The issues of greenhouse gas emissions and global warming are at the forefront of the movement toward market-based environmental solutions. With carbon dioxide concentrations in the atmosphere rising steadily and resulting in global warming, a system of trading carbon credits was established under the Kyoto Protocol of 1997. Under the protocol, quotas can be set for greenhouse gas emissions within individual member countries. Assigned amount units, or AAUs, are allowances for one metric ton of carbon dioxide emissions, or the equivalent. These carbon credits can be traded on the open market, creating a mechanism for market pricing of carbon emissions.
With the rise of carbon trading, policy makers are looking at other environmental problems that can be addressed with cap-and-trade systems. Nutrient runoff is a problem associated with agriculture, sewage and certain industries. Many types of organic pollution such as fertilizers and sewage result in rapid algae growth, which can be toxic. Algae blooms also deplete dissolved oxygen levels in rivers and oceans, leading to dead zones. Nutrient trading policies require the government to establish caps on pollution levels and provide a credit system to polluters. While a command-and-control system of environmental management imposes the same rules for everyone, cap-and-trade systems allow the broader economy to determine where pollution occurs, as long as it remains within prescribed limits.
Taxes can be used by governments in place of regulations to ensure that polluters pay for their activities. As with cap-and-trade policies, the government must determine pollution levels that are in the public interest. The tax system is usually implemented at the source of pollution. A key concern is structuring the tax so that it encourages reduction and innovation but does not become overly burdensome on industry. Tax revenues can be used in subsidy programs to encourage development of environmentally beneficial industry processes or for other programs to benefit the environment. Governments can also provide tax credits to industries that engage in conservation activities that reduce their ecological footprint.
Quota and tax systems can be used jointly for some resource industries as well. For example, ocean fisheries are open-access systems. Since nobody owns the fish, market participants are encouraged to catch as many fish as possible, with little regard for discarded bycatch. An effective regime would set quotas for each species, with taxes coming into effect after quota levels have been reached. Taxes could be set at a higher rate for fishing methods known to have high bycatch rates, such as shrimp trawling. Quotas and taxes would result in smaller annual catches and higher consumer prices, both of which are probably necessary for sustainable fisheries.