New directions in emissions trading: the potential contribution of new institutional economics

Once an arcane topic even among environmental economists, emissions trading systems have substantially increased during this past decade in the USA. Moreover, the implementation of these systems has necessitated increased involvement of professionals in many fields besides economics. This paper reviews the practical experience of the six major types of emissions trading systems, focusing on credit market development, participation and results, including transaction costs. Five more recent applications of emissions trading also are considered, as well as the possibility of inter-pollutant trading. While inter-pollutant trading has been successfully used for chlorofluorocarbons (CFCs), the applicability of this experience is probably very limited. Additionally, it would be highly premature to attempt an evaluation of these newer emissions trading systems, some of which have yet to be even partially implemented. In order to improve these latter and future programs, the paper considers the potential contribution of the New Institutional Economics (NIE) to emissions trading. The NIE is used to develop theoretical insights and a series of predictions about the performance of a range of emissions trading systems.