Tradable permits for greenhouse gases are growing in popularity as one of the available tools to tackle climate change. How should these be handled in cost-benefit analysis?

According to CERE working paper 2016-14 and its author Per-Olov Johansson, it would be a mistake to value permits at the global marginal damage cost. Also, it would be a mistake to treat permits as a transfer within the private sector. These considerations are key to both researchers and practitioners conducting cost-benefit analysis including tradable permits.

Multiple ways to handle tradable permits have been proposed but here Per-Olov Johansson has developed a numerical illustration of how to handle Tradable Permits in Cost-Benefit Analysis. The model can be used in advanced courses to illustrate how to treat tradable permits in economic evaluations of projects. It 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.

Read the working paper: Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration

Learn more via the SSE Working Paper in Economics No. 2015:3