Topic: Politics & GovernmentGovernment

Last updated: November 2, 2019

Tradable Pollution Permits as a Remedy for the Negative ExternalityDue to the increased pollution rates all over the world, policymakers have been looking for more innovative ways to minimize pollution and hence its negative effects to the environment.

There are two public policies that have been widely applied in advancing the efforts to reduce pollution. These are the Command and Control policy and the Tradable Pollution Permits. For over a long period, governments have been using ‘command-and-control’ public policy to regulate and minimize pollution. This is a method of public policy whereby the government sets specific emission limits to regulate the behavior of polluters.

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For example; the government or an authority in charge of the environment may require polluters to adopt a certain technology to minimize its emissions. As much as this method contributes to the reduction of pollution in some instances, it is rigid and thus firms cannot adopt other forms of technology however better they are. In addition, it has not only proved difficult to enforce but also costly. Tradable pollution permits are instruments used in minimizing pollution.

The national government determines the maximum amount of emission and also permits the maximum amount of emission by industries. The permits are then traded to firms and industries that are in need of more permits for continuation of their production activities. The firms and industries which have high pollution levels are expected to buy more permits. In this case, their production costs increases thus making them less competitive and less profitable. On the other hand, the low polluters sell their surplus permits thus receiving extra revenue hence becoming more competitive and more profitable.

This system of regulating pollution is used to prompt firms to adopt more environmentally friendly production methods in order to increase their profits.


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