Are cap-and-trade programs more environmentally effective than conventional regulation?

Market-based instruments (MBI’s) are advocated because of their presumed lower economic cost in comparison with conventional regulatory instruments. The environmental effectiveness of the MBI is typically assumed to be the same as that of the conventional alternative (Crocker, 1966; Dales, 1968; Montgomery, 1972). Recent experience with cap-and-trade systems has confirmed the economic advantages of MBI’s (Ellerman et al., 2000; Carlson et al., 2000; Ellerman et al., 2003) and failed to find a degradation of environmental performance (Burtraw and Mansur, 1999; Swift, 2000). As a result, MBI’s, and especially cap-and-trade systems, have become widely accepted in the policy community. Recognizing this circumstance, opponents of the use of MBIs tend to attack the assumption that the environmental performance is equal (Clear the Air, 2002; Moore, 2002). Their argument is that, while the economic performance may be better, the environmental performance is worse, and that the increased environmental damages outweigh the savings in abatement cost.