Tradable Pollution Permits
- Governments calculate an optimum (or preferable) level of pollution
- They then create a pollution permit market and issue permits to polluting firms
- This is also known as a Cap and Trade Scheme (CATs)
- Each permit is typically valid for the emission of one ton of pollutant
- Firms that pollute more have to buy additional permits from less-polluting firms
- The price of the permit represents an additional cost of production which reduces the supply
- This helps to reduce negative externalities of production
- The price of the permit changes as it is determined by demand and supply
- If the cost of additional permits is more than the cost of investing in new pollution abatement technology, firms will be incentivised to switch to cleaner technology
- Firms can then sell their spare permits and gain additional revenue
- Firms can then sell their spare permits and gain additional revenue
Evaluating the use of Tradable Permits
Evaluation Point |
Explanation |
Challenges involved in the measurement of externalities |
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Degree of effectiveness |
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Consequences for stakeholders |
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