Tradeable permits – Ten key design issues

2 Introduction In this paper, we provide a guide for policymakers who consider using tradeable permits as an environmental policy tool. Most of the issues we discuss are relevant both in the domestic and the international realm, although some have particular significance in one of the two areas. In recent years, tradeable permits (TP) have become rather widespread in use 1. The following table 1 gives an overview of some of the numerous experiments, in particular in the US. There is a wealth of resources available that comment on the success of these programs (Stavins 2002). One noteworthy point is that the international experience is rather small. Europe has only relatively recently begun to develop such programs. For example, in Denmark, the Ministry of the Environment fixes annual emissions ceilings in the power generation industry, and leaves the actual allocation to the country's two power plant consortia. The UK allowed intra-firm trading of SO 2-allowances among large combustion plants from 1991 to 1997. But inter-firm trading was not allowed (Sorrell 1999). 1 This should not obscure the fact, however, that tradeable permits are not the only game in town. In fact, important tradeoffs with alternative environmental policy instruments need to be considered. For space reasons, it is not possible to adequately deal with these tradeoffs here, and so we can only point the reader to the more extensive survey (Wagner and Schneider 2003) where questions like the optimal timing of environmental policy in the presence of significant uncertainties and irreversibilities and the relative merits of different policy instruments with respect to cost efficiency, environmental effectiveness, administrative practicability, dynamic efficiency and incentives for technological innovation, and political acceptability are discussed (Summary tables of the relative advantages and disadvantages can be found in the appendix of this paper). One particularly important insight developed recently in a number of papers (Abel et al. concerns the fact that policy decisions with respect to climate change are essentially irreversible and delay of action is possible. Under these conditions, waiting has optionality value; thus, the observed delay in climate policy implementations may at least partially be an optimal response to the prevailing uncertainties.