(A) design of tradable tagged permit systems and its applications to environmental problems

Abstract

We propose a new tradable permit system, called "Tradable Tagged Permit System (TTPS)," where there are various types of permits, one for each pollutee. It induces pollutees to reveal their damages through their permit prices and ensures cost-effective emission control by means of permit trades among polluters. It is shown that the TTPS gives voluntary participation incentives for all the parties concerned and improves the environmental quality. The TTPS can be used as an endowment trading scheme for complementing conventional single-type permit systems, through which the fixed target emission level can be adjusted toward an efficient level. The repeated application of TTPS guarantees a convergence to the global first -best solution in a dynamic game of global pollution control. A numerical analysis with empirical data for the global warming problem shows that the TTPS achieves most of the potential gains that can be achieved by global cooperation, even with an incentive-compatible permit allocation through based on voluntary pledge levels. Sensitivity analyses for discount factors and purification rates indicate that the TTPS is an effective policy instrument for a wide range of long-term dynamic pollution problems. Another important observation in the practical sense is that the issues of emission reduction, financial resources and technology transfer, that are typically negotiated separately and often unsuccessfully, can be addressed in an integrated manner within the TTPS framework. The TTPS guarantees a greater efficiency with less informational burden for regulatory authorities, dynamic efficiency, voluntary participation incentives, by means of delegations of all the relevant decisions to individual agents. The TTPS can be applied to other international issues and some domestic pollution control problems, as well as common property resource problems, where the long-term dynamics play a crucial role and the autonomous participation is a key requirement.