TRADABLE PERMITS
Chapter 11. Tools for Restructuring the Economy
Lester R. Brown, Eco-Economy: Building an Economy for the Earth
(W.W. Norton & Co., NY: 2001).
Environmental taxes and tradable permits
are both economic instruments that can be used to reach environmental
goals. The principal difference between the two is that with permits,
governments set the amount of a given activity that is allowed,
such as the harvest from a fishery, and let the market set the price
of the permits as they are auctioned off. With environmental taxes,
in contrast, the price of the environmentally destructive activity
is set by government in the tax rate, and the market determines
the amount of the activity that will occur at that price. Both economic
instruments can be used to discourage environmentally irresponsible
behavior.42
The decision of when to use taxes as opposed to permits is not always
a clearcut one. When it is desirable to keep an environmentally
destructive activity below a certain level, permits are more precise
than taxes, which have a less certain effect. Once permits are set
at the desirable level, the market decides what they are worth.
When taxes are fixed at a certain level, the market decides how
best to minimize their effect by reducing the undesirable environmental
activity. Governments have much more experience with environmental
taxes. It is also clear that environmental taxes work under a wide
range of conditions. Still, permits have been used successfully
in two widely differing situations: restricting the catch in an
Australian fishery and reducing sulfur emissions in the United States.
Concerned about the threat of overfishing to its lobster fishery,
the government of Australia estimated the sustainable yield of the
fishery and then issued permits totaling that amount. Fishers could
then bid for these permits. In effect, the government decided how
many lobsters could be taken each year and let the market decide
how much the permits were worth. Since the permit trading system
was adopted in 1986, the fisheries have stabilized and appear to
be operating on a sustainable basis.43
Perhaps the most ambitious effort to date to use tradable permits
was the U.S. effort to reduce sulfur emissions by half from 1990
to 2000. Permits were assigned to some 263 of the more sulfur-dioxide-intensive
electrical generating units operated by 61 electric utilities. These
were mostly coal-fired power plants east of the Mississippi River.
The result was that sulfur emissions were cut in half between 1990
and 1995, well ahead of schedule. Although this approach has occasional
hitches, the sulfur reduction effort is widely seen as successful,
an approach that minimized the costs of achieving an environmental
goal.44
Trading permits had been proposed by the U.S. government as a way
to reach the carbon reduction goals of the Kyoto Protocol. Permits
are desirable when there is a specific goal, but if the purpose
is to stimulate a long-term trend, then graduated taxes over time
may be preferable. If the goal is to reduce carbon emissions worldwide,
with higher goals for industrial countries who burn disproportionately
large amounts of fossil fuels, then governments can set taxes at
a level appropriate to each country's situation.45
ENDNOTES:
42.
Roodman, op. cit. note 6, pp. 15-27.
43. Australia in John Tierney, "A Tale of Two Fisheries," New York
Times Magazine, 27 August 2000.
44. Richard Schmalensee et al., "An Interim Evaluation of Sulfur
Dioxide Emissions Trading," in Robert N. Stavins, ed., Economics
of the Environment (New York: W.W. Norton & Company, 2000), pp.
455-71; actual reduction from ibid., p. 460.
45. "Bush Charts Global Warming Course," Associated Press, 6 June
2001.
Copyright
© 2001 Earth Policy Institute
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