For many years, economists have speculated on the potential cost savings that could accrue from applying market-based approaches, such as emissions taxes and marketable emission rights, to controlling environmental risks. Only recently, however, have regulatory agencies in developed countries begun to experiment with these approaches. Most new applications are aimed at limiting a particular set of environmental hazards, such as air or water pollution. The implementation of these regulatory reforms provides a unique opportunity to examine how different market-based institutions perform in practice. The research has three main objectives: (1) to examine the evolution and performance of new market-based approaches for managing environmental risk critically; (2) to provide a more realistic framework for comparing alternative instruments for controlling environmental risk; and (3) to develop rules that would help increase efficiency in environmental markets. The research effort collects new data on the performance of environmental markets and uses these data to understand factors affecting the performance of these markets better. More realistic models of the impact of different regulatory approaches on environmental quality and control costs are expected to result from this analysis.
