Tradable Permits

Tradable Permits

• Tradable permits are a market-based means of correcting market failure
• The total number of permits is strictly controlled as a means of limiting the overall level of pollution
• The permits can be bought and sold at an agreed price between the owner and purchaser
• The incentive is for permit holders to achieve a lower level of pollution, so they can sell the permit on.
• Tradable permits therefore combine the benefits of a market solution with those of regulation
• If firms don’t have sufficient permits to cover their pollution, they will be prosecuted.

• There are some problems to permits
  • There’s a problem calculating and distributing the permits to consumers
  • It’s hard to calculate the market price for traded permits
  • Enforcing and policing the system is difficult and costly