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Using financial incentives and market-based schemes to promote global environmental objectives: some cautionary considerations

By David Friedman - posted Saturday, 15 July 2000


The precautionary considerations discussed above suggest that proposals to use market-based and financial regimes in pursuit of global environmental objectives be moderated with a cautious understanding of their limitations. Modern environmental policies arise from complex social and political calculations.

If market-based environmental protection and conservation programs are to be incorporated into the international financial system, under what circumstances are they more likely to succeed? Effective guidelines would almost certainly include the following:

  1. Market-based regimes are more likely to succeed to the extent bioactive constituents of concern are fully understood and precisely defined.
  2. Market-based regimes should anticipate the possibility of changed goals and priorities
  3. .
  4. Market institutions are comparatively less attractive to the extent pre-market verification clarifies cost and compliance options.
  5. Markets should address environmental issues about which there is general consensus or which can be defended on the basis of comparative risk assessment.
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It is possible that the application of these basic principles could preclude immediate deployment of currently popular proposals, including global CO2 trading or rainforest preservation incentive schemes. Whether such programs should be advanced depends on the accuracy with which they have been specified, the extent to which they can be modified in the future, the relative gains that might be realized from markets versus mandated results, and the extent of agreement on program priority. When this set of initial considerations is satisfied, market-based programs are generally defensible. In such cases, it is likely that global finance can usefully address environmental problems while potentially adverse, unanticipated consequences are minimized.

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This is an edited extract of a paper commissioned for the New America Foundation Workshop on the Environmental Dimensions of Global Financial Architecture and presented on July 14, 2000.



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About the Author

David Friedman is Markle Senior Fellow in the New America Foundation.

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