Key terms
- Tradable pollution permit
- A tradable pollution permit allows a firm to emit a set quantity of pollution, and firms can buy and sell these permits among themselves.
- Pollution charge
- A pollution charge is a tax imposed on the quantity of pollution that a firm emits.
A permit scheme sets the total that may be emitted
The UK Emissions Trading Scheme works on the cap and trade principle: a cap is set on the total amount of certain greenhouse gases that the sectors it covers can emit. Within the cap, participants receive free allowances or buy them at auction or from each other. The cap is reduced over time, so total emissions must fall. It covers energy-intensive industry, power generation, aviation and maritime activity.