emissions trading

Definition

Tradable-permit system in which a greenhouse gases emitter (firm or country under obligation to limit its total air pollution emissions to a specified level) can buy/sell permission to emit a certain amount of emissions from/to other emitters (who are below/above their limit). The market price of these permits (called 'pollution credits') reflects the marginal cost of emission reduction and gives an emitter the incentive to install and manage a cost effective pollution control system as an income producing asset. Accumulating emissions reductions for trading is called 'banking.' See also bubble concept.

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