A Pollution Market is a method of partly internalizing the costs a negative externality (such as pollution) by setting up a government designated maximum amount of the specified activity and then auctioning or selling tradable permits to engage in some of the specified activity.
For example, in a fictional state, perhaps 100 units of industrial pollution will be permitted each year. 100 permits to pollute one unit each year will be sold/auctioned/lotteried to industries in the state. Each firm will compare the cost of buying more permits to pollute with the cost of making their factories pollute less. The firms that are easiest to reform for less pollution will do so, and sell their permits to the firms that have the greatest difficulty in achieving low pollution. Firms which cannot reform the amount they pollute and are not productive enough to afford permits to pollute will go out of business, firms which develop pollution reduction technology will become more profitable. Only 100 units of pollution will be emitted during the year, with the least reduction of productivity overall.