Environmental Policy for Developing Countries: Most Nations Lack the Infrastructure and Expertise Necessary to Implement the Market-Based Strategies Being Recommended by the International Development Banks. (Environmental Policy)

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Most developing countries have long since established laws and formal governmental structures to address their serious environmental problems, but few have been successful in alleviating those problems. The development banks, which control resources desperately needed by the developing countries, are promoting the use of economic incentives and other market-based strategies as the key to more effective environmental protection. However, the donors have rarely asked whether the approaches they are urging, which have recently had some success in Europe and the United States, can be implemented effectively in developing countries with limited resources and little experience with market-based policies of any kind.

We worry that these highly sophisticated instruments have been pushed too hard and too fast, and that those who promote them say little about the context and conditions in which they thrive. The targets of this advice should be better informed about everything they would need to do to make market-based instruments work. Otherwise, the cause of environmental protection itself may be dealt a blow when ill-conceived policies divert a country's energies without producing the desired result. Developing-world regulators, already marginalized in their own countries, will have little to show for their efforts in terms of a cleaner environment.

Before imposing a regulatory strategy on the developing world, we should review the experience of the industrialized countries and others that have implemented market-based policies. How extensive is the experience? How successful? What have we learned about the conditions necessary for effective market-based policies? Then we will be ready to consider when and where these policies are likely to work in the developing world.


Although incentive-based approaches to environmental control were being developed by economists in the early 1970s when many of the basic environmental laws were being written in the United States, none of the early laws used economic instruments. Market-based tools began to make inroads in the 1980s when regulators at the U.S. Environmental Protection Agency (EPA) saw that they could be useful in dealing with difficult Clean Air Act implementation problems. Each stack at each regulated facility had been given a discharge permit. The EPA innovation allowed firms to trade those permits internally and externally, so that expensive-to-control sources could emit more and cheap-to-control sources would be encouraged to cut back.

A variation of this system was eventually written into law to create the best-known and most successful U.S. market-based instrument. To control acid rain, Title IV of the 1990 Amendments to the Clean Air Act established tradable emission allowances for sulfur dioxide. Starting in January 1995, the electric power industry in the eastern third of the nation was allocated a fixed number of total "allowances." The rules allowed firms to bank allowances for future use, buy allowances to meet regulatory requirements rather than reduce emissions, or sell excess allowances.

Rigorous checks and balances built into the program ensure compliance, system credibility, and integrity. Utilities participating in the program were required to have expensive equipment for continuous monitoring. Every allowance is assigned a serial number. EPA records transfers to make sure that a unit's emissions do not exceed the number of allowances it holds and makes this information available to the public. The transparency in the system provides a level of reassurance to the public and competitors alike. Noncompliance is punished.

Allowance trading has undoubtedly accelerated program implementation and saved money. Utility companies are pleased that they, rather than the government, decide the most cost-effective way to comply.

Although much is made of the success of this program, the reality is that most U. …