Environmental and Resource Economics

, Volume 31, Issue 2, pp 133–157 | Cite as

Managing Permit Markets to Stabilize Prices



The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in cases where the marginal damages of emissions are relatively flat, such as with greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.


banking borrowing prices quantities tradable permit market uncertainty 

JEL classifications

Q28 Q48 D8  L51 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Barro, R. J., Gordon, D. B. 1983‘A positive Theory of Monetary Policy in a Natural Rate Model’Journal of Political Economy91589610CrossRefGoogle Scholar
  2. Cronshaw, M. B., Kruse, J. B. 1996‘Regulated Firms in Pollution Permit Markets with Banking’Journal of Regulatory Economics9179189CrossRefGoogle Scholar
  3. Haubrich, J.G., Ritter, J.A. 2000‘Dynamic Commitment and Incomplete Policy Rules’Journal of Money, Credit, and Banking32766784CrossRefGoogle Scholar
  4. Hoel, M., Karp, L. 2002‘Taxes versus Quotas for a Stock Pollutant’Resource and Energy Economics24367384CrossRefGoogle Scholar
  5. Keohane, N. O., Revesz, R. L.,  et al. 1998‘The Choice of Regulatory Instruments in Environmental Policy’Harvard Environmental Law Review22313367Google Scholar
  6. Kling, C., Rubin, J. 1997‘Bankable Permits for the Control of Environmental, Pollution’Journal of Public Economics64101115CrossRefGoogle Scholar
  7. Kydland, F. E., Prescott, E. C. 1977‘Rules rather than discretion: The Inconsistency of Optimal Plans’Journal of Political Economy85473491CrossRefGoogle Scholar
  8. Leiby, P., Rubin, J. 2001‘Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions’Environmental and Resource Economics19229256CrossRefGoogle Scholar
  9. McKibbin, W. J., M. Ross, et al. (1999), ‘Emissions Trading, Capital Flows and the Kyoto Protocol’,Energy Journal, special issue.Google Scholar
  10. Newell, R., Pizer, W. 2003‘Regulating Stock Externalities Under Uncertainty’Journal of Environmental Economics and Management45416432CrossRefGoogle Scholar
  11. Phaneuf, D.J., Requate, T. 2002‘Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking’Environmental and Resource Economics22369390CrossRefGoogle Scholar
  12. Requate, T. 2002Does the Environment Benefit from Banking Programs for Tradable Permits? ManuscriptUniversity of KielKiel, GermanyGoogle Scholar
  13. Roberts, M.J., Spence, M. 1976‘Effluent Charges and Licenses Under Uncertainty’Journal of Public Economics5193208CrossRefGoogle Scholar
  14. Rubin, J., Kling, C. 1993‘An Emission Saved is an Emission Earned: An Empirical Study of Emission Banking for Light-Duty Vehicle Manufacturers’Journal of Environmental Economics and Management25257274CrossRefGoogle Scholar
  15. Rubin, J. D. 1996‘A Model of Intertemporal Emision Trading, Banking, and Borrowing’Journal of Environmental Economics and Management31269286CrossRefGoogle Scholar
  16. Schennach, S.M. 2000‘The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments’Journal of Environmental Economics and Management40189210CrossRefGoogle Scholar
  17. United Nations Framework Convention on Climate Change (2000), Procedures and Mechanisms Relating to Compliance under the Kyoto Protocol: Note by the co-Chairmen of the Joint Working Group on Compliance. Bonn, UNFCCC.Google Scholar
  18. Weitzman, M.L. 1974‘Prices vs Quantities’Review of Economic Studies41477491CrossRefGoogle Scholar
  19. Weitzman, M. L. 1978‘Optimal Rewards for Economic Regulation’American Economic Review68683691Google Scholar
  20. Wiener, J. 1998‘Global Environmental Regulation: Instrument Choice in Legal Context’Yale Law Journal677108Google Scholar
  21. Williams, R. C.,III 2001Price vs Quantities vs. Tradable Quantities. ManuscriptUniversity of TexasAustin TXGoogle Scholar
  22. Yates, A. J., Cronshaw, M. B. 2001‘Pollution Permit Markets with Intertemporal trading and Assymetric Information’Journal of Environmental Economics and Management42104118CrossRefGoogle Scholar
  23. Yohe, G. W. 1978‘Towards a General Comparison of Price Controls and Quantity Controls under Uncertainty’The Review of Economic Studies4522938CrossRefGoogle Scholar

Copyright information

© Springer 2005

Authors and Affiliations

  • Richard Newell
    • 1
  • William Pizer
    • 1
  • Jiangfeng Zhang
    • 1
  1. 1.Resources for the FutureWashingtonUSA

Personalised recommendations