Making environmental markets work: Lessons from early experience with sulfur, carbon, wetlands, and other related markets

Ever since the passage of the 1990 amendments to the US Clean Air act and the creation of a market in sulfur dioxide (SO2), it has become clear that market mechanisms can be effectively used to achieve environmental policies. But markets are neither infallible nor automatic. They have blind spots and they need to be designed effectively if they are to effectively achieve environmental ends. This paper defines markets as regular gatherings of people for the purpose of buying and selling goods or services. Such markets are distinguished from public payments to private landowners for ecosystem services, or private deals between a few buyers and sellers. It then provides a brief overview of several existing and proposed environmental markets, including: the Acid Rain market in the US, the Emissions Trading Scheme in the UK, the proposed Emissions Trading System for the European Union, the US market in greenhouse gases proposed by Senators McCain and Lieberman, the US market in wetlands mitigation credits, and the renewable energy market in Texas. From these the paper attempts to draw some lessons and conclusions.