Dynamic efficiency of tradable license system with time-flexible quantities.

Tradable license system (TLS) is a fundamental policy instrument for environmental management or resource development. We construct a muti-periods dynamic model with respect to a general TLS with three time-flexible quantity mechanisms: fixed quantity, solely banking, and banking and borrowing, in which the firm maximizes its discounted net benefits over the horizon by selecting an optimal license usage by license trading across agents or transferring across periods. The dynamic efficiency performance and price dynamics in TLS are respectively examined. The decentralized equilibrium in TLS with fixed quantity cannot achieve benefit-maximum unless initial license allocation is efficient. The decentralized behaviors in TLS with solely banking lead to benefit-maximum and price dynamics follows the Hotelling rule, if and only if the cumulative initial license allocation in each period is not less than the optimum, while TLS with banking and borrowing can achieve the optimal outcome and price dynamics follows Hotelling rule regardless of the initial allocation. The findings highlight the synergistic effects between the initial allocation of licenses and time-flexible quantity mechanisms in TLS design.