International Review of Environmental and Resource Economics > Vol 6 > Issue 1

Tradable Permits versus Tradable Credits: A Survey and Analysis

Andries Nentjes, University of Groningen, Faculty of Law, Department of Law and Economics, The Netherlands, a.nentjes@online.nl Edwin Woerdman, University of Groningen, Faculty of Law, Department of Law and Economics, The Netherlands, e.woerdman@rug.nl
 
Suggested Citation
Andries Nentjes and Edwin Woerdman (2012), "Tradable Permits versus Tradable Credits: A Survey and Analysis", International Review of Environmental and Resource Economics: Vol. 6: No. 1, pp 1-78. http://dx.doi.org/10.1561/101.00000047

Published: 01 Jan 2012
© 2011 A. Nentjes and E. Woerdman
 
Subjects
Environmental Economics
 
Keywords
Q58K32D62D21
Emissions tradingCap-and-tradeCredit tradingEconomic incentivesInstrument choiceEnvironmental law and economics
 

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In this article:
1 Introduction
2 A Short History of Permits and Credits
3 Economic Impacts of Permits and Credits
4 Permits and Credits in Public Choice Theory
5 Permits, Credits and Technical Progress in Pollution Control
6 Compliance in Permit and Credit Trading Schemes
7 Permits, Credits and Institutional Evolution
8 Conclusion
Acknowledgements
References

Abstract

This article compares tradable permits with tradable credits, two distinct economic instruments of environmental policy. It is demonstrated that under credit trading, which is an addition to (relative) emission standards, residual emissions are free of cost. Under permit trading (cap-and-trade), residual emissions always have a cost. The economic consequences of this difference are surveyed and analyzed with regard to various issues, including economic efficiency, political acceptance, incentives for adopting clean technologies, and incentives for legal compliance. The review concludes that permit trading is less costly to society than credit trading, but imperfect markets for output may change this ranking. The article reveals several gaps in the literature and formulates some new hypotheses for future research.

DOI:10.1561/101.00000047