Tradable tagged permit system for global pollution control

Abstract

We propose a new tradable permit system, called “tradable tagged permit system” (TTPS), which is specifically geared to global environmental issues of long-term dynamics. This is an extended emission permit system composed of various types of permits, one for each country or class of countries. It induces countries to reveal their damages, in addition to the costs, through their permit prices. It is shown that this achieves a Pareto-superior outcome than without the system, and that the repeated application of this scheme converges to the global first-best steady state. A numerical analysis with empirical data shows that TTPS achieves most of the potential gains from global cooperation, even with an initial allocation scheme based on voluntary pledge levels that gives participation incentives for all countries.