Volume 29

Political Costs and the Challenge of Tradable Environmental Allowance Markets

by David Bullock

Traditional accounts of tradable environmental allowance markets focus on the economics of their operation and the instrumental costs of their design, such as the definition, monitoring, and enforcement of rights. Less attention has been given to the role of political costs in influencing whether these market-based mechanisms get enacted at all, and their form and fate if they do. These costs help to explain the divergence between strong theoretical arguments in favor of tradable environmental allowance markets and their more limited real world success. This Article analyzes how costs arising from the political process—that is, costs to political actors of pursuing particular policies—affect the decision to advance tradable market-based environmental policies, and whether these policies are sustained. This Article does so through an examination of two tradable environmental allowance markets established in New Zealand: one governing fisheries and another regulating greenhouse gas emissions. The political acceptability of these environmental markets was affected by internal and external influences, including wider economic reforms, policy entrepreneurs, and failure of other policy options. Moreover, both policies have faced post-enactment political challenges that have threatened to undermine their design. New Zealand’s experience suggests that tradable environmental allowance markets have limited political range, making them vulnerable to policy failure or manipulation and, though they can be successful in certain political environments, they are unlikely to form the basis of wide ranging environmental policy reform.

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