Emissions Trading

With an emissions trading system, a regulatory agency specifies an overall level of pollution that will be tolerated (a cap) and then uses allowances to develop a market to allocate the pollution among sources of pollution under the cap. Emissions permits or allowances become the currency of the market, as pollution sources are free to buy, sell, or otherwise trade permits based on their own marginal costs of control and the price of the permits. In no case can total emissions exceed the cap.