Economics and politics of global environmental commodities markets

This dissertation examines the evolution of emissions trading systems for air pollution control. The cap-and-trade system is a state-of-the-art concept that sets a politically determined environmental goal or “cap” while allowing cost-effective trading of entitlement shares among pollution sources and other interested parties.; The U.S. implementation experience confirms that well-functioning private markets for environmental commodities are feasible. However, this study argues that the processes of policy design and implementation are path dependent and institutionally embedded (Chapter 2). This reality presents both opportunities and constraints to the evolution and relative success of future market-based air quality management programs, and should be taken into account by their designers.; Case studies of implementation patterns of U.S. emissions trading programs operating to date are conducted (Chapters 4–7) to illustrate how a myriad of forces—historical, political, social, economic, scientific, and practical—influence the process of developing emissions trading programs through time. This study integrates these concerns into policy analysis by introducing a framework of environmental market creation parameters (Chapter 3) to be used to learn from the past and to design new applications. This method emphasizes the policy roles in market design, implementation, and choice of management strategies that are determinants of the degree of efficiency and effectiveness of existing (and failed past) trading mechanisms.; The mechanisms studied include the early use of bubbles and offsets within local air basins, the national SO₂ allowance trading program, the local-level RECLAIM program for trading NO_x allowances in southern California, and the interstate ozone transport trading agreements among northeastern states. Strong institutional support to market-based air quality management, active private financial sector participation in the development of environmental markets infrastructure, and effective use of modern information management and monitoring tools are common elements that have made the successful U.S. environmental markets relatively efficient, operational, and enforceable.; Using the forward-looking example of climate change policy making (Chapter 8), the study suggests that an integrated international environmental market for greenhouse gases emissions will not emerge in the near future unless minimum policy design standards and smart/best practices for such a system are in place. Moreover, political consensus among interested nations must be reached about establishing the institutional thresholds (or accession protocols) of independent countries to be able to participate in an international emissions trading system. Because conventional enforcement institutions are traditionally weak in international governance structures, the development of verification measures and sanctions that would ensure the environmental integrity of international trading activity poses a formidable obstacle to the implementation of such a system. If such a system is to evolve, its most likely path will be through the development of domestic and regional emissions markets that over time can be integrated.; Finally, patience is advised. Policy makers considering such an ambitious application of the emissions trading concept must keep in mind that U.S. policy designers spent more than two decades developing a workable policy design. The dissertation concludes with a summary of the findings and suggestions for future research (Chapter 9).