Tradable Permits Essay ⋆ Environment Essay Examples ⋆ EssayEmpire

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A tradable permits system represents an attempted solution to problems arising from the use of common property resources, such as air and water, either as a source of value or a sink for pollutants or waste. Since such resources are freely available to everyone and costs of their overuse, depletion, or damage are not borne directly by the user, there is a tendency toward unsustainable usage (a Tragedy of the Commons).

A tradable permit system limits the amount of the resource that can be used or the quantity of pollution that can be emitted, but then allows this quantity to be freely exchanged. Tradable permits are licenses issued by a competent authority that give the holders the right to use the resource specified (e.g., producing pollution or catching fish). They may be traded with other institutions or individuals, generally, but not necessarily, for money. Tradable permits have been considered a success in tackling some environmental issues. In theory, their advantage is to create an incentive for increased efficiency, allowing those who pollute less in production, for example, to sell their unused rights for a profit. Tradable permits have been used largely in the areas of water management, fisheries control, air pollution, and land use. The Kyoto Protocol on atmospheric emissions is perhaps the best-known example. The Chicago Climate Exchange has emerged in the United States in anticipation of carbon trading to control global warming.

Market-oriented approaches appeal to those who are opposed to the concept of governmental control of the use of natural resources. Governance is essential for such systems to work, however, since caps and limits must be set and enforced and trading must be organized and regulated. It is necessary to ensure that all participants have confidence in the system and that it is transparent.

There are transaction costs involved in the trading process and inevitable asymmetries of information may make the pricing mechanism inefficient. In order to improve the efficiency of the process, additional features have been implemented in some cases, in the same way that derivative or future options are used in financial markets to enable parties to manage their exposure to risk (such as the inefficient use of resources). These include by-catch quotas, safety values, and zero revenue auctions. These market-based mechanisms can be effective when properly regulated, although there is always the concern of collusion or other disreputable behavior on the part of participants.

Bibliography:

Tom Tietenberg, “The Tradable Permits Approach to Protecting the Commons: What Have We Learned?” Paper Presented at the First Workshop of the Concerted Action on Tradable Emission Permits (CATEP) (Venice, December 3-4, 2001);
Ada Wossink and Cornelis Gardebroek, “Environmental Policy Uncertainty and Marketable Permit Systems: The Dutch Phosphate Quota Program,” American Journal of Agricultural Economics (v.188/1, 2006).