Discuss the role that Pollution Permits could play in reducing global warming?

Pollution permits are schemes to limit the amount of pollution created. Firms could be given quotas to pollute a certain amount of carbon dioxide. If the firms pollute more then they would have to buy more permits from other firms. If they pollute less than their quota then they could sell their permits to other firms. There is a clear incentive to pollute less and develop more efficient production methods, in order to reduce pollution. This scheme creates a market incentive to reduce pollution, because the more you pollute the more you pay. It is a way of charging firms for the negative externalities that they create.

However, there are some difficulties with the scheme. Firstly, it is difficult to know how many quotas to give out. If the government is too generous then pollution levels may not fall. If they are too strict with quotas it may restrict business. A simpler solution may be to simply tax production which causes pollution; this would raise revenue rather for the government as well.

Another problem of the scheme is that it is quite costly to administer. It is costly to set up and costly to monitor how much pollution a firm creates. There is also the scope for firms to cheat and exceed their output quotas without knowing - it is difficult to monitor pollution levels, it may require self-monitoring by firms.

Another issue is that global warming is a global problem. Therefore, to be effective it needs global co-operation. If some countries don't take part, multinationals may move to these areas and pollute their. If the pollution permit scheme is international, it may cause developed countries to buy permits of poor countries and this will hamper economic development in developing countries.