For a brief period between the end of the Cold War and September 11, 2001, an opportunity arose to consider global concerns beyond East-West politics and nudear threats. The connection between states' failed environmental policies and the devastation wreaked on the health and stability of their people suddenly became a frequently discussed subject in foreign policy, no longer consigned to specialized journals.
However, though the foreign policy debate has shifted, the potentially disruptive environmental conditions still persist. One solution to pollution and depleted biodiversity has come in the form of development assistance. International financial institutions' (IFI) environmental advice to the developing world and transitioning counties sounds familiar. Its components--principally market solutions--parallel what the institutions and their advisors (dubbed the Washington Consensus) tell the same counties to do to reform their economies. The environmental policies therefore suffer from the same failings as the economic advice.
The IFIs, in a form of Environmental Consensus, preach that counties can only clean up badly polluted environments by adopting management systems based on economic incentives. Elements of the institutions' mantra include tradable emissions permits and effluent charge systems. Advice arrives in a flood of papers from the Organisation for Economic Co-operation and Development and the World Bank.
The difference between the economic and environmental programs is that IFI environmental advice flies under the radar. The Washington Consensus has become a brawl among economists, lawyers, sociologists, and politicians who fight publicly over what went wrong in Russia and how best to manage Argentina's meltdown. In contrast, the Environmental Consensus has received little public attention.
As a result, the countries most in trouble are not hearing the whole truth. What the Consensus does not say is that the institutions, infrastructure, and human capital needed to support the sophisticated environmental instruments the West promotes are not present in much of the developing world. Although the advice sounds appealing, it will not lead to clean air or drinkable water where it is badly needed. For the most part, the IFI investments have not improved environmental quality in any significant manner. It is time to end the silence and initiate a public discussion. The stakes are too great to cede the conversation to economists.
The story starts with the use of market-based instruments in the United States, the model for dissemination elsewhere. Economists were developing incentive-based approaches to environmental control at the same time that many of the basic environmental laws were being written in the United States, but none of those early laws used economic tools. Economists' suggestions began to make inroads when US Environmental Protection Agency (EPA) regulators realized that they could help resolve difficult Clean Air Act implementation problems using incentives. Accordingly, the EPA set up a system that gave industry the opportunity to bank or sell emission reduction credits.
This policy worked well enough that credit trading was written into a 1990 law to control acid rain. Firms that can control their pollution more cheaply may accumulate credits and can then sell the credits to others, who must otherwise spend more to reduce pollution. Trading has clearly accelerated the goal of reducing sulfur dioxide discharges in the United States and has saved money. Business, not government, decides the most cost-effective way to comply.
The entire system, however, rests on the rule of law. The government firmly manages system integrity, expensive monitoring equipment assures that genuine reductions are being sold, and every credit (called an "allowance") is assigned a serial number, which allows the EPA to record transfers and ensure that a units emissions do not exceed the number of allowances it holds. …