Economic Assertions for Rewards versus Permits Trading


Increasingly, trading schemes are advocated as the economic tool of choice to allocate public goods efficiently and to alleviate public bads. Two well known schemes are Carbon Permits for reducing greenhouse gases and Water Permits to allocate water. These schemes work by creating artificial commodities to represent the problem being solved such as the limited supply of water and the high level of green house gas emissions. For water, a cap is set for the consumption of water from sources such as rain and ground water. The cap is then apportioned between members of society and the allocations can be traded. For greenhouse gases, a cap is set on the emission of green house gases and emissions are represented by carbon permits which are allocations that permit people to emit greenhouse gases. These permits can be generated by different activities that either reduce the amount of carbon emissions or that produce energy or other products which are emission-free.

A Rewards scheme works in a different way. People are paid to reduce their consumption and the payment comes from a surcharge on people who use excess water and on those whose activities emit greenhouse gases. Rewards must be spent on ways to solve the problem being addressed.

A measure of economic efficiency for both Permit Trading schemes and Rewards schemes is the total amount society pays to achieve the desired result. For water it is the total amount paid by the community to remove the need for water restrictions and for greenhouse gases it is the total amount paid to reduce greenhouse gas emissions to the desired cap.

It is asserted that a Rewards scheme is at least twice as economically efficient as a Permit Trading scheme, as measured by the total amount of money needed to achieve the desired result.

Rewards schemes are more economically efficient because:

  • They pay people to help achieve the desired result. That is, there is a direct economic benefit to the consumer from reduced consumption.
  • They change behaviour through both higher costs and through incentives.
  • They foster and enhance trading systems for technologies that help solve the problems being addressed.
  • They deal in real products that are not subject to manipulation and to abuse which may, in turn, cause economic inefficiences.
  • They ensure that money collected over and above the cost of production is spent addressing the problem being solved.
  • They cost less to administer.


It is asserted that a Rewards scheme will require between half and one third the amount of money to be spent to solve the problem being addressed, compared with a Permit Trading scheme. For example, if society wishes to reduce carbon emissions to 20% of the current level then a Rewards scheme will produce that reduction for one half of the cost of a Permit Trading scheme. Furthermore, if an urban community wishes to remove the need for water restrictions then a Rewards scheme will achieve the desired result for one half of the cost of a Permit Trading scheme.

 

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