The political economy of instrument choice
Despite the advantages to society of permit trading, seen from the viewpoint of neoclassical economics, certain politicians are inclined to opt for credit trading, either or not based on voluntary agreements.
The usual political economy explanation for this is that credit trading has advantages for certain interest groups, such as the industry which does not have to purchase extra emission rights if companies seek to expand their production (for example, Dijkstra, 1999). However, there are also advantages of credit trading for politicians themselves (for example, Woerdman, 2004). Permit trading sets emission ceilings by (re-)distributing property or user rights, while credit trading uses existing environmental policy as a baseline for the calculation of the tradable emission reductions.An institutional economics explanation for the political attraction of credit trading is that the start-up ‘capital’ or political transaction costs of permit trading are relatively high since it comes to replace existing environmental policy, while credit trading builds increasingly on extant policy (ineffective and inefficient as it may be). Another explanation for the political attraction of credit trading is that under permit trading a choice must be made between auctioning emission allowances or give them away free (for example, ‘grandfathering’ based on historical emissions). Under credit trading, emissions are always given away free, thus lowering the political visibility of the (re-)distribution issue.