Market-Based Environmental Policies:
What Can We Learn from U.S. Experience
(and Related Research)?
This volume is premised on the notion that market-based instruments have been part of the environmental policy landscape in the United States for twenty years. Although such instruments were first introduced early in the 1970s,1 and the surge of high-level national interest in this set of policy tools did not commence until late in the 1980s,2 twenty years is a reasonable reference point to use to reflect on our experiences and search for lessons from this set of experiments with economic-incentive approaches to public policy. In the intervening years, the concept of harnessing market forces to protect the environment seems to have evolved from being almost politically anathema to being close to politically correct.
For purposes of this chapter, I define market-based instruments to be aspects of laws or regulations that encourage behavior through market signals, rather than through explicit directives regarding pollution control levels or methods. These policy instruments, such as tradable permits or pollution charges, can reasonably be described as “harnessing market forces,”3 because if they are well designed and properly implemented, they encourage firms or individuals to undertake pollution control efforts that are in their own interests and that collectively meet policy goals.
By way of contrast, what may be thought of as conventional approaches to regulating the environment—frequently characterized as commandand-control approaches—allow relatively little flexibility in the means of achieving goals. Such policy instruments tend to force firms to take on similar shares of the pollution control burden, regardless of the cost, sometimes by setting uniform standards for firms, the most prevalent of which are technology- and performance-based standards.