Pollution Permits - Economics Help

Pollution Permits.

These involve giving firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year.
If the firm produces less pollution it can sell its pollution permits to other firms.
However if it produces more pollution it has to buy permits off other firms.
Therefore there will be a market for pollution permits. IF firms pollute a lot there will be low supply and high demand therefore the price will be high for permits.
Therefore there is an incentive for firms to cut pollution
These pollution permits are used in the form of Carbon credits. Each country has been given a permit to produce Carbon dioxide pollution which causes Global warming. If it pollutes less than its quota then it can sell it to other countries. Therefore there is an incentive to pollute less.

It is difficult to know how many permits to give out. The government may be too generous or too tight.
Difficult to measure pollution levels. There is potential for hiding pollution levels.
Administration Costs of Implementing the scheme.
Countries who pollute more than their quotas can simply buy permits off other people. Therefore rich developed countries have been buying permits of less developed countries. This has not reduced pollution