Tradable Permits

To minimize the cost of meeting an environmental target (such as only allowing only one million tons of sulfur dioxide emitted), allowances can be distributed to polluting firms, who are then allowed to exchange them for money. Firms with low compliance costs can sell their permits and cut back emissions. Alternatively, the agency responsible for allocating permits could sell them to the highest bidders, and then allow the permits to be further traded as firms discover new ways to reduce emissions.