A tradeable pollution permits scheme sets a decreasing cap for CO2 from energy intensive industries and allocates or auctions emissions allowances which can be traded on the open market.

Businesses need to buy enough emissions allowances – the higher the price, the greater the incentive to cut pollution. Increasing the scarcity of carbon permits leads to an increase in market price.

This makes it more expensive for firms to emit carbon which in turn increases the incentive for investment in low carbon ‘green’ technologies.