Requirements for a Successful Permit Market
Note:These are Not Guarantees
- Scarcity of permits (which determines price and increases pollution abatement)
- Permits that are standardized and clearly understood across market
- Transaction and information costs are kept to a minimum, along with government intervention, i.e. a free market
- Permits are bankable and tradable, especially into the future.
- Penalties for exceeding individual firm cap (polluting beyond # of permits obtained) are more expensive than cost of permit.
- Undesired externality (pollution, development) must affect many people, or be transboundry. The larger the bubble of the externality-affected area the better.
- Toxic chemical must be uniformly mixing. That is it must not be like mercury, a non-uniformly mixing carcinogen that does not travel far from its point source. If a cap and trade mechanism is used in these situations, there are likely to be hotspots of contamination localized around firms that chose not to abate. In cases such as heavy metal air pollution, or when downstream industries bear the brunt of the upstream pollution a market solution can work with some modification. This includes a zonal system that either prohibits trade of permits between certain zones, or a rule that sets the trading rates between zones as something besides a 1 to 1 basis- say one downstream permit is equal to three upstream permits (Hanley, 261).
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