Marketable emission permits with imperfect monitoring

The objectives of Santiago's Prevention and Air Cleaning Plan (PPDA) are established in terms of quantities of emissions. This is the reason why economic instruments like marketable emission permits seem to be the more attractive instruments to reach the objectives of the plan. In Santiago there is one experience with this kind of instrument, since in 1992 the government enacted the Executive Order No. 4 (EO4), whose objective was to regulate the PM 10 and TPS emissions from boilers in the metropolitan region. In this work, using a simulation model, the enlargement of this system to include the industrial processes is studied. These sources are responsible for about 12% of the emissions of particulate material in the area of Santiago. The difficulties of this enlargement are related to the impossibility of having a continuous monitoring of sources. Because of this, the emissions have to be estimated using a proxy variable. This fact brings welfare losses because of the alteration of the marginal abatement costs and the difference between targeted emission reduction and effective emission reduction reached by the system. This paper show that the welfare can be improved using different proxy variable instead of the one used in the EO4. (C) 2002 Elsevier Science Ltd. All rights reserved.