Competitive Market theory suggests that all relevant cost of an ‘activity’ must be internalized. Further, according to Ronald Coase, in a system where ‘transaction costs’ are negligible and property rights are well defined, resources would be utilized in an economically efficient manner irrespective of the legal regime. Borrowing from these theories, this paper seeks to explore the possibility of reduction of emission in India under a regime which permits emission trading. In this paper it shall be specifically argued that emission trading, a mechanism based on free market principles, can prove to be a useful tool in ensuring compliance to pollution laws and reduction of emissions. Secondly, it shall be emphasized that such a trading mechanism can also be used to ensure equitable distribution of wealth and allocation of resources.