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In most schemes, permit owners can donate permits to a nonprofit entity and receive a tax deduction.

The overall goal of an emissions trading plan is to minimize the cost of meeting a set emissions target.

In an emissions trading system, the government sets an overall limit on emissions, and defines permits (also called allowances), or limited authorizations to emit, up to the level of the overall limit.

Because permits can be bought and sold, a participant can choose either to use its permits exactly (by reducing its own emissions); or to emit less than its permits, and perhaps sell the excess permits; or to emit more than its permits, and buy permits from other participants.

In effect, the buyer pays a charge for polluting, while the seller gains a reward for having reduced emissions.

The most cost-effective strategy depends on the polluter's marginal abatement cost and the market price of permits.

In theory, a polluter's decisions should lead to an economically efficient allocation of reductions among polluters, and lower compliance costs for individual firms and for the economy overall, compared to command-and-control mechanisms.) emissions.

The government may sell the permits, but in many existing schemes, it gives permits to participants (regulated polluters) equal to each participant's baseline emissions.

The baseline is determined by reference to the participant's historical emissions.

In some schemes, a proportion of all traded permits must be retired periodically, causing a net reduction in emissions over time.

Thus, environmental groups may buy and retire permits, driving up the price of the remaining permits according to the law of demand.

An externality is an effect of some activity on an entity (such as a person) that is not party to a market transaction related to that activity.