Quasi-price instruments: marketable/tradable licences, permit and quotas
Licences, permits and quotas are a form of regulation and ostensibly should be considered in the following section. However, increasingly they are being implemented with the greater flexibility of making them tradable so will be examined here. Licences are essentially official or formal non-transferable permission whereby an individual or group of firms or persons is given the legal authority to produce or use a good, service or resources, or permitted to do a specific thing. An example is the right to produce a good or service or use a trade name over which another has property right. A permit is less formal and can take a tradable form; it does not necessarily entail a legal agreement between the granter and recipient. A quota is the allocation of permission to produce or use a given quantity of a tangible good.
Issuing licences, permits or setting quotas as a mean of controlling output or the use of a resources has an impact on both those subject to then and the operation of the goods and services markets. It is but a short step also to control directly the residuals of any production or activity. Particularly pollutants, by granting licences or permits or quotas to emit or discharges them. More contentious is how to control the over exploitative extraction of consumable product from open access resources that threatens the long-term yield of such product; see chapter 8 concerning issues regarding open access resources. Two recent cases to illustrate the problems in the context of environmental policy instruments are the limited revival of the ivory trade and the hunting of whales. Control of the quantity of ivory yielded or whales caught is intended to preserve the species and the diversity of their gene pool, recognizing also that they have a value in the wildlife watching market. However, if the condition of governing the issues of the licences/permits to cull the species are not met, a quotas set are very likely to be flouted and over-exploitation to occur, so that there is a danger that the species will become extinct, given the impossibility of fully policing the nature of the resources pin which elephants and whales live.
A similar major example is the long experience of applying quotas in the fishing industry. These have been imposed internationally and unilaterally by countries, to restrict the tonnage and/or species landed because of the depletion of fish stocks. Their purpose is to preserve a population as such a level that it is able to reproduce at a rate to sustain the industry in the long term. The outcome, not necessarily intended, has led to much higher prices for consumers and the exodus of fisherman from the industry, where their livelihood was no longer economically viable, notwithstanding the fact that schemes have been initiated in some countries to give them incentive to retire, such as severance payments. Andeerson (1995) and Conrad (1995) have examined the devices used to deal with the depletion of stocks and the restructuring of the given below in the section on the relevance of the policy instruments to the sector.
It is also of interest to examine licences, permits and quotas when they become tradable and how this might work in a market context if they can be freely bought or sold. Making them tradable allow the market determine their value and producer to assess the best course of action in order to comply with them. In the case of pollution, the outcome is much the same as with the other pricing mechanism. If a particular producer finds that the cost of purchasing a licence/permit is lower than undertaking investment to reduce emissions, then licence/permit will be chosen. Conversely, a business which finds the costs of abatement lower than that of the licence/permit it has been granted will sell it. Of course it is conceivable, depending on the basis on which the initial allocation was made, for firm to sell a part rather than all of their rights. For example, if the licences/permit allows the emission of 100 tons of a residual and the actual amount is only 80 tons, them the remaining tonnage can be traded.
The economic analysis of tradable pollution instruments considers their efficiency in terms of an optimal position that depend on how they are offered when issued. They could be free, or issued at a given price, or auctioned. In essence, it is assumed that the initial quantity of licence issued is based on the estimates of targets set; with perfect knowledge the target for allowed emissions or discharges will be the assimilative capacity of the environment(see figure 9.4), i.e. the supply curve will be vertical. The demand curve is dependent on the perception of would be purchasers, as suggested in the previous paragraph, and will be downward sloping from the left to the right, reflecting the marginal abatement cost to the purchaser. The intersection of the demand curve with the supply of licence/permit will be the optimum position. Once they are issued the market will be like that for any good, the demand curve as already indicate and the supply curve upward sloping from the left to the right up to total capacity.
Thus, the advantage of licences, permits and quotas as environmental policy instruments, for instance in relation to pollution, is that they potentially lower the cost of compliance and can reflect the variation in cost structure of business and their dynamic and in term of entry into and departure from and industry or market. The drawback of such instruments is ascertaining in practice of the aggregate permitted residual, which raises the fundamental issue of ascertaining the capacity of environment to assimilate it. Thus regulation ultimately has to be exercised in the light of experience, raising or lowering the permitted level when appropriate and monitoring whether firm comply. This may impose costs on society at large. There is some evidence of how the instruments work with respect to air emissions in the USA (Tietenberg, 2006). There are moves in other countries to extend the idea to the use of resources, along the lines of those already implemented in agriculture and fishing. At an international level, the allocation of quotas on the emissions of carbon dioxide has already been referred to in chapter 8. Countries which emit less CO2 than their quota can sell the balance to countries that are exceeding theirs.