Scandinavian Working Papers in Economics

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

No 2016:14: Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration

Per-Olov Johansson ()
Additional contact information
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.

Keywords: Cost-benefit analysis; greenhouse gases; tradable permits; general equilibrium; Samuelson condition; numerical illustration

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

16 pages, May 11, 2016

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