ABSTRACT
A competitive environmental commodities market requires three conditions: (1) an adequate number of buyers and sellers so that none possess significant market power (the ability to influence market prices by a firm’s own actions); (2) sufficient incentives to buy and sell credits or allowances; and (3) moderate transaction costs. An environmental commodities market must be able to function with minimal transaction costs in order to be efficient and competitive. Regulation is necessary to ensure the environmental integrity of the system, but compliance costs should not impede competitiveness. A successful emissions market also depends on the availability of information: information management systems should be efficient and transparent (Liroff 1986, 3). This chapter shows how the attempt to develop market-based systems for air pollution control in the United States (US) during the 1970s and 1980s failed due to an inadequate number of market participants, insufficient incentives to buy and sell credits, and, in particular, high transaction costs, attributed to fragmented markets.
