Transferable permit systems to control spatial pollutants: A laboratory experiment
This research focuses on the comparison of three different pollution control systems: Ambient Permit System, Emissions Permit System and Zonal Permit System. Theoretically, the Ambient Permit System is the best alternative for controlling spatially distributed pollutants. It ensures that the ambient air quality targets are met at a least cost by utilizing the information on source location and pollution dispersion pattern. The Emissions and Zonal Permit Systems are sub-optimal by design. Instead of directly controlling the levels of pollution concentration, they rely on aggregate emissions as a proxy for the ambient air quality. In the case of spatially distributed pollution, the relationship between aggregate emissions and the resulting pollution concentration is quite complex, and therefore, both systems are expected to result in higher costs in order to achieve the same ambient air quality targets. However, the simplicity of the Emissions Permit System and Zonal Permit System design is a big advantage. The Ambient Permit System design requires participants to assemble “portfolios” of permits in order to cover their emissions. The complexity of transactions and coordination problems could significantly reduce the potential gains predicted by the theory. The main objective of this research is to explore the tradeoff between “inefficiency by design” associated with the second-best alternatives to pollution control, and the degree of complexity of the least cost alternative.
This research demonstrates that the Ambient Permit market did not realize its full potential despite the use of a combinatorial auction facilitating the permit trade. However, the results might improve if certain aspects of design and execution are addressed. The experimental data supports the theoretical result of independence of initial allocation proven by Montgomery (1972). The local spatial pollution dispersion characteristics prove to be a significant factor in system performance. Some pollution dispersion environments represent a challenge for the Ambient Permit System; however, the relationship between performance and pollution dispersion can be quite complex.
The experimental data confirm that trading inefficiency in Emissions Permit System and Zonal Permit System can result in non-attainment of the pollution concentration goals even though the aggregate emissions standard is chosen to meet them. In my experiments, the Emissions Permit System and Zonal Permit System outcomes resulted in the violation of the ambient air standard at one or more receptor points in 3 out of 24 cases, and 9 out of 21 cases respectively.
The results indicate that the participants are learning in the course of the experiment, with their performance improving with the repetition of the same market, participation in other markets, and completing more experimental sessions. The learning effect is much stronger for Ambient Permit System, which places more emphasis on trade to achieve the cost-efficient allocation of permits. The experimental teams exhibit some degree of heterogeneity with all the models consistently ranking some teams higher and some lower than average. However, the variance attributed to subject heterogeneity is not large when compared to the residual variance.