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Market Mechanisms for Pollution Control

AUTHOR: Jan L. Vernon
DATE: August 1990

This report examines the use of market mechanisms for pollution control. That is, regulatory approaches such as taxes, subsidies and market creation which harness the power of the market to modify consumption and production patterns so that they are more environmentally benign. The focus is on market mechanisms with potential impacts on the coal industry.

Currently-operating market mechanisms are reviewed, and their effectiveness and advantages are compared with traditional regulations and standards. Most current market mechanisms aim to raise revenue for specific purposes, such as investment in central treatment of pollution, rather than aiming to change polluters' behaviour. Despite these limitations, governments have found market mechanisms useful to give flexibility to regulations and standards and to speed their implementation.

Proposals for new market mechanisms, with a potentially significant impact on coal prospects, are evaluated. The proposals relate particularly to control of carbon dioxide emissions and 'acid rain'. The proposals are analysed to determine their potential impacts on coal, and it is concluded that a considerable reduction in coal use could result. The risk of such market mechanisms being introduced in the short term is reviewed.

Most proposals are at an early stage of discussion, but it is suggested that coal users and producers should monitor and participate in discussions on their development. This will allow the potential impacts on coal to be identified at an early state and to be subjected to wider scrutiny.