Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration
16 Pages Posted: 22 Aug 2016
Date Written: May 11, 2016
There are different views with respect to the treatment of tradeable permits for greenhouse gases in cost-benefit analysis. This note aims at illustrating numerically within a simple general equilibrium model how to treat tradeable permits in economic evaluations of projects. The note looks at a cost-benefit rule for a large project providing a public good interpreted as a shortcut for infrastructure, using a fossil fuel and a renewable as inputs. The paper also evaluates a small or marginal project involving the same output and inputs. In addition, it illustrates the Samuelson condition for the optimal provision of the public good. The note is a supplement to CERE Working Paper No 2015:11 and SSE Working Paper in Economics No 2015:3. The model used here may also be useful in advanced courses to illustrate general equilibrium cost-benefit analysis.
Keywords: Cost-benefit analysis, greenhouse gases, tradable permits, general equilibrium, Samuelson condition, numerical illustration
JEL Classification: H21, H23, H41, H43, I 30, L13
Suggested Citation: Suggested Citation