Tradable Rights and Transaction Costs: a comparative analysis of alternative policy instruments for emissions, road use and public deficits

Although permit trading ranks low in the political hierarchy of most countries, it is climbing up. The Kyoto Protocol has been ratified by more than 55 % of industrialized countries and international permit trading is one of the four mechanisms of the Protocol. These actual developments have made the instrument better known and have put the effectiveness of existing policy under increasing pressure. However, the choice between other policy instruments and permit trading can only be made when case-specific factors are taken into account. We have focussed on one factor, namely transaction costs. We have demonstrated that the historical view of preferring other (market-based) instruments above tradable permits because of excessive transaction costs is incorrect. The argument rests on an incomplete and inaccurate definition of transaction costs. Furthermore, we have shown that the current policy instruments used, such as environmental taxation, road pricing and the Stability Pact, induces in some cases even more transaction costs. If these instruments would be designed in such a way to be as effective and efficient as tradable permits, their transaction costs would prohibit their use. Dissertation zur Erlangung des Grads einer Doktorin der Wirtschaftswissenschaft (Dr. rer. pol.) der Universität Erfurt, Staatswissenschaftliche Fakultät, Tag der mündlichen Prüfung: 5. Dezember 200

Road pricing versus tradable entry rights: a transaction cost approach

This paper describes how, with respect to market-based transportation policies, it is a widely held view of transportation professionals that road pricing entails substantial, though far fewer, transaction costs than tradable transportation permit systems. This conclusion seems to hold only if operational costs are singled out and this paper explores all relevant market, managerial and political transaction costs associated with road pricing and tradable entry rights. The two instruments have the same objective, namely to reduce congestion, and, to a lesser degree, noise, safety and environmental externalities. It is argued that the prevalence of transaction costs is largely dependent on the design of the policy instrument and the technology used. Developments in new technology will ensure that transaction costs associated with implementing a network wide, fleet wide road pricing or tradable entry permit system can remain at a low level. Comparative analysis further shows that a cap-and-trade program of entry permits distributed for free (on a smart card), traded on a brokered market and monitored downstream is not only more effective, but also likely to entail fewer transaction costs than road pricing. Any attempt, in turn, to save the huge information and search costs incurred by road pricing impairs its efficacy by severing the link between the externality and the price paid