Emission discharge permits with regulatory tiering: Numerical simulations with a computer-assisted smart market

Permit trading for a cap and trade policy where the property right traded is an emission discharge permit (EDP) and with 'hot spots' can be addressed in a cost-effective manner in a framework combining regulatory tiering and a 'computer-assisted' smart market model. A smart market model is an optimisation-based framework used to compute permit trading solutions and the actual calculation of permit trades is based on a linear programming model. The model objective function is defined as the aggregate net benefit function for the market traders subject to a well-defined constraint set. The key characteristic of the smart market model is that all EDP trades are with a common pool and no bilateral trades are allowed to occur. The 'hot spot' problem is addressed by adding a set of regional pollutant constraints to the smart market model constraint set. In the paper, we design and implement a smart market model with regulatory tiering. The property right traded is an EDP and the regulatory tiering component is introduced into the smart market model constraint set as a set of regional pollutant constraints. Using a linear programming model, a set of experiments are extracted from numerical simulations to demonstrate the smart market usefulness for dealing with the specific environmental problems from the policy perspective.