WSEAS Transactions on Business and Economics
Print ISSN: 1109-9526, E-ISSN: 2224-2899
Volume 12, 2015
Trading of Emission Discharge Permits in a Common Pool Market (A Gross Pool Formulation)
Authors: ,
Abstract: The modern-day version of a property right system for environmental quality is the cap and trade policy where the property right traded is an environmental discharge permit (EDP). Trading EDPs can become problematic with the occurrence of “hot spots,” but this is easily resolved by using a trading framework that combines regulatory tiering with a common pool permit trading market. In this paper we design and implement a common pool market trading model with regulatory tiering. This framework is an optimization-based system which is used to compute EDP trading solutions and the actual calculation of permit trades based on a linear programming model. The property right traded is an EDP and the regulatory tiering component is introduced in the common pool market model constraint set as a set of regional pollution constraints. The key feature of the permit trade is modeling system is that all EDP trades are within a common pool and no bilateral trades are allowed to occur. The actual trading model is formulated as a gross pool, where the decision variables are the number of EDPs each market participant desires to hold and the market manager calculates net trades after the market is solved, given participants’ initial EDP holdings. The linear programming model is used to develop a set of numerical simulations demonstrating the functioning of the common pool market model formulated as a gross pool. The numerical exercise also demonstrates the model usefulness for dealing with the specific environmental problems from the policy perspective.
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Keywords: environmental pollution policies, air pollution, permit trading, regulatory tiering, common pool market, gross pool market
Pages: 400-409
WSEAS Transactions on Business and Economics, ISSN / E-ISSN: 1109-9526 / 2224-2899, Volume 12, 2015, Art. #37