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The Pros and Cons of Pollution Permit Trading

Meghan Oh

Permit Trading, otherwise known as Emissions Trading or “cap and trade” is a market based approach to reduce pollution from corporations by creating an allowance that can be bought or sold to other agencies. The goal of permit trading is to limit the amount of pollution by creating a “cap” that allows them to pollute a certain amount. While they are proven to be effective in reducing pollution, there are many limitations, advantages and disadvantages.


  1. Cost-effective: Saving money, and resources

Emission trading is more cost effective than traditional command and control regulations. By creating a market for emission permits and allowing parties to buy and sell, firms can reduce their emissions at the lowest possible cost.

  1. Market-driven incentive: A global framework connected through $$$

Creating a market for trade and incentivizing pollution through an allowance allows for international cooperation and integration by providing a common framework to collaborate in emission reduction efforts. This can lead to greater harmonization of environmental policies and more efficient resource allocation at a global level.

  1. Flexibility: Pollute or pay, reduce and save

Emission trading provides room for flexibility in meeting regulatory targets and requirements by providing agencies with the options of reducing emissions or purchasing permits from other agencies that have reached their emission reduction goals. This flexibility can incentivize and encourage innovation in a cost–efficient manner


  1. Market Failures

Price volatility, market power, and the potential for market manipulation are all factors that critics claim can subject emission trading to market failure. This would undermine the effectiveness of emission trading and lead to distorted market outcomes.

  1. Distributional Impacts and Environmental Injustice

Emission trading can become a game with winners and losers depending on the initial allocation of permits and the bargaining power of each party involved. Overallocation of permits would lead to insufficient emission reductions. Incentivizing emissions can disproportionately affect lower income populations and lead to increased concentrations of pollution in vulnerable communities. Companies can also pass the costs of purchasing permits to consumers by increasing the prices of goods and services to compensate.

  1. Inconsistencies

The estimates for past, current, and future emission lack reliable data. The risk of untruthful emission reports and inventories is a common challenge for emission trading to work. Additionally, different countries will have various priorities that create difficulties in achieving an international consensus on pollution limits.

Overall, permit trading is found to be a cost-efficient market based approach with certain limitations. By reframing resource conservation and allocation into a money-based framework, agencies will be forced to prioritize sustainability within their practices, but at what cost to the consumer? In capitalist America, incentivizing natural resources to encourage preservation may be the only realistic approach in contrast to everyday lifestyle changes in consumerism. However, the risk of market manipulation and failure due to volatility can undermine the entire point of emission trading due to differing levels of power across different agencies creating room for environmental injustice.


1. Center for climate and energy solutions. “Cap and Trade Basics | Center for Climate and Energy Solutions.” Center for Climate and Energy Solutions, 21 Oct. 2017,

2. Environmental Defense Fund. “How Cap and Trade Works.” Environmental Defense Fund, 2023,

3. July 15, Denny Ellerman |, and 2009. “Cap-And-Trade Addresses Inequity—without Losing Efficiency.” Americas Quarterly,

4. Kemp, René, and Serena Pontoglio. “The Innovation Effects of Environmental Policy Instruments — a Typical Case of the Blind Men and the Elephant?” Ecological Economics, vol. 72, Dec. 2011, pp. 28–36, Accessed 13 Feb. 2019.

5. Kenton, Will. “Cap and Trade Basics: What It Is, How It Works, Pros & Cons.” Investopedia, 5 Dec. 2020,

6. Woerdman, Edwin. “Chapter 5 - Transaction Costs of Market-Based Climate Policy.” ScienceDirect, Elsevier, 1 Jan. 2004,


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