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Published October 5, 2017 | Submitted
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Designing a Market for Tradable Emissions Permits


The economics literature shows that tradable emissions permits have important theoretical advantages over source-specific technical standards as a means for controlling pollution. But efficient, competitive markets in emissions may also be difficult to implement: transactions may be few with high negotiation costs; the market may be highly concentrated. Simple workable versions of the market concept may fail to take account of important complexities in the relationship between the pattern of emissions and the geographical distribution of pollution. This paper examines the feasibility of tradable permits, given these potential problems. Although the empirical part of the paper deals with a specific case—particulate sulfates in the Los Angeles airshed—the methods developed for investigating these issues have general applicability. Moreover, the particular market design that is proposed—an auction process that involves no net revenue collection by the state—has attractive features as a general model.

Additional Information

The work reported here was supported by the California Air Resources Board, Glen Cass provided useful comments on an earlier draft, and Richard Hanson provided data management support. The authors are solely responsible for the contents of this paper. Published in Reform of Environmental Regulation, edited by Wesley Magat. Lexington, MA: Lexington Books, 1982.

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