permit market

A permit market, also known as emissions trading or cap and trade, is an economic tool used to control pollution. In this system, a regulatory authority sets a limit on the total amount of emissions allowed within an industry. This limit is then divided into a limited number of permits, which are issued to firms. Each permit grants the holder the right to produce a certain amount of emissions.

Firms that can reduce their emissions cost-effectively can sell their excess permits to firms for whom reducing emissions is more expensive. This creates a market price for emissions and incentivizes innovation in pollution-reducing technologies. Permit markets are a form of market-based regulation designed to achieve environmental goals more efficiently than traditional command-and-control methods. They are particularly relevant in addressing issues like carbon emissions and acid rain.12