Although permit trading ranks low in the political hierarchy of most countries, it is climbing up. The Kyoto Protocol has been ratified by more than 55 % of industrialized countries and international permit trading is one of the four mechanisms of the Protocol. These actual developments have made the instrument better known and have put the effectiveness of existing policy under increasing pressure. However, the choice between other policy instruments and permit trading can only be made when case-specific factors are taken into account. We have focussed on one factor, namely transaction costs. We have demonstrated that the historical view of preferring other (market-based) instruments above tradable permits because of excessive transaction costs is incorrect. The argument rests on an incomplete and inaccurate definition of transaction costs. Furthermore, we have shown that the current policy instruments used, such as environmental taxation, road pricing and the Stability Pact, induces in some cases even more transaction costs. If these instruments would be designed in such a way to be as effective and efficient as tradable permits, their transaction costs would prohibit their use. Dissertation zur Erlangung des Grads einer Doktorin der Wirtschaftswissenschaft (Dr. rer. pol.) der Universität Erfurt, Staatswissenschaftliche Fakultät, Tag der mündlichen Prüfung: 5. Dezember 2005