Scandinavian Working Papers in Economics

CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

No 2015:11: Tradable Permits in Cost–Benefit Analysis

Per-Olov Johansson ()
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Per-Olov Johansson: Stockholm School of Economics & CERE, Postal: CERE, SE-901 87 Umeå, Sweden

Abstract: There is no consensus with respect to handling of tradable permits in cost–benefit analysis. The leading (organizational/governmental) manuals in North America, Europe, Asia, and Australia handle permits in different ways or ignore them. This paper offers a brief discussion of the properties of cap-and-trade systems, and contrast these to the properties of emission charges. The paper then turns to cost–benefit rules for projects using fossil fuels in a cap-and-trade system. The focus is on small projects but the paper also briefly addresses the case where a project significantly affect prices. As a service to the reader the small project rules are contrasted to the much more familiar and standardized ways of handling emission charges in cost–benefit analysis. Finally, the consequences of market power in cap-and-trade markets are briefly addressed.

Keywords: Cost–benefit analysis; greenhouse gases; tradable permits; emission charges; market power.

JEL-codes: H21; H23; H41; H43; I30; L13

29 pages, November 7, 2015

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