Tradable Permits

A tradable permit system is a government policy that limits pollution by creating a permit market where firms can buy and sell emission permits.

The government first sets the maximum pollution allowed for a given industry, called the cap, and then divides the cap into small units, called permits.

Each permit gives a firm the permission to release one ton of emissions.

Every firm must hold permits equal to the pollution it releases. If it pollutes more, it ust buy permits. If it pollutes less, it can sell them.

For example, a modern factory that switches to efficient technology can reduce emissions at low cost and sell surplus permits.

On the other hand, an older power plant, facing high upgrade costs, finds it cheaper to simply buy these permits than to modernize.

In this way, this trade rewards the modern factory with profit while requiring the older power plant to pay for the right to continue emitting.

Ultimately, by combining environmental limits with market incentives, tradable permits support sustainable development while allowing economic activity.