Assessing the Distributional Impacts of Transferable Pollution Permits: The Case of Phosphorus Pollution Management at a River Basin Scale

Although the initial allocation of pollution permits is neutral in terms of efficiency, itdoes have a significant impact on distributive equity. In this paper, we examine the twomain categories of permit allocation rules, the distributive and the reductive, for controllingphosphorus pollution in a small catchment in South West England. Based on thepremise that the regulatory choice compromises efficiency and equity, the main result ofthis paper is that an allocation of permits in proportion to the intensity of environmentalpreferences is a “win-win” choice. The reason is that it simultaneously achieves twogoals. First, it is efficient (or cost-effective) since a permit system achieves a prespecifiedtarget at a minimum abatement cost, while second, it is the only allocationrule which reduces the income inequality of the baseline scenario.