Environmental Trading in Context

Pollution credit trading has been promoted by economists for years and, in the United States, is finally being considered seriously to deal with problems ranging from air and water pollution to global warming and the loss of wetlands and biodiversity.¹ Whether these market-based alternatives to direct regulation are given a chance to succeed before they are abandoned will depend, more than anything else, on the results of early trading. In principle, most people are willing to accept that environmental markets might be a good idea. However, nothing will undermine their tentative support more than an early track record of environmental trades that fail to deliver in terms of expected emission reductions or habitat protection.