Under a program called the Emissions Trading​ Scheme, the governments of European Union member nations establish overall targets for greenhouse gas emissions and issue​ , or​ permits, authorizing companies to emit certain amounts. In​ theory, an increase in the market clearing price of​ should induce firms to develop methods of​ their emissions of greenhouse gases.

allowances; allowances; reducing.

Explanation:

Pollution can be defined as the physical degradation or contamination of the environment through an emission of harmful, poisonous and toxic chemical substances.

Offset trading refers to a type of trading system that is typically designed for the realization of more efficient pollution control.

Additionally, a free market in tradable pollution permits simply means giving manufacturing companies and individuals the legal right to pollution of the environment. For example, ABC company is purchasing the permit of 500 units of carbon dioxide (CO2) pollution annually, this simply means it is permitted to pollute the environment by 500 units of CO2 annually.

Furthermore, a free market in tradable pollution permits has some sort of benefits as companies can resell their unused permits or devise a cheaper means of reducing pollution. It also compensate companies that significantly reduces its pollution of the environment.

Hence, a government could issue allowances or permits to companies, thereby, giving them the permission and authority to emit certain amounts of pollutants. In​ theory, an increase in the market clearing price of​ allowances should stimulate the business firms to develop effective and efficient methods of​ mitigating their emissions of greenhouse gases (pollutants) such as methane, water vapor, carbon dioxide, etc.

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