Economic Policy Instruments and Environmental Sustainability: A Second Look at Marketable or Tradeable Pollution or Environmental-Use Permits

There has been a recent tendency to extol tradeable or marketable pollution permits or similar permits to use or exploit some natural resources, such as fish. They are often seen as a very effective way of maintaining environmental conditions in a desired way. However, considerable care is required in adopting such systems. If they are inappropriately designed, the government will lose its flexibility to control the state of the environment. Permits which give their owners absolute rights to emit certain quantities of pollution in perpetuity or entitle holders to use or appropriate a particular quantity of a natural resource in perpetuity can cause particular problems for government. They can for example, involve expensive buy-back schemes. There are, however, ways around the problem. Furthermore, holders or rights may have to pay fees to cover enforcement costs. Where tradeable permits have a very long-life, the question arises of how they should be allocated and whether those allocated these rights should be allowed to capture the rents. As discussed, changing ambient conditions may have to be allowed for in designing systems involving tradeable permits