International Pollution Control: a Review of Marketable Permits

Over the course of the last few years, there has been increasing attention paid to the problems of international pollution, most notably global warming. Likewise, there has been growing interest in the economic instruments which might be directed at reducing pollution levels, to supplement or replace the more common "command-and-control" strategies. This paper focuses upon the properties of one such instrument, marketable pollution permits, when applied in the context of widely-dispersed pollutants at national or international levels. Essentially, the permit mechanism addresses the fundamental cause of the pollution externality, which is the absence of property rights to the environment, by the issuing of pollution permits or quotas which correspond to the target level of pollution established. A market, which previously did not exist, is created for waste-disposal rights and owners of permits possess a valuable commodity. Provided that the permits are transferrable and the market is competitive, a price for waste disposal will be determined in this market, rather than being fixed ex ante by a regulatory body. This price will reflect the pollution control costs of the firms and industries involved, and will provide a dynamic incentive to avoid the costs of permit purchases through the progressive adoption of cleaner technologies. Whilst a permit system possesses a number of properties in common with other charging mechanisms, it also has additional positive attributes which are reviewed in the paper.