ABSTRACT
The ETS mechanism offers a significant reduction in the costs incurred to society for transboundary airborne pollution as well as climate change damage. The trading taking place in competitive markets allows for optimal equilibrium prices and pollution levels to be set according to firms’ marginal abatement costs. A vast merit of the ETS is that the regulator would not need to gather information on such costs: the market mechanism operates in such a way that inevitable adjustments are automatically placed through pollution demand and supply bargaining power. The ETS, therefore, grants benefits in terms of innovation in cleaner technologies because operators have the incentive to innovate through additional abatement measures due to foregone revenues (savings) when selling (buying) permits.
