Personal tradable carbon permits for road transport: Why, why not and who wins?

Personal road transport sector poses a significant challenge in reducing carbon emissions. This paper evaluates a policy approach known as personal tradable carbon permits to reduce carbon emissions from personal vehicles. The policy is a downstream tradable permit where individuals are allocated carbon emission caps. The policy is qualitatively evaluated in the context of carbon taxes and some upstream tradable permit options. The biggest disadvantage of such a policy is the initial set up costs. Personal tradable permits, however, are more effective than carbon taxes and are also capable of stabilizing the gasoline prices faced by the consumers when the underlying oil prices fluctuate. Since equity effects are often a concern to policy makers, the effect of such personal carbon permits on the distribution of burden is quantified in a partial equilibrium framework for the US population. Different permit allocation strategies are investigated in this regard. Using US consumer expenditure survey data, and incorporating a differentiated price response for different households, we find that all three allocation strategies considered are progressive: a per adult based allocation is the most progressive, a per vehicle allocation nearer to proportional, and a per capita allocation in between the two. Personal tradable permits therefore take care of equity concerns directly through the design of the policy.