Tradable Permits: Generally

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A tradable permit scheme sets an upper limit (“cap”) on the total emissions from firms or other sources. This cap is then divided up into individual allowances or permits. Each permit allows a source to emit a certain amount (such as one ton of CO2). These permits are auctioned off, allocated for free, or otherwise distributed to emissions sources.

Permits can also be bought and sold (“traded”). This promotes reducing emissions at lowest cost: sources that can reduce emissions cheaply will do so, and sell their extra permits; and sources that cannot reduce emissions cheaply will buy extra permits for themselves instead.