Abstract
Under tradable pollution permit system, firms can decide whether or not to install new control equipment to achieve the reduction targets. Therefore, sending the right price signals could help firms make decisions concerning whether to adopt technology or to buy permits. By incorporating technology adoption as a Yes/No binary variable, this research develops an optimization framework analyzing how control agencies can search out appropriate price signals to enhance overall efficiency in the trading market. In this study, we will construct two optimization models, so called the “social planner’s model” and the “firm level model” to investigate how tradable pollution permit system may affect firms’ investment decisions in Kaoshiung and Pingtung areas. The results show that if the government require firms to reduce total NOX emissions by 10%、15% and 30% from the year 2007 levels, the total regulation costs would be $68.93 million,103.81 million and 210.13 million. The electricity generating industry always plays a major role in pollution reduction and is the largest supplier in the market. However, no equilibrium can be found in these scenarios. Under the 10% regulation, the price range that is closest to the equilibrium condition is from $11,364 to$11,392 per ton. Although there exists excess supply within the price range, the reduction target is achieved. Therefore, if promoting environmental quality is the prime task, the government should release a higher price signal to enhance firm’s incentive for installing new control equipment. However, the excess supply of permit from over investment might be viewed as inefficiency. The government should consider the cost and benefit from excess demand and excess supply in the market before deciding what price signals should be sent.