Environmental benefits from marketable discharge permits or an ecological vs. economical perspective on marketable permits

Abstract

Economists typically extol the virtues of marketable discharge permits based on their ability to obtain a given environmental standard at least cost. Previous empirical studies of marketable permits have quantified the benefits from the use of permits relative to a command-and-control system in terms of cost savings. Occasionally, the benefits of a permit system are described by noting that the efficiency of such systems would allow improved environmental quality relative to a command-and-control system for the same cost. That is, the increased efficiency resulting from a permit system would allow environmental regulators to tighten emission standards, resulting in less pollution while still holding costs at their initial level. This paper presents a simple conceptual model that examines the potential emission savings from a marketable permit system. The conceptual model is empirically implemented with data on abatement costs for light-duty vehicles in California. The emission saving potential is directly compared with the cost saving potential. Although cost savings from a marketable permit system in this context are found to be relatively modest, on the order of 1% to 10%, the emission savings potential is found to be much larger. Estimates of the emission savings possibilities range from about 7% to 65%.