Per-Olov Johansson: CERE and HHS, Postal: Department of Economics, Umeå University, S-901 87, Umeå, Sweden
Abstract: There are different views with respect to the treatment of tradable permits for greenhouse gases in cost-benefit analysis. This note aims at illustrating numerically within a simple general equilibrium model how to treat tradable permits in economic evaluations of projects. The note looks at a cost-benefit rule for a large project providing a public good interpreted as a shortcut for infrastructure, using a fossil fuel and a renewable as inputs. The paper also evaluates a small or marginal project involving the same output and inputs. In addition, it illustrates the Samuelson condition for the optimal provision of the public good. The note is a supplement to CERE Working Paper No 2015:11 and SSE Working Paper in Economics No 2015:3. The model used here may also be useful in advanced courses to illustrate general equilibrium cost-benefit analysis.
16 pages, May 11, 2016
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