Market-based environmental policy instruments

In environmental law and policy, market-based instruments (MBIs) are policy instruments that use markets, price, and other economic variables to provide incentives for polluters to reduce or eliminate negative environmental externalities. MBIs seek to address the market failure of externalities (such as pollution) by incorporating the external cost of production or consumption activities through taxes or charges on processes or products, or by creating property rights and facilitating the establishment of a proxy market for the use of environmental services. Market-based instruments are also referred to as economic instruments, price-based instruments, new environmental policy instruments (NEPIs) or 'new instruments of environmental policy.

Examples include environmentally related taxes, charges and subsidies, emissions trading and other tradeable permit systems, deposit-refund systems, environmental labeling laws, licenses, and economic property rights. For instance, the European Union Emission Trading Scheme is an example of a market-based instrument to reduce greenhouse gas emissions.

Market-based instruments differ from other policy instruments such as voluntary agreements (actors voluntarily agree to take action) and regulatory instruments (sometimes called "command-and-control"; public authorities mandate the performance to be achieved or the technologies to be used). However, implementing an MBI also commonly requires some form of regulation. Market based instruments can be implemented in a systematic manner, across an economy or region, across economic sectors, or by environmental medium (e.g. water). Individual MBIs are instances of environmental pricing reform.

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