Dynamic efficiency of tradable license system with time-flexible quantities.

Area of Science:

• Environmental economics
• Resource management
• Policy analysis

Background:

• Tradable license systems (TLS) are key policy tools for environmental and resource management.
• Firms aim to maximize discounted net benefits through optimal license usage and trading.

Purpose of the Study:

• To analyze the dynamic efficiency and price behavior of a general TLS with time-flexible quantity mechanisms.
• To compare fixed quantity, banking-only, and banking-and-borrowing mechanisms within a multi-period dynamic model.

Main Methods:

• Construction of a multi-period dynamic model for TLS.
• Analysis of firm behavior optimizing discounted net benefits.
• Examination of decentralized equilibrium and price dynamics under different mechanisms.

Main Results:

• Fixed quantity TLS requires efficient initial allocation for optimal benefits.
• Banking-only TLS achieves optimal benefits if cumulative initial allocation meets a threshold, with Hotelling-rule price dynamics.
• Banking-and-borrowing TLS consistently achieves optimal outcomes and Hotelling-rule price dynamics, irrespective of initial allocation.

Conclusions:

• Time-flexible quantity mechanisms significantly impact TLS efficiency.
• Synergistic effects between initial license allocation and flexible mechanisms are crucial for optimal TLS design.
• Banking-and-borrowing offers the most robust approach for maximizing benefits in dynamic TLS.