Can personal gasoline permit trading be effective? An investigation into permit demand

This study proposes a personal gasoline permit trading scheme to limit the total gasoline consumption, thus reducing its environmental impact. We studied the effectiveness of this scheme by analyzing the permit demand of a gasoline-driven vehicle in transportation sector. A general utility optimization model is formulated and a Cobb-Douglas utility function is further assumed to analyze the response of permit demand to its price changes with the Slutsky decomposition of price effects. The results, when defined in economic terms, indicate that the permit demand of consumers in higher income groups are negatively related to permit price; permit demand are also negatively related to permit price for consumers in medium income groups, but with positive income effect; and the direct relationship between permit demand of lower income groups and the price is defined as a Giffen-good effect. That is, for those low income groups, when the permit price rises their demand for permits would also increase. Then US and Singapore household expenditure data are used to show comparable results of a pilot personal gasoline permit trading scheme. Further, some regulations on critical parameters, such as permit allocation and permit prices in the policy design are proposed to make the scheme feasible in different income groups. Based on these results, implications, limitation and suggestions for future study are discussed.