Experience with Market-Based Environmental Policy Instruments

Environmental policies typically combine the identification of a goal with some means to achieve that goal. This paper, prepared as a chapter draft of the forthcoming Handbook of Environmental Economics, focuses exclusively on the second component, the means -- the "instruments" -- of environmental policy, and considers, in particular, experience around the world with the relatively new breed of economic-incentive or market-based policy instrumens. The author defines these instruments broadly, and considers them within four categories: pollution charges, tradable permits; market barrier reductions; and government subsidy reductions. By defining market-based instruments broadly, the author casts a large net for this review of applications. As a consequence, the review is extensvie. But this should not leave the impression that market-baseed instruments have replaced, or have come anywhere close to replacing, the conventional, command-and-control approach to environmental protection. Further, even when and where these approaches have been used in their purest form and with some success, such as in the case of tradeable permit systems int he United States, they have not always performed as anticipated. In the final part of the paper, the author asks what lessons can be learned from our experiences. In particular, the paper considers normative lessons for: design and implementation; analysis of prospective and adopted systems; and identification of new applications.