotted by regulators, although at the cost of additional expense in the system.

There have been complaints based on ethical grounds that it is inappropriate to give the ability and right to pollute to those who are the greatest offenders. However, this need not be problematic so long as the polluters are properly monitored. Even so, it is possible that those firms or states that have already taken steps to reduce their emissions will be disadvantaged if the assessment of total permissible levels is taken on current rather than historic measurements. Given the importance of the problem of pollution, this argument is trivial and it may even be that such states can obtain economic benefits by selling their technology to others struggling not to exceed their permitted targets.

Problems with the marketable permits scheme and similar arrangements include the difficulty in identifying accurately the total level of appropriate pollution, together with the issues surrounding transaction costs and uncertainty. Transaction costs are all those costs that are part of an economic transaction but are not central to it. Examples include insurance, verification costs, transportation, and legal fees. Since there is a measure of uncertainty attached to pollution and environmental issues, which are complex and often chaotic in nature, the transaction costs involved in trying to accurately price permit purchases can be high or can be ignored at the risk of making the purchase inefficient. Despite the problems inherent in the system, the marketable permits approach appears the most helpful one currently available to tackle pollution.

Bibliography:

John Ledyard and Kristin SzakalyMoore, “Designing Organizations for Trading Pollution Rights,” Journal of Economic Behavior and Organization (v.25/2, 1994);
Arik Levinson, “Why Oppose TDRs? Transferable Development Rights Can Increase Overall Development,” Regional Science and Urban Economics (v.27/3, 1997);
Juan-Pablo Montero, “Marketable Pollution Permits with Uncertainty and Transaction Costs,” Resource and Energy Economics (v.20/1, 1998);
Putting Markets to Work: The Design and Use of Marketable Permits (OECD, 1998).