Tradeable Permits

The government specifies an overall level of pollution we'll tolerate, then gives each polluter a "permit" for its portion of the total. Firms that keep emissions below their allotted level may sell or lease the surplus to other firms that can use the permits to exceed their original allotment. For example The 1990 Clean Air Act which set up tradeable permits for sulfur dioxide emissions in an effort to reduce acid rain. The approach may save the economy $1 billion a year. Other cases where it can work include water pollution from both point and non-point sources and international trading in greenhouse gas permits. If the number of permit holders is very high, the program can be expensive to operate. If the number is very small, some firms could monopolize the market.