The Next Generation of Market-Based Environment Policies

We examine what will be required if market-based environmental policy instruments are to become a major force in U.S. environmental policy. We define market-based instruments, and specify five categories: pollution charges; tradable permits; deposit refund systems; reducing market barriers; and eliminating government subsidies. We review major U.S. applications, including: EPA's emissions trading program; the leaded gasoline phasedown; water quality permit trading; CFC trading; SO2 allowance trading; and the RECLAIM program. We assess the U.S. experience in terms of the relatively limited use of these instruments and in terms of the mixed record of performance of implemented instruments. We ask how the next generation of market-based instruments can be advanced, focusing on four sets of approaches: improving program design; applying market-based instruments on the state level; implementing new Federal programs; and addressing long-term issues. We conclude with a brief prognosis of the likely future role of market-based instruments in U.S. environmental policy.