Policy makers have a range of different tools available in the policy toolkit to help deal with our environmental impacts, from ‘command and control’ regulation, to information provision to help people and businesses make more informed decisions. One set of tools sets out to influence the decisions made by individuals, businesses and other actors that produce environmental impacts. Called market-based instruments (or MBIs), these instruments use markets, prices and other economic variables to provide incentives that reduce pollution and other environmentally harmful outcomes in societies. MBIs have the potential to achieve environmental policy goals more efficiently and effectively than other options, but they must be carefully designed and used in the right context.
Among the earliest and simplest MBIs are taxes or charges on pollution emissions that can be levied on polluters, to account for the environmental cost of the pollution that is borne by broader society and is not otherwise included in prices of goods produced for which the pollution is a by-product. These environmental costs are examples of ‘externalities’, and the taxes and charges are designed to ‘internalise’ the environmental cost of pollution into the market.
A well known example of an MBI is an emissions trading scheme for greenhouse gases – a ‘cap and trade’ MBI. However, similar markets have been developed around the world to manage water scarcity and water quality, as well as air pollutants produced from coal-fired power plants. Nowadays, a broad range of MBIs now exist around the world in most environmental sectors to internalise externalities in a cost-effective way. These include landfill levies used across Europe, reverse auctions and revolving funds for biodiversity management, and water clarity trading.
Along with our project partners, Trinomics has begun work on a study exploring the potential for greater use of MBIs in a range of sectors in the EU. Trinomics leads the water scarcity theme in the project, considering different pricing and market mechanisms and drawing on our water economics expertise from around the world. Click here to visit the project page.
For more information about the project, please contact Kym Whiteoak.