Market-based approaches to environmental regulation: Editors’ introduction

Abstract

The practice of environmental regulation in the past two decades has been transformed by the rise to prominence ofmarket-based instruments, tradable permits, off-sets, taxes labels, etc. replacing old-style command-and-control traditionally at the heart of the regulatory tool-kit. This is an area where academic research lead policy practice, with scholarship from the learned journals of the 1970s and 1980s providing the intellectual foundation for the reform of policy that followed. The kernel of the market-based approach to policy is to face polluters with a price for the environmental damage that they impose. This is an old idea, dating back at least to Pigou (1920), who developed the classic analysis of taxing externalities to correct incentives, and carried forward in the guise of marketable property rights by Coase (1960), Dales (1968) and others. Modern economics has become increasingly sophisticated in its analysis of market-based environmental regulation, using theoretical, econometric and experimental approaches, and the Journal of Regulatory Economics has been an important outlet for such research in recent years. It is now fair to say that the ‘default’ approach when developing environmental policy is the application of such market-based mechanisms. Examples abound. In 2012 Australia put a carbon tax at the heart of its Clean Energy Plan, while British Columbia became the first North American jurisdiction to implement such a scheme in 2008. Carbon emissions in the European Union have been managed through the EU Emissions Trading Scheme since 2005; China announced in 2012 it would launch a comprehensive trading scheme in 2015. The California Air Resources Board launched