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Tradable Permits

What are tradable permits and how do they work?
© Adam Smith Centre

Besides carbon taxes, tradable permits is another innovative market-based solution used to reduce carbon emissions.

It works by setting a cap on the total level of emissions a year, and then allowing individuals to buy rights to emit pollutants, subject to the cap. For instance, a limitation of 1000 000 tonnes of carbon dioxide along with 20 permits will mean that each permit entitles the company who owns it to emit 50 000 tonnes of carbon dioxide. Then, the permit then goes to the highest bidder. Once the permit is bought, the owner can do anything with it, including selling the permit to someone else who wants or needs it. Should companies run out of permits, they can always purchase more from other companies in order to emit more carbon dioxide.

By charging an additional cost on firms, firms will be incentivised to invest in cleaner technologies and innovate for more environmentally-friendly methods of production. What is especially important is that tradable permits allow firms to harness their own local knowledge and cut emissions in their own ways, rather than expecting across the board cuts. This way, overall emissions reductions is achieved in the most efficient way possible.

Countries have tried it. California’s cap-and-trade program, which the Environmental Defense Fund (EDF) has helped design and implement, has led to a consistent decrease in the state’s carbon dioxide pollution. California’s emissions subjected to the cap declined by 10% between the program’s launch in 2013 and 2018. At the same time, the state economy also continues to prosper and thrive.

© Adam Smith Centre
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Climate Change and Public Policy

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