Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration

16 Pages Posted: 22 Aug 2016

Date Written: May 11, 2016

Abstract

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

Johansson, Per-Olov, Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration (May 11, 2016). CERE Working Paper, 2016:14, Available at SSRN: https://ssrn.com/abstract=2827513 or http://dx.doi.org/10.2139/ssrn.2827513

Per-Olov Johansson (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
SWEDEN
+46 8 736 92 82 (Phone)
+46 8 30 21 15 (Fax)

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