Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience

Daniel A. Farber

For the past several decades, environmental economists have urged the replacement of conventional regulatory schemes with market-based systems.¹ This book seeks to evaluate how these proposals have worked in practice. Not surprisingly, many of the contributors focus on the economists' central claim that these systems produce equal environmental benefits at lower cost than conventional regulation.² Over the past thirty years, we have amassed sufficient experience with market systems to begin to evaluate those claims.

This chapter, however, examines that experience from a different perspective. Quite apart from the efficiency benefits claimed by economists, market systems may also have unexpected legal benefits—benefits that were not contemplated by their economist advocates and that in fact were less significant thirty years ago. In particular, environmental trading systems may mitigate the effects of recent Supreme Court decisions that call into question the use of conventional regulation in some situations.³

This beneficial effect is a counter to legal difficulties that have intensified since the beginning of the modern environmental era about thirty years ago. When the major federal environmental statutes were passed, federal regulatory authority was at its peak. Federalism concerns were at their lowest ebb in the twentieth century. Property rights received little attention from the Supreme Court, and there was some reason to hope that the lower courts might become receptive to environmental restrictions on property. Today, as we will see, these constitutional problems have grown in their prominence (and the recent appointment to the

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