The Next Generation of Market-Based Environmental Policies

This draft paper, intended for a general audience interested in environmental policy, has been prepared for the Next Generation Project at the Yale Center for Environmental Law and Policy. We examine what will be required if market-based environmental policy instruments are to become a major force in U.S. environmental policy in the coming decades. We begin by defining market-based instruments, and contrast these with conventional command-and-control instruments. We specify five categories of market-based or economic- incentive instruments: pollution charges; tradeable permits; deposit refund systems; reducing market barriers; and eliminating government subsidies. We review major U.S. applications of these instruments, including: EPA's emissions trading program; the leaded gasoline phasedown; water quality permit trading; CFC trading; SO2 allowance trading; and the RECLAIM program. We first assess the U.S. experience in terms of the relatively limited use of these instruments. We examine: a stock-flow problem; the role of interest groups; ambivalence toward better regulation; and consumer experience. We also assess the U.S. experience in terms of a mixed record of performance of implemented market-based instruments. Here we examine the role of: inaccurate predictions; design problems; and limitations of firms' structure. Next, we ask how the next generation of market-based instruments can be advanced. We focus on four sets of approaches: improving program design; applying market-based instruments on the state level (waste management, land use, and air quality); implementing new Federal programs (hazardous waste deposit refund systems, and a revenue-neutral carbon tax); and addressing some long-term issues. We conclude with a brief prognosis of the likely future role of market-based instruments in U.S. environmental policy