Limit the amount of negative externalities, in the form of pollution, craeted by industries.
Firms will be allowed to pollute up to a certain amount, and any surplus on their permit can be traded.
Advantage
Benefits the environment in the long run, by encouraging firms to use green production methods
Advantage
The government could raise revenue from the permits, because they can sell them to firms. This revenue could then be reinvested in green technology.
Advantage
If firms exceed their permit, they will have to purchase more permits from firms which did not use their whole permit. This raises revenue for greener firms, who might then invest in green production methods.
Disadvantages
It could lead to some firms relocating to where they can pollute without limits, which will reduce their production costs.
Disadvantage
Firms might pass the higher costs of production onto the consumer.
Disadvantage
Competition could be restricted in the market, if the permits create a barrier to entry for potential firms.
Disadvantage
It could be expensive for governments to monitor emissions.
