PAYING FOR POLLUTION - PERMITS AND CHARGES

Tradeable emission permits are becoming an increasingly important inst rument for controlling emissions. For a variety of reasons, emission p ermits are often allocated gratis, conferring a windfall gain on the f irst generation of permit holders. This paper examines how a regulator may capture this rent. Four different methods of rent capture - profi t, output and input charges and an emission permit rental charge - are compared with respect to their effects on efficiency and the relative burden placed on ''cleaner'' and ''dirtier'' firms. In addition to ge nerating revenue for the regulator, certain charges coupled with emiss ion permits may result in a better instrument than permits alone.