We examine the extent to which various environmental policy instruments meet major evaluation criteria, including cost-effectiveness, distributional equity, minimization of risk in the presence of uncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissions allowances, subsidies for emissions reductions, performance standards, technology mandates, and research and development subsidies. Several themes emerge. First, no single instrument is clearly superior along all the criteria. Second, significant trade-offs arise in the choice of instrument; for example, assuring a reasonable degree of distributional equity often will require a sacrifice of cost-effectiveness. Third, it is possible and sometimes desirable to design hybrid instruments that combine features of various instruments in their pure form. Fourth, for many pollution problems, more than one market failure may be involved, which may justify (on efficiency grounds, at least) employing more than one instrument. Finally, potential overlaps and undesirable interactions among environmental policy instruments are sometimes a matter of concern.

A central issue in environmental law is the choice among regulatory instruments. From Pigou to Coase to the present, scholars have debated the relative merits of liability rules, property rules, technology standards, taxes, subsidies, and tradeable allowances. An emerging scholarly consensus in economics and law would crown taxes as the presumptive optimal instrument for controlling environmental externalities. But this debate has largely been confined to the context of national law. This article examines the choice of regulatory instruments at the global level--the Olympics of instrument choice. It contends that the choice of optimal regulatory instrument is contingent on the underlying legal system of the regulatory polity. The article focuses on two salient dimensions of variation across legal systems; the voting rule for adoption of law, and the implementation structure for execution of law. The economics literature on instrument choice typically assumes that the regulator wields automatic fiat and unitary implementation. National regulatory legislation is generally adopted under a majoritarian voting rule which can compel sources of externalities to comply, and executed through a federalist structure which can impose constraints directly on sources. By contrast, global regulatory treaties are generally adopted under a voluntary assent voting rule which requires source countries to choose to participate, and executed through a jurisdictional structure which requires regulation to be implemented by nation-state intermediaries. The article argues that the fundamental differences along these two dimensions between the national and global legal systems--voting rules and implementation structures--make tradeable allowances, not taxes, the presumptive first choice for environmental protection at the global level. The article shows that the voluntary assent voting rule for international treaty law necessitates side payments to engage reluctant sources of externalities--a "beneficiaries pay" rather than a "polluters pay" approach. And it shows that making such side payments is more "participation efficient" under tradeable allowances than under taxes, where participation efficiency is defined as minimizing the sum of the costs of securing participation (which include not only out-of-pocket costs but also the moral hazard distortions induced by subsidizing or compensating polluters for the costs of abatement) plus the costs of enduring nonparticipation (which include "leakage" of the externality-generating activities from regulated to unregulated jurisdictions). The article argues that when participation must be secured rather than coerced, side payments can be made in a more participation efficient manner alongside tradeable allowances than alongside other instruments. In addition, the article shows that implementation by nation-states makes taxes more costly to monitor than tradeable allowances. In concert, these two legal system variables counsel selection of tradeable allowances, not taxes or command-and-control technology standards, to address global environmental problems such as greenhouse warming and biodiversity loss. More generally, the article argues that whether the regulatory polity is the entire planet or a local neighborhood, the prevailing voting rule and implementation structure will powerfully affect the relative merits of regulatory instruments, and that the debate over instrument choice needs to be reconceived with more explicit attention to the assumed underlying legal framework. Indeed, the article suggests that a key explanation for the divergence between the Pigouvian and Coasean approaches is the assumed underlying legal system. The article seeks to demonstrate that in the design of international regulatory law, economics matters; and, at the same time, that in the economics of regulatory design, law matters.

Thomas Sterner's book is an attempt to encourage more widespread and careful use of economic policy instruments. The book compares the accumulated experiences of the use of economic policy instruments in the U.S. and Europe, as well as in rich and poor countries in Asia, Africa, and Latin America. Ambitious in scope, it discusses the design of instruments that can be employed in any country in a wide range of contexts, including transportation, industrial pollution, water pricing, waste, fisheries, forests, and agriculture. While deeply rooted in economics, Policy Instruments for Environmental and Natural Resource Management is informed by political, legal, ecological, and psychological research. The new edition enhances what has already been widely hailed as a highly innovative work. The book includes greatly expanded coverage of climate change, covering aspects related to policy design, international equity and discounting, voluntary carbon markets, permit trading in United States, and the Clean Development Mechanism. Focusing ever more on leading ideas in both theory and policy, the new edition brings experimental economics into the main of its discussions. It features expanded coverage of the monitoring and enforcement of environmental policy, technological change, the choice of policy instruments under imperfect competition, and subjects such as corporate social responsibility, bio-fuels, payments for ecosystem services, and REDD.