In most cases economic instruments aim to maximise economic effi­ciency rather than environmental protection.

That is, they aim to achieve a given level of environmental protection at least cost to industry, and to enable continued economic growth despite restrictions on pollution. An OECD report (1989: 118) states:

More consensus seems to exist regarding advantages of emissions trading in terms of economic efficiency than with respect to its envi­ronmental effectiveness.

Open market emission trading does not ensure that the growth of total emissions in the environment is controlled. Unlike cap and trade emis­sions trading, there is no limit on the total amount of a pollutant allowed into the air in a region. When emission reduction credits are sold, the quantity of emissions they represent is usually reduced by 10 per cent, which is supposed to ensure that the environment benefits from the transaction - however, if more facilities are established in a region aggre­gate emissions can still rise.

The use of price-based instruments such as tax incentives and grants has not been particularly successful at promoting environmental protec­tion either, because often they are not worth enough to motivate compa­nies to earn them. An Asia-Pacific study found that 'tax incentives and grant schemes appear to be an area where numerous initiatives have been established through APEC, but with very little effect or benefit'. It found that measures such as technology transfer which inform and teach companies about what they might do, and the removal of 'perverse incentives' such as fossil fuel subsidies, were more effective at achieving environmentally beneficial changes (Gunningham amp; Sinclair 2002: 29-30).

Limited vs substantial reductions

Economic instruments 'encourage change by those who can achieve the change most cheaply' (National Heritage Trust 2004: 3), which is fine if only limited pollution reductions are required - that is, if reductions can be limited to what can be done cheaply.

The US EPA (2004b) notes that water pollution trading works best when 'the necessary levels of pollutant reduction are not so large that all sources in the watershed must reduce as much as possible to achieve the total reduction needed - in this case there may not be enough surplus reductions to sell or purchase'. The same is true of air pollution trading.

If substantial pollution reductions are necessary, more expensive reductions have to be made, and there is little point in setting up markets that enable some firms to avoid making those expensive reductions to minimise aggregate costs to the industry. This became evident in Germany when the government was considering implementing an acid rain emissions trading programme, the aim of which was to be a 90 per cent reduction in SO2 between 1983 and 1998. By comparison, the US emissions trading programme aimed at only a 50 per cent reduction by 2010. This meant that in the USA there was much greater scope for power stations to find cheaper ways to reduce their emissions than in Germany, where every power station would have little choice but to retrofit their plants with flue-gas desulphurisation and selective catalytic reduction for nitrogen oxides - which meant that there was no scope for trading (Scharer 1999: 144-5). The Germans therefore decided against an emis­sions trading programme and achieved their goal using legislation.

In other words, the more rigorous the emission reduction required the more likely it is to require state-of-the-art technology to be achieved and the less scope there is to find cheap solutions and sell excess allowances or reduction credits.

The US acid rain cap and trade scheme is consistently cited as a success because it has achieved some reductions at minimal cost - but how do those reductions compare with what can be achieved with tradi­tional regulation? 'US sulphur emissions now exceed those from the EU Member States by 150%' (EA 2003: 8). Despite overall national reduc­tions, levels of SO2 increased in 16 states, and 252 out of 600 power sta­tions increased their emissions (Moore 2004a: 11). Even according to its champion, the US EPA:

The Acid Rain Program has enjoyed an unusually high level of emis­sion reductions and near-perfect compliance. However, it is becoming increasingly clear that the program's emission targets may not be sufficient to achieve its environmental goal of ecosystem recovery. For example, some Adirondack and other sensitive ecosys­tems remain acidic, and visibility in the East, including the Great Smokies [Smoky Mountains], remains impaired. Scientists believe that emissions from electric generating facilities that cause acid rain must be reduced by two-thirds or more beyond current requirements to allow ecosystems to recover. (USEPA 2002a: 9)

The EPA intends to continue the cap and trade programme to achieve these reductions.