pollution allowance or emission rights, government-issued permit to emit a certain amount of a pollutant. The holder of the permit may use it to pollute legally, may trade permits, or may sell the permit for a profit. The allowance issued to a polluter is reduced over time as permitted levels of a pollutant are cut. By specifying reductions in emissions but leaving the polluter to decide how to cut them, the system is intended to provide free-market incentives to lessen both pollution (principally acid rain) and compliance costs. A company that cuts its pollution below its permitted level may sell the surplus allowance; a company that exceeds its limits without purchasing an extra allowance is fined. Under the Clean Air Act of 1990, federal allowances for sulfur dioxide emissions are issued to polluters, and additional allowances are auctioned. Usually bought by companies, allowances are sometimes purchased by environmentalists who retire them in order to reduce overall emissions. Sponsored by the Environmental Protection Agency and run by the Chicago Board of Trade, the first U.S. air pollution auction was held in 1993. While many have praised the system's innovative market-driven approach to the problem of environmental pollution, critics question its monitoring provisions and raise the possibility that it may merely shift pollution from one region to another. Under the 1997 Kyoto Protocol on greenhouse gases (as amended in 2001; effective 2005; extended to 2020 in 2012), nations that emit fewer such gases than permitted under the accord may sell their surplus emission rights to other nations.
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