University of California, Santa Barbara

Santa Barbara, CA  93106-5131



August 24, 2003


Have Market-Based Incentives in Environmental Regulation Worked?:  A 20-Year Evaluation



Santa Barbara CA.   Over the weekend of August 23 and 24Twenty-one of the nation’s leading expertsresearchers in environmental regulation assembled this weekend to examine how well the regulatory innovations of the 1990s have actually worked.  The workshop was entitled “Twenty Years of Market-based Instruments for Environmental Protection: Has the Promise Been Realized?”


Held at the Bren School of Environmental Science & Management at the University of California, Santa Barbara, the workshop featured an unusual combination of lawyers and economists, who presented prepared papers and then fielded questions and defended their research with discussants.


“We put this workshop together expecting confirmation to learn that economic incentives for environmental protection had been overhyped, and that we would find that the promise was not delivered,” said Charles Kolstad, Professor of Environmental Economics & Policy at the Bren School and one of the organizers.  “In fact, a number of authors found the opposite.  Economic incentives are viewed as helping lower the cost of environmental regulations.  And many argued that environmental protection was actually higher with economic incentives than with more conventional technology-based incentivesregulations.”


The background for the workshop is this.  Efforts to comply with new federal environmental requirements during the 1980s yielded experimentation with market-based instruments (MBI) for pollution control, particularly in the United States.  .  The phase-down of lead in gasoline was one of the first successful uses of MBI.  Lead, an octane-boosting additive, was shown to be a very potent health hazard in auto emissions but it was unclear how to phase it out without generating inequities and political opposition, due to the fact that different regions and refiners faced very different problems in eliminating it.  The solution was to smoothly reduce over time the amount that individual refiners could put in their gasoline product and then allow refiners to trade this obligation.  Then, the Clean Air Act Amendments of 1990 introduced a major program for trading sulfur dioxide emissions.  Additional trading programs for better managing natural resources followed, including those for fisheries and wetlands.  Overall, the 1990s saw a tremendous expansion of MBI programs.


In 2002, the European Union decided to introduce the biggest trading program in the world: trading greenhouse gas reduction obligations.  Earlier this year, Senators McCain and Lieberman introduced legislation for a similarly amibitious program to trade rights to emit greenhouse gases in the US.  Theseis and other programs have generated a great deal of optimism and widespread acceptance of the superiority of MBI over “command-and-control” regulations—in which specific behaviors are mandated regardless of individual context—for managing natural environments.  The time was right to look at the results of these programs and determine their effectiveness.


The workshop papers and discussions were particularly relevant: both President Bush’s Clearn Skies and Healthy Forests initiatives, which appear environmentally proactive but many argue will result in greater environmental degradation in the long run, have been front and center in the news this past month.  Just a week earlier, the EPA announced major changes in New Source Review, changes intended to introduce flexibility into technology based incentives, though viewed by many as weakening the Clean Air Act.  Against this political background, workshop topics included a comparison of national and international programs, the effectiveness of tradeable permits, specific markets such as solid waste, agriculture, and wetlands, and the effectiveness of specific initiatives and programs.


The participants evaluated successful and unsuccessful models of economic incentives.  The sulfur dioxide emissions trading program, which occurs inter-state, is widely considered to be successful, principally because it allows individual entities to craft the solutions that work best for them.  The Los Angeles air pollution market, RECLAIM, by contrast, has been far less successful, in part because it is less flexible with regard to both participants and program requirements.


Market incentives for each pollutant or project must be assessed uniquely.  One participant, for example, presented on why incentives in agriculture—such as subsidies for not farming depleted soil—won’t work as well as incentives like trading credits do for polluters.  “Trading” wetlands areas, for another example, must be carefully monitored to avoid patchworking that results in nonviable habitats.


The edited papers will ultimately be published in a book.


The Market Incentives Workshop was organized by Professor Jody Freeman, Professor of Law, School of Law at UCLA and Associate Dean for Law and Policy at the Bren School, and Professor Charles Kolstad Donald Bren Professor of Environmental Economics & Policy at the Bren School.  Participants included Robert StavinsDan Farber from UC Berkeley and the University of MinnesotaHarvard University, Nathaniel Keohane from Yale University, Winston Harrington and Richard Newell from Resources For The Future, Maureen Cropper from the World Bank, Jim Salzman of American University, Juan Pable Montero from the Universidad of Chile, Catherine Kling  from Iowa State, Peter Menell  from UC Berkeley School of Law, among others.  A complete list of participants and topics is given below.




Robert N. Stavins, Harvard University.  Discussant: Daniel Farber, University of Minnesota.

“Market-Based Environmental Policies: What Can We Learn from U.S. Experience and Related Research?”


Winston Harrington, Resources for the Future.  Disussant: David Driesen, Syracuse University School of Law.

“International Experience with Competing Approaches to Environmental Policy: Results From Six Paired Cases”


Thomas Tietenberg, Colby College.  Discussant: Jim Salzman, American University.

“The Tradable Permits Approach to Protecting the Commons: What Have We Learned?”


Nathaniel Keohane, Yale University.  Discussant: Maureen Cropper, World Bank, University of Maryland.

 “Environmental Impacts of Policy-Directed Technique Choice: The 1990 Clean Air Act and the Distribution of Sulfur Dioxide Emissions”


Richard G. Newell, Resources for the Future.  Discussant: Denny Ellerman, MIT.

“The U.S. Experience with the Market-Based Phasedown of Lead in Gasoline”


Jim Salzman, American University.  Discussant: Jason Johnston, University of PA Law School.

“Net Loss:  Instrument Choice in Wetlands Protection”


Juan Pable Montero, Universidad of Chile.  Discussant: J.R. DeShazo, UCLA.

“Tradeable Permits with Incomplete Monitoring: Theory and Evidence"


David M. Driesen, Syracuse University College of Law.  Discussant: Magali Delmas, UCSB.

“Design, Trading, and Innovation”


Catherine Kling, Iowa State.  Discussant: Kathleen Segerson, University of Connecticut.

“Command and Control vs. Market-Based Instruments in Agriculture”


Denny Ellerman, MIT.  Discussant: Nathaniel Keohane, Yale University.

“Are Tradeable Permits More Environmentally Effective than Command-and-Control?"


Peter Menell, UC Berkeley School of Law.  Discussant: Michael Gerrard, Arnold & Porter.                       

“The Municipal Solid Waste 'Crisis' in Retrospect: A Success Story for Market-Based Mechanisms”


Kathleen Segerson, University of Connecticut.  Discussant: Winston Harrington, Resources for the Future.

“An Assessment of Voluntary Approaches to Environmental Protection:  Evidence from the Clean Charles 2005 Project”


Jason Johnston, University of PA Law School.  Discussant: Richard Newell, Resources for the Future.

“Marketable Environmental Use Rights and the Location of Economic Activity: Trading, Tipping, and the New Economic Geography”


Daniel Farber, University of Minnesota.  Discussant: Peter Menell, UC Berkeley School of Law.

“Legal Constraints on Environmental Trading Systems”


Michael Gerrard, Arnold & Porter.  Discussant: Tom Tietenberg, Colby College.

“The Pervasive and Sometimes Perverse Effects of Implicit Economic Incentives: A Practitioner's Perspective”




Contact: Alexandra Halsey, (805) 893-5160,