Experience with Market-Based Environmental Policy Instruments

Environmental policies typically combine the identification of a goal with some means to achieve that goal. This chapter for the forthcoming Handbook of Environmental Economics focuses exclusively on the second component, the means - the "instruments" - of environmental policy, and considers, in particular, experience around the world with the relatively new breed of economic-incentive or market-based policy instruments. I define these instruments broadly, and consider them within four categories: charge systems; tradable permits; market friction reductions; and government subsidy reductions. Within charge systems, I consider: effluent charges, deposit-refund systems, user charges, insurance premium taxes, sales taxes, administrative charges, and tax differentiation. Within tradeable permit systems, I consider both credit programs and cap-and-trade systems. Under the heading of reducing market frictions, I examine: market creation, liability rules, and information programs. Finally, under reducing government subsidies, I review a number of specific examples from around the world. By defining market-based instruments broadly, I cast a large net for this review of applications. As a consequence, the review is extensive. But this should not leave the impression that market-based instruments have replaced, or have come anywhere close to replacing, the conventional, command-and-control approach to environmental protection. Further, even where these approaches have been used in their purest form and with some success, such as in the case of tradeable-permit systems in the United States, they have not always performed as anticipated. In the final part of the paper, I ask what lessons can be learned from our experiences. In particular, I consider normative lessons for: design and implementation; analysis of prospective and adopted systems; and identification of new applications.


Issue Date:
2001
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/10909
Total Pages:
92
JEL Codes:
Q28
Series Statement:
Discussion Paper 01-58




 Record created 2017-04-01, last modified 2017-08-23

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