The use of Permit Markets for Incorporating Source Location: the Case of Acid Rain in Europe

The paper shows that cost-effective involvement of the source location involves utmost difficulty in practice. Based on the RAINS model, it is recommended that source location should be ignored in a European market for SO2, as is the case in the U.S. Acid Rain Program. The RAINS-model predicts a cost-saving of 37 percent but an average loss of 2 percent in ecological protection. To overcome this reduction in protection, we recommend that some of the large cost-savings should be reallocated in further overall reduction and that the countries suffering the most from introducing the permit-market should be compensated by receiving extra permits in the initial distribution.