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Environmental and Resource Economics

, Volume 55, Issue 3, pp 309–336 | Cite as

A Tradable Permit System in an Intertemporal Economy

  • Ken-Ichi AkaoEmail author
  • Shunsuke Managi
Article

Abstract

It is known that in an intertemporal competitive economy, a tradable permit system may not achieve efficiency without setting appropriate permit interest rates (i.e., rewards for holding permits). To find the rates, however, we need to know in advance the path of efficient permit prices, which is difficult to obtain. This study intends to solve this problem in two ways. First, we analyze a special case in which the permit interest rates are given by a simple rule. For example, if the marginal abatement cost of pollution emission is constant, then the appropriate rate is to equal the monetary interest rate. As is the case for global warming, if the damage is caused in the future far beyond the planning period of the environmental program, the appropriate rate coincides with the marginal self-recovery of environmental stock under certain conditions. As a second approach, we propose a tradable permit system with a permit bank, as a mechanism by which the permit interest rates are generated endogenously without governmental intervention other than the issuance of permits. However, we also show that this approach raises the problem of indeterminacy of the equilibrium.

Keywords

Tradable permit system General equilibrium Permit interest rate  Permit bank Indeterminacy 

JEL Classification

H23 K32 Q58 

Notes

Acknowledgments

We are grateful to two anonymous referees of this journal for their detailed and helpful comments and the constructive criticism. Financial supports are acknowledged: MEXT Kakenhi (K. Akao: 23330065, 19530161, 18078004, GCOE E11; S. Managi: 70372456, 24330070).

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Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  1. 1.School of Social SciencesWaseda UniversityTokyoJapan
  2. 2.Graduate School of Environmental StudiesTohoku UniversityAoba-Ku, SendaiJapan

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