Can market-based instruments replace conventional regulation in nature conservation?
In an attempt to strengthen their position, supporters of market-based instruments like to cite examples of the supposed ineffectiveness of conventional regulation in nature conservation. They argue that such approaches are no longer a suitable tool for the effective reduction of environmental pollution and the overuse of natural resources. The implication is that market-based instruments overcome the limits of conventional regulation and facilitate more effective nature conservation.
In practice, conventional regulation has a better track-record for nature conservation
As long ago as 1976, the United States Environmental Protection Agency (EPA) introduced the concept of trading in pollution rights in order to reduce emissions of certain airborne pollutants. The national trade in sulphur dioxide allowances that was introduced in the USA in 1990 is often cited as the forerunner of today's emissions trading. Sulphur dioxide emissions in the USA did indeed fall after the introduction of the scheme. However, emissions also fell – and sometimes fell faster – in countries that relied on conventional regulatory instruments to reduce sulphur dioxide emissions.
Efforts to reduce deforestation in Brazil likewise show that so-called 'command-and-control' instruments make effective nature conservation possible if they target the key drivers of deforestation. The Brazilian example also demonstrates that introducing market-based instruments can undo the success that has been achieved through conventional regulation and enforcement. In 2012, Brazil amended its forest legislation, introducing market-based instruments for forest conservation and at the same time restricting the use of conventional regulatory instruments. This, combined with sweeping cuts in the funding of the environmental agencies, meant that the impressive reduction in deforestation that had been under way since 2004 turned into a renewed increase in forest destruction in recent years.
REDD+ does not prevent deforestation
This increase is being driven partly by the promotion of tradable restoration credits that were introduced in the revised forest legislation on the back of the presumed success of REDD+, a market-based forest and climate protection instrument. These credits enable a landowner to continue to use land illegally deforested to raise cattle or grow soy - provided that he provides proof of a corresponding number of restoration credits to the environmental law enforcement agencies. The credits are accepted as evidence that legally permitted and planned destruction of rainforest elsewhere has been prevented, and that a landowner in possession of such restoration credits has compensated the illegal deforestation on his own land which he otherwise would have had to restore under provisions of the revised forest law.
The certificates can be purchased on trading platforms and enable continued production in areas where deforestation in excess of the legal limits promises the largest profits. Without the availability of tradable restoration credits, landowners would have to restore these lucrative but illegally cleared forest areas. The result is more forest loss where it is most lucrative to clear land while forests that were never under any real threat of deforestation provide cheap restoration credits. By contrast, the impressive success in reducing deforestation in Brazil between 2004 and 2009 was achieved largely through conventional environmental regulation and enforcement. Similar examples of the success of conventional environmental regulation have been documented in connection with improvements to water quality and the reduction of airborne pollutants in the EU. It is noticeable that the call for the introduction of market-based instruments is particularly loud in those places where conventional regulatory instruments are having an effect.
There is no doubt that conventional regulatory instruments cannot prevent the destruction of nature unless there is political support for their enforcement. However, it is incorrect to conclude from this that conventional environmental regulation overall has failed and needs to be replaced with market-based instruments.
The EU emission trading scheme reveals the structural weaknesses of market-based instruments
By contrast, the verdict on the trade in pollution rights as a tool for regulating greenhouse gas emissions is sobering: in the EU emissions trading system, which has now been in force for more than a decade, prices have collapsed. For some years, EU emission certificates have been traded for less than five euros. The price signal: emitting greenhouse gases remains cheaper than investment in expensive transition to renewable energy technologies. The European Commission's 2016 'Trends and Projections' report puts it succinctly: “At current levels, the price signal of the EU ETS provides limited incentive for the more expensive abatement options necessary to decarbonise the European economy in the long term.”
In addition, the EU emissions trading system has turned into a cash cow for the EU's largest polluters and bestowed gifts of billions of euros on Europe’s largest emitters of greenhouse gases. Between 2008 and 2014, they pocketed assets worth over eight billion euros because they received free of charge far more emission certificates than they needed to cover their emissions – and could sell the surplus of certificates they had received for free. The decade of the EU emissions trading system also brought with it various episodes of fraud and the theft of digital emission certificates. Set against this are the somewhat unconvincing arguments of its supporters, who claim that there is a causal link between the fall in emissions in the EU and the introduction of the emission trading scheme.
This article is part of our dossier "New Economy of Nature".
 Is Emissions Trading an Economic Incentive Program?: Replacing the Command and Control/ Economic Incentive Dichotomy.
 S. de Bruyn et al. (2016): Calculation of additional profits of sectors and firms from the EU ETS. A CE Delft report for Carbon Market Watch.