Relation to other Techniques
Tradable Pollution Permits (TPPs) builds upon the Coase theorem with its idea of a regulatory or governmental entity assigning property rights over certain public property.The permits are considered property of the firm, as the right to pollute can be bought, traded, and utilized. But TPPs differs from this theory because the market does not need very few people like the Coase theory does. Another difference is that TPPs markets assign property rights to many entities, not just one as with the Coase theorem (Hanley, 27-28). Because of these distinguishing factors, TPPs is able to address the many environmental issues where there are many parties involved. With the number of vested interest parties, political or equity concerns prevent the awarding of property rights to one party. These obstacles often make the Coase theorem unworkable. This holds even if the outcome is the same regardless of the choice of property owner is, which is a characteristic of the Coase theory. The requirements of the Coase theorem for low transaction costs and clear property rights don't often exist in the marketplace, and so they can also make the application of the theory unfeasible.
It also serves as an alternative to green or Pegovian taxes. Proponents of these taxes claim it doesn’t distort market, but rather, that they actually correct market distortion through the so-called produces double dividends effect. This effect states that there is increased abatement and increased revenue for government with such taxes as a coal tax. This allows the treasury to rely less on distortion-causing income and other taxes. But green taxes also can distort and inflate market prices, and cause a decrease in labor demand. Green taxes also are complex with all the information required for it. Data must be culled about the nature of the pollutant, valuation studies must be done to quantify the risk in monetary terms, and the firms' MAC and benefits curves must be known. This adds up to a lot of administrative costs. They also do not ensure that the specific pollution abatement benchmark will be reached. (Hanley, 29, 284) . They also require significant amounts of political capital investment, as they place a burden on both the producers and the suppliers. This political will has been lacking lately.
Market based solutions can represent a better choice in most cases than command-and-control type of regulation, and in many cases present a better alternative to either green taxes or property assignment using the Coase theorem. The latter two methods are still viable in some cases. Green taxes are preferable when one wants to wield more control of the cost of pollution reduction; when reaching a target emission threshold isn't critical; and when the information costs aren't prohibitive. Occasionally, these market based solutions should incorporate some command-and-control elements especially when dealing with highly toxic pollutants.
Source: Hanley, Nick, Jason F. Shogren, and Ben White. Introduction to Environmental Economics. 2001.