Tradable Permits Design Considerations: Borrowing and Banking

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Firms can be allowed to “bank” extra permits and carry them over into future years. Conversely, they can be allowed to “borrow” permits from future years and repay the permits later, perhaps with interest.

Banking gives firms an incentive to reduce emissions more in the near term, in order to bank additional permits.

Borrowing allows firms to increase emissions in the near term, but may also cost less overall, if it would be extremely expensive for firms to reduce emissions right away.