Emission Discharge Permit Trading and Persistant Air Pollutants (A Common Pool Market Application with Health Risk Specifications)

This paper shows the development of a common pool permit market formulated as a dynamic gross pool market for trading emission discharge permits. The pollutant modeled is a persistent pollutant. The common pool dynamic gross pool market formulation is derived with health risk specifications along with the general set of marginal-cost pricing rules based on the model's shadow prices and developed numerical simulations to demonstrate the working of the model in different scenarios. In the first simulation, no regional environmental quality constraints were imposed, but the same limit for emission discharge permits were introduced in both trading periods. The total number of EDPs to be sold was exactly equal to the number of emission discharge permits to be purchased in each trading period. The EDP price paid or received for each permit was the same. In the trading period 2, the price paid or received for each permit was the same, but different than the price in period one. The emission discharge permit limits were the same for both trading periods, but regional environmental quality constraints were added to the common pool trading model for period 2. The regional environmental quality constraints were binding and there was a surplus of emission discharge permits. In addition, each trader paid or received a different marginal cost price. The next set of simulations included the health-risk parameters in the common pool model. Including the health-risk parameters and increasing the health-risk level led to an increase in the total surplus of emission discharge permits for the two-period formulation.