EC238 Chapter 20 – Emissions Trading Principles and Application Week 10
How will Permits be Allocated?
-Permits can be either auctioned or distributed without charge
The simple economics of the TEP system show that:
1. The TEP system will affect product prices and quantities produced of GHG-intensive goods
2. Producers and consumers will “share” in the burden of the system. There will be a loss of producer
and consumer surplus, ignoring any of the benefits of GHG reductions
3. If permits are given away instead of auctioned, the loss of producer surplus can be greatly reduced.
Consumer surplus losses are unaffected
4. If permits are auctioned, governments could recycle the revenue in the form of tax cuts to offset
Design Issues: What Exactly will be Traded?
-Credit trading – credits are given to polluters from documenting a reduction in emissions – baseline-
-Substance trading – allows for the trading of permits denominated in units of the polluting substance
-Emission-rights trading- this system limits aggregate emissions of a GHG from specific sources at the
point of release into the atmosphere – cap-and-trade system
-The following are principles to help design the system:
-Cover a broad base of