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The design of environmental markets: What have we learned from experience with cap and trade?

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  • Richard Schmalensee
  • Robert N Stavins

Abstract

This article reviews the design of environmental markets for pollution control over the past 30 years, and identifies key market-design lessons for future applications. The focus is on a subset of the cap-and-trade systems that have been implemented, planned, or proposed around the world. Three criteria led us to the selection of systems for review. First, among the broader class of tradable permit systems, our focus is exclusively on cap-and-trade mechanisms, thereby excluding emission-reduction-credit or offset programmes. Second, among cap-and-trade mechanisms, we examine only those that target pollution abatement, and so we do not include applications to natural resource management, such as individual transferable quota systems used to regulate fisheries. Third, we focus on the most prominent applications—those that are particularly important environmentally, economically, or both.

Suggested Citation

  • Richard Schmalensee & Robert N Stavins, 2017. "The design of environmental markets: What have we learned from experience with cap and trade?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(4), pages 572-588.
    • Handle: RePEc:oup:oxford:v:33:y:2017:i:4:p:572-588.
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    File URL: http://hdl.handle.net/10.1093/oxrep/grx040
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