Environmental markets in the year 2000

This article examines the prospects for marketable emissions permits in the coming decade. We identify both the reasons that politicians are reluctant to embrace marketable emissions permits as a solution to environmental problems and also changes in the political landscape that could lead to the increased use of this approach. Over the next decade, we believe there is reason to be cautiously optimistic. Selective experimentation with market-based approaches is likely to continue; however, we are not optimistic about the prospects for widespread application of this tool. Moreover, applications of this tool will necessarily reflect important political constraints, thus rendering the tool substantially less effective than the textbook applications examined by economists. An important intellectual challenge is to work on the design of market-based approaches that address political concerns, enhance efficiency, and promote innovation, so that it will be easier to meet the environmental challenges that lie ahead.Mr. Hahn is a Resident Scholar at the American Enterprise Institute and Associate Professor of Economics and Public Policy at Carnegie Mellon University. Mr. Noll is a Professor of Economics at Stanford University. Hahn's research was supported by a grant from the Decision, Risk and Management Science Program at the National Science Foundation. Noll's research is supported by a grant from the Smith-Richardson Foundation. The authors would like to thank Kip Viscusi for helpful comments on an earlier draft.