Environmental Economics

An Evaluation of Marketable Effluent Permit Systems

This report is a study of the practical problems and prospects of using marketable effluent permits (MEPs) as a water pollution control tool. Under such a system, pollution rights are contingent upon possession of permits; the permits are acquired and/or traded through an auction or market. This study details the requirements of MEP systems, discusses their theoretical advantages, and examines them through the use of industrial organization theory, comparisons with analogous markets, and a simulation model. The simulation model employs Mohawk River data to determine the effect of different system parameters on the operation of a MEP system. The legal and administrative aspects of the marketable permit system are also dealt with. The conclusion is that marketable permits are a promising control tool for many river basins.
The introductory section of this report, Section 1, is followed by the detailed examination of the MEP system in Sections 2 through 7. In Section 8 the results from earlier sections are evaluated, the MEP system is compared with other control alternatives (in particular, the effluent charge system and the NPDES), and some aspects of implementation are discussed. Section 2, which follows below, is a detailed look at the variants of the MEP system. For example, the question of what pollutants to include under this control system is discussed and tentative conclusions are presented. Wherever possible, logical choices among variants of the system are made in Section 2. In many cases the viability of the MEP system does not rise or fall on the basis of the resolution of such questions; nevertheless, their tentative resolution allows the discussion in the following parts of the report to be better focused. In Section 3 the theory of the MEP system is discussed. The material in that section is based on the standard theorems of microeconomics theory. In addition, theoretical work on externalities and on systems of emission rights is reviewed. Section 4 is drawn from the theory of industrial organization. The concepts of workable competition are applied to the MEP system to attempt to discover potential problems of the effluent permit market. Markets and auctions analogous to the MEP system are de-scribed in Section 5. The Treasury bill market, the offshore oil leasing auction, and the market for taxi medallions are examined to find information relevant to the workings of the MEP system. In Section 6 the results of the Mohawk River effluent permit system simulation are presented and analyzed. Variants of the MEP system were analyzed with a computer simulation model. The data base used for the model is the upper Mohawk River basin. Responses of the polluters in that basin to a MEP system are estimated with the computer simulation model. The legal and administrative aspects of the MEP system are treated in Section 7. The discussion there includes constitutional, tax, and legislative issues, as well as related administrative matters. The costs of administering the MEP system are compared in Section 7 to those of other control systems.
There are two appendices mentioned:
A. The Mohawk River Permit System Simulation Results, and
B. A River Basin Case Study: The Mohawk River Basin.