Issuing permits for certain activities and establishing a tradable permit system. Permits can "permit" many kinds of things, such as volume emissions of air or water pollutants, exploitation rights for natural resources, or consumption of units of resources.
Governments have encouraged the use of tradable permits in order to ensure that resources are used by those who value them most. Even if the overall quantity of pollution or resource use is fixed, the market can still be allowed to allocate the quantity through the use of tradable permits. The most informal policy is simply to let pollution quotas be traded within firms. In this case a firm can increase the pollution emitted by one of its plants if it makes a compensating reduction in pollution emission by another. Alternatively, the firm may increase emissions in one year if it decreases them in another. An even more market-oriented approach is to allow inter-firm trading. This can range from informal trading among firms to a formally established market in pollution rights like that recently announced by the Chicago Board of Trade for sulphur dioxide (SO2) emissions. Among incentive-based policies, the choice between charges and tradable permits depends partly on the capabilities of regulators. However, tradable permits tend to be more administratively demanding than charges because the latter can typically be implemented through the existing fiscal system.
A permit market could allow trade between governments, trade between private parties, or both. Governments would be able to choose how to distribute permits to individual parties, depending on whether they needed to raise revenue. Auctioning the permits would raise most revenue, giving them away would raise none. A compromise is to charge an annual fee to participants.
Tradable permits have been used in: (a) the control of non-point-sources of water pollution in the USA; (b) the control of acid rain precursors in the USA; (c) the control of air pollutants in Germany in a system that also allows the trade of emission permits for one pollutant for those of another, providing they have similar environmental effect; (d) Canada, which is also investigating the trading of NOx, SO2 and volatile organic compounds in certain heavily polluted areas; (e) Poland, which is setting up a tradable permit system for pollutants, having investigated and rejected a system of emission charges; (f) the control of over-fishing in New Zealand; and (g) the overproduction of milk in the EEC/EU.
Tradable permits have yet to be used in international settings. The basis on which to allocate permits is a key issue in the operation of an international tradable permit system. The initial allocation, is not likely to affect the efficiency of the system: however initial permits are allocated, the trading that subsequently occurs works to ensure that the system operates at minimum cost to the participants. Furthermore trading will tend to transfer resources from the richer nations, where the cost of finding alternatives is generally high, to the poorer ones, where it is generally lower. Only two parameters have therefore to be considered in the initial allocation: what would be fair or equitable, and what would countries accept ? There are two ways of approaching the situation: the first is to define equitable allocation systems, and then investigate their acceptability. The second is to examine acceptable systems, and then analyse their implications for equity.