Some thoughts on the Efficiency of Emission Permit Markets

In recent years, tradeable permits (TP) have become widespread in use. One noteworthy point is that the international experience is rather small. Europe has only relatively recently begun to develop such programs. There is a wealth of resources available that comment on the rise of these programs (Stavins 2002). In discussions of how well TP programs have worked and can potentially work, the notion of “efficiency” is frequently employed. Unfortunately, the term efficiency, while central to economics, is ambiguous. The keydistinction to be made when we talk about the “efficiency” of tradable permit markets is whether we mean social (allocative) or market (informational) efficiency.