key term - Marketable Permits

Definition

Marketable permits are a type of market-based environmental policy tool that aims to reduce pollution or resource use by setting a cap on the total amount allowed and then distributing or selling permits that grant the right to emit or use a certain amount. Firms can then buy and sell these permits on a secondary market, providing flexibility and incentives to find the most cost-effective ways to meet environmental goals.

5 Must Know Facts For Your Next Test

1. Marketable permits create a financial incentive for firms to find the most cost-effective ways to reduce emissions or resource use, as they can profit by selling unused permits.
2. The total number of permits issued represents the environmental cap, which can be gradually reduced over time to achieve greater emissions reductions.
3. Firms with higher marginal abatement costs will tend to buy permits from firms with lower marginal abatement costs, leading to a more efficient allocation of the pollution reduction burden.
4. Marketable permits provide flexibility for firms to choose the most appropriate compliance strategy, whether it's investing in pollution control technology, changing production processes, or buying/selling permits.
5. Effective monitoring and enforcement are crucial to ensure the integrity of the marketable permits system and prevent non-compliance.

Review Questions

• Explain how marketable permits work as a market-oriented environmental policy tool.
  • Marketable permits establish a cap on the total amount of pollution or resource use allowed, and then distribute or sell permits that grant the right to emit or use a certain quantity. Firms can buy and sell these permits on a secondary market, providing flexibility to find the most cost-effective ways to meet the environmental goals. The market-based approach incentivizes firms to reduce emissions or resource use, as they can profit by selling unused permits.
• Describe how the trading of marketable permits can lead to a more efficient allocation of the pollution reduction burden.
  • Under a marketable permits system, firms with higher marginal abatement costs (the cost of reducing one additional unit of pollution) will tend to buy permits from firms with lower marginal abatement costs. This allows the pollution reduction burden to be shifted to the firms that can achieve the reductions at a lower cost, leading to a more efficient overall allocation of the environmental compliance responsibility.
• Evaluate the role of monitoring and enforcement in ensuring the effectiveness of a marketable permits system.
  • Effective monitoring and enforcement are crucial to the success of a marketable permits system. Without proper oversight, there is a risk of non-compliance, such as firms exceeding their allotted permits or engaging in fraudulent trading practices. Robust monitoring mechanisms and strict penalties for violations are necessary to maintain the integrity of the system and ensure that the environmental goals are achieved. Additionally, the credibility of the permit market depends on the confidence that the cap on emissions or resource use is being enforced, which requires a strong regulatory framework and enforcement capabilities.

Related terms

Cap-and-Trade:

A market-based approach to controlling pollution where a limit (cap) is set on the total amount of a pollutant that can be emitted, and permits representing the right to emit a certain amount are distributed or auctioned off to regulated entities.

Emissions Trading: The exchange of emissions allowances or credits between regulated entities, allowing those who can reduce emissions more cheaply to sell their extra allowances to those who would find it more costly to reduce emissions.

Pollution Taxes:

A fee imposed on the release of pollutants into the environment, designed to internalize the external costs of pollution and provide an incentive to reduce emissions.