Working Paper: NBER ID: w31987
Authors: Estelle Cantillon; Aurlie Slechten
Abstract: The main argument in favor of markets in environmental contexts is the same as in other contexts: their ability to promote efficient allocations and production. But environmental problems bring their own challenges: their underlying bio-physical processes - and the technologies to monitor them - constrain what is feasible or even desirable. This chapter illustrates the main design dimensions in environmental markets, the trade-offs involved and their impact on performance, through the lens of a regulated market for pollution rights (the EU emissions trading scheme) and a voluntary market for the provision of environmental services (the global market for carbon credits). While both markets eventually contribute to climate change mitigation, their organisation as a “pollution market”, for the former, and as a “provision market”, for second, means that different design considerations take precedence. Both markets also face challenges: volatile prices in the EU emissions scheme and low trust for voluntary carbon markets. We discuss how alternative design options could address those.
Keywords: market design; environment; pollution rights; carbon credits; climate change mitigation
JEL Codes: D47; Q2; Q53; Q57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Design (D49) | Environmental Performance (Q56) |
| Compliance Markets (G18) | Operational Efficiency (D24) |
| Voluntary Markets (L17) | Trustworthiness (Z13) |
| EU Emissions Trading Scheme (Q58) | Price Volatility (G13) |
| Price Volatility (G13) | Effectiveness in Reducing Emissions (Q52) |
| Low Trust (Y70) | Uptake and Impact of Voluntary Carbon Markets (F69) |
| Market Design Differences (D49) | Varying Outcomes in Climate Change Mitigation (Q54) |
| Allocation of Property Rights (P14) | Effectiveness of Markets (D47) |
| Monitoring of Compliance (M48) | Effectiveness of Markets (D47) |