When comparing a permit trading system to the use of a pollution charge

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A permit trading system and a pollution charge both aim to achieve the same goal, which is to reduce pollution. However, while a permit trading system relies on the market to determine the price of permits and allocate them to firms, a pollution charge involves government setting a tax on all units of pollution not abated. The revenue generated from the pollution charge can then be used by the government for other purposes. While a permit trading system may require some government intervention to set initial permit prices, it can ultimately be more flexible as the number of permits can be adjusted over time based on changes in demand. Additionally, pollution charges can create pollution hot spots if firms simply move their pollution to parts of the country or world where the charge does not apply.

When Comparing a Permit Trading System to the Use of a Pollution