Emission Permit Banking for Stock and Flow Pollutants


Bankable Permits for the Control of Stock and Flow Pollutants:
The Greenhouse Gas Case

Paul Leiby* and Jonathan Rubin**
*Energy Division, Oak Ridge National Laboratory
**Margaret Chase Smith Center for Public Policy and Department of Resource Economics and Policy, Univ. Maine
Revised DRAFT, February 2, 2000
Key Words: Emission Trading, Marketable Permits, Stock Pollutant, Greenhouse Gases


This paper integrates two themes in the intertemporal permit literature by constructing an intertemporal banking system for a pollutant that creates both stock and flow damages.  A permit system for the special case of a pollutant that only causes stock damages is also developed.  This latter, simpler case corresponds roughly to the greenhouse gas emission reduction regime proposed by the U.S. Department of State as a means of fulfilling the U.S. commitment to the Framework Convention on Climate Change. This paper shows that environmental regulators can achieve the socially optimal level of emissions and output through time by setting the correct total sum of allowable emissions, and specifying the correct intertemporal trading ratio for banking and borrowing. For the case of greenhouse gases, we show that the optimal growth rate of permit prices, and therefore the optimal intertemporal trading rate, has the closed-form solution equal to the ratio of current marginal stock damages to the discounted future value of marginal stock damages less the decay rate of emissions in the atmosphere.  Given a non-optimal negotiated emission path we then derive a permit banking system that has the potential to reduce net social costs by adjusting the intertemporal trading ratio taking into account the behavior of private agents.  We use a simple numerical simulation model to illustrate the potential gains from various possible banking systems.

Our Latest Report:
"Flexible Greenhouse Gas Emission Banking Systems," DRAFT Final Technical Report, Integrated Assessment of Global Climate Change, Research Program, Notice 98-15, Jonathan Rubin and Paul Leiby, March 31, 2001. Download (305 KB, Adobe Acrobat format).

Journal Article:
Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions, Paul Leiby and Jonathan Rubin, July 24, 2000 (Forthcoming in Environmental and Resource Economics). Download (103 KB, Adobe Acrobat format).

An earlier working paper, including initial numerical results:
Efficient Greenhouse Gas Emission Banking and Borrowing Systems,  Paul Leiby and Jonathan Rubin, May 31, 1998. Download (143 KB, Adobe Acrobat format).

The presentation slides from the Aug 1998 WEA conference:
Efficient Greenhouse Gas Emission Banking and Borrowing Systems, Paul Leiby and Jonathan Rubin, Presented to the Western Economic Association International's 73rd Annual Conference,  Lake Tahoe (Stateline) Nevada, July 1, 1998.
Download (179 KB, Adobe Acrobat format).

For more information, contact:
Paul Leiby (leibypn@ornl.gov, 865-574-7720)