Pollution Permits

Abstract

Government can reduce pollution by issuing permits to polluters in numbers below existing emission levels. Under a tradable permit programme, a firm with high abatement costs can buy permits from another firm with low abatement costs, leading to a reduction in the total cost of abating relative to a system where reduction levels are strictly assigned. For tradable permits to work effectively, the emissions must come from discrete point sources and be relatively easy to monitor. Aside from issuing the permits, the government’s role is to enforce compliance and establish optimal penalties for non-compliance.