key term - Marketable Permits

Definition

Marketable permits, also known as tradable permits or cap-and-trade systems, are a market-based environmental policy tool used to control and reduce pollution or resource use. They establish a limit or 'cap' on the total amount of a pollutant that can be emitted, and then allow entities to buy and sell permits to meet their individual needs, creating a market for the right to pollute or use a resource.

5 Must Know Facts For Your Next Test

1. Marketable permits provide flexibility for entities to choose the most cost-effective way to comply with environmental regulations.
2. The total number of permits issued sets the overall cap on emissions or resource use, which can be gradually reduced over time to achieve environmental goals.
3. Entities that can reduce their emissions or resource use more cheaply can sell their excess permits to those who find it more costly to do so.
4. Marketable permits create a financial incentive for entities to invest in clean technologies and find innovative ways to reduce their environmental impact.
5. The success of a marketable permits system relies on effective monitoring, enforcement, and a well-functioning market for the trading of permits.

Review Questions

• Explain how marketable permits work as a market-based environmental policy tool.
  • Marketable permits, or cap-and-trade systems, establish a limit or 'cap' on the total amount of a pollutant that can be emitted or resource that can be used. Entities are allocated or must purchase a certain number of permits, which represent the right to emit a unit of pollution or use a unit of the resource. Entities can then buy and sell these permits on a market, allowing those who can reduce their emissions or resource use more cheaply to sell their excess permits to those who find it more costly to do so. This creates a financial incentive for entities to invest in clean technologies and find innovative ways to reduce their environmental impact.
• Describe how the design of a marketable permits system can be used to achieve environmental goals over time.
  • The total number of permits issued in a marketable permits system sets the overall cap on emissions or resource use. This cap can be gradually reduced over time to achieve more stringent environmental goals. As the cap is lowered, the price of permits will rise, further incentivizing entities to invest in cleaner technologies and find ways to reduce their environmental impact. The flexibility of the market-based approach allows entities to choose the most cost-effective way to comply with the regulations, which can lead to greater overall emissions or resource use reductions compared to traditional command-and-control policies.
• Analyze the potential benefits and challenges of implementing a successful marketable permits system.
  • The key benefits of a well-designed marketable permits system include the flexibility it provides for entities to choose the most cost-effective compliance methods, the financial incentives it creates for investment in clean technologies, and the ability to gradually tighten environmental goals over time. However, the success of such a system relies on effective monitoring and enforcement to ensure compliance, as well as the development of a well-functioning market for the trading of permits. Challenges can include establishing the initial cap, allocating permits fairly, and preventing market manipulation or the concentration of permits in the hands of a few entities. Additionally, the system must be designed to account for factors such as new entrants, economic growth, and technological changes to maintain its effectiveness over time.

Related terms

Cap-and-Trade:

A regulatory system that sets an overall limit on emissions, and then allows entities to trade emissions permits or allowances within that cap.

Emissions Trading:

The exchange of emissions allowances or credits between entities to meet regulatory requirements or achieve emissions reduction targets.

Pollution Taxes: A fee imposed on the release of pollutants into the environment, designed to incentivize reduced emissions or resource use.