Tradable permits and unrealized gains from trade

- Specify DEA models of the joint production of electricity and SO2 emissions
- Scenarios: command-and-control, tradable permits within each year and across years
- Balanced panel of 87 coal-fired power plants from 1995 to 2005
- Electricity production increases by less than 10 percent with optimal permit trading

With the advent of tradable permit programs for bad outputs (e.g., SO2 emissions); concerns arose over whether the theoretical gains from trade would be realized. We will employ a methodology that calculates the potential gains accruing to coal-fired electric power plants from implementing a tradable permit program. The magnitude of the potential gains in a plant's kilowatt hour output from a tradable permit program relative to its observed production provides insights into the existence of intertemporal allocative inefficiencies and spatial allocative inefficiencies after the implementation of a tradable permit program.