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GIARI Working Paper Vol.5 2007-E-4,
Dec.30, 2007
2007-E-4
A Tradable Permit System in an Intertemporal Economy

Ken-Ichi Akao, and Shunsuke Managi
School of Social Sciences, Waseda University, Japan
Faculty of Business Administration, Yokohama National University, Japan

December 30, 2007

• Abstract
• 1. Introduction
• 2. The Problem of the Arbitrage Condition
  • 2.1 Welfare maximization
  • 2.2 Cost minimization
• 3. Trading with a Permit Bank
• 4. Knowledge Updating
• 5. Concluding Remarks
• References

Tradable permit schemes are market-based instruments that many countries can potentially use to improve the management of their natural resources and to reduce pollution emissions. This study analyzes the intertemporal allocation of tradable permits, including the founding of a bank of permits. We show that Tinbergen’s policy principle applies to the intertemporal permit system: at least as many policy instruments are required as policy objectives. The policy instruments are required to have the same Lebesgue measure in a continuous time model. Thus, the merits of the artificial market system analyzed by Montgomery (1972) are reduced in an intertemporal setup.

Keywords: Tradable permits; Intertemporal arbitrage condition; Knowledge updating; Tinbergen’s policy principle; Artificail market.
JEL Classification: H23; K32; Q58.