Price setting and allocation of tradeble permits in agri- and horticulture (PRRECHTEN)

Tradable permits allow farmers to spread manure on their land (nutrient allocation rights) or to produce milk (milk quota). The aim of tradability is to allocate permits to the most efficient farms. Under perfect market conditions, tradable permits are efficient policy instruments. In reality, however, the trade of permits does not occur under perfect market conditions. The primary goal of this ILVO and Ghent University collaboration is to describe and analyse the allocation, trade, price setting and use of individual permit systems. The secondary objective is to explore the links between the different types of tradable permits. The result is advice to the public authorities about the application of tradable rights as a policy instrument.

We describe and analyse the individual permits systems based on a literature review, expert information and administrative data on the allocation, payments and trade of permits. We analyse the impact of government interventions in the permit market system  (e.g. introduction of a quota fund for quota transfers) on the price setting and the amount of tradable permits. We explore the over- and underuse of available permits. We develop a manure allocation model that gives a complete view of the manure market and use this model to analyse the impact of manure policy. In the context of the abolition of milk quota, we examine the maximum milk production level in Flanders, given the existing nutrient allocation rights and nutrient production rights.

This research has identified three different causes for market failure of tradable permit systems: government intervention due to social or environmental concerns, lack of market information for the market players and deviating behaviour of the market players. In spite of these market imperfections, tradable permits remain more efficient than other policy instruments. To minimise market imperfections, the creation of a permit market system requires that attention is paid to 1) a well-functioning market 2) adequate initial permit allocation to individual farmers and 3) the necessity to maintain different systems of tradable permits. Under a tradable permit system, structural growth of the sector remains possible. The farmer can adapt his behaviour according to government policy aims. Specific conclusions regarding this project can be found in numerous publications and in the PhD dissertation 'Lessons learnt from the application of tradable permits in the Flemish animal production sector ' (Bart Van der Straeten, Ghent University).