Experiences with market-based instruments for environmental management

Consistent with global developments, market-based instruments are increasingly being used for environmental management across Australia. While the use of economic analysis tools by policy makers broadens the inputs to policy formulation, it is important to be realistic about their strengths and limitations. A dearth of thorough evaluations has meant that, to date, there is limited evidence supporting the cost advantages of market-based instruments identified by economic theory. Nevertheless, there has been some verification of these advantages, most notably from evaluations of the US sulphur dioxide tradeable permit scheme. A review market-based instruments within Australia and overseas reveals that while different environmental problems require tailored solutions, there are many design elements such as monitoring and enforcement that are critical to the performance of all instruments. To reconcile economic and non-economic objectives of market-based instruments, substantial compromises are often made. Thorough and open evaluation is therefore essential for better instrument selection and design.