on local legislation, measurements may require additional checks and verification by government or third party auditors, prior or post submission to the local regulator. Enforcement methods include fines and sanctions for polluters that have exceeded their allowances. Concerns include the cost of MRV and enforcement, and the risk that facilities may lie about actual emissions. Pollution markets An emission license directly confers a right to emit pollutants up to a certain rate. In contrast, a pollution license for a given location confers the right to emit pollutants at a rate which will cause no more than a specified increase at the pollution-level. For concreteness, consider the following model. There are agents each of which emits pollutants. There are locations each of which suffers pollution . The pollution is a linear combination of the emissions. The relation between and is given by a diffusion matrix , such that: . As an example, consider three countries along a river (as in the fair river sharing setting). Pollution in the upstream country is determined only by the emission of the upstream country: . Pollution in the middle country is determined by its own emission and by the emission of country 1: . Pollution in the downstream country is the sum of all emissions: . So the matrix in this case is a triangular matrix of ones. Each pollution-license for location permits its holder to emit pollutants that will cause at most this level of pollution at location . Therefore, a polluter that affects water quality at a number of points has to hold a portfolio of licenses covering all relevant monitoring-points. In the above example, if country 2 wants to emit a unit of pollutant, it should purchase two permits: one for location 2 and one for location 3. Montgomery shows that, while both markets lead to efficient license allocation, the market in pollution-licenses is more widely applicable than the market in emission-licenses. International emissions trading Example Emissions trading through Gains from Trade can be more beneficial for both the buyer and the seller than a simple emissions capping scheme. Consider two European countries, such as Germany and Sweden. Each can either reduce all the required amount of emissions by itself or it can choose to buy or sell in the market. Suppose Germany can abate its CO2 at a much cheaper cost than Sweden, i.e. MACS > MACG where the MAC curve