intersect. The equilibrium market price of a tradable permit is P*. Since MAC is the demand
curve for permits—derived as the horizontal summation of schedules MACl and MAC2 of
individual firms 1 and 2—any price higher than P* would reduce the number of permits
demanded since it would be cheaper to clean up production. Firms 1 and 2 buy Ql and Q2
of permits respectively. Thus, if initially they are allotted an equal number of permits, they
will trade permits between themselves. Thus a permits market emerges.
The United States made explicit use of permits during its lead trading programme
whose aim was to allow petroleum refineries greater flexibility during the 1982-86 period
when lead in petroleum was being reduced. Permits trading has continued and they are
regularly traded, for example, in the Chicago stock exchange, for sulphur dioxide emissions.
Tradeable permits may not, however, be easily amenable to international manipulation.
Their very merit in fixing pollution levels in the national context becomes a demerit in the
international context because the levels of pollution caused by individual industries would
have to be agreed upon internationally.
There is likely to be a lack of incentive for any particular country to come forward
with global welfare in mind. This is depicted in Diagram 6 in which an individual country
would be willing to undertake abatement to an extent less than the global optimum (Q* less
than Q**) as long as a country considers its own marginal benefit of abatement schedule to
lie below the global one. Indeed, some countries might prefer to be freeriders knowing that
others would foot the bill of attempting to achieve Q**. Leave alone developing countries,
even high pollution developed countries such as the United States have demanded special
consideration in international negotiations for undertaking to "decrease" pollution more rapidly
than in the past (Soroos, 1991).
Even if hypothetically the quantum of allowable pollution per industry could be
determined at the global level, the revenue impact of each agreement would be one shot,
requiring increasing coverage Ofindustries on a continuing basis. It is difficult to predict with
confidence that such progress is achievable. To conclude, the use of tradeable permits as a
global revenue source is fraught with practical difficulties.
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