Marketable Emission Permits

Industrial emission is probably the largest influence human beings exert over the atmosphere and water system. Sulfur oxides, carbon oxides and water steam are the major human contributors for climate change, acid rain and smog, that are released by millions of manufacturers everyday worldwide.

Governments have adopted several policies to restrict the industrial emission, motivating companies to spend more on technologies helping to reduce their emission. Direct regulations are the most common way. Some governments choose to tax the pollution and subsidize firms that emit pollution lower than expected level. However, those policies generate large government administrative and monitoring costs. In 1970s, some economists started advocating market method to control industrial emission, marketable/tradable emission permits system. This system would set up a limited pollution allowance in an area, distributing the pollution permits to firms with all the permits tradable among or within companies. That is, corporations pollute less than allowed can make profits by selling their permits, while those pollute more than allowed need to spend more on their pollution. Overall, by theory, this could encourage companies to reduce their emission to cut the costs with less government supervisory effort.

Although this system effectively reduce the costs of reducing pollution, the application proves to be difficult. The price and amount of permits are very difficult to set up at the optimum level, because it is hard to evaluate the costs generated from the system. Also, as a new market, the entry and trasaction costs are not, as assumed, closed to zero. They impede the large adoption of this system. Right now, the most popular type of emission permit system is carbon trade market. Although debates exist, this market is proved to be efficient in controlling the carbon trace of businesses at a lower social and government cost.

For my project, I hope that I can look into the circumstances under which shall this system work well and the reasons for it.

Here is a video about a debate in the US congress about a bill
for setting up carbon dioxide emission permits system in 2009. With the pressure from the economic condition, this system is being criticized for damaging consumption power and reducing company profits: