Five years after Rio: innovations in environmental policy by World Bank

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Tradable pollution emission permits (as implemented for ozone-depleting substances in Singapore, for instance) are the best known examples of market creation, and the evidence is that they are very effective as long as a number of important design issues are addressed. First, the permit must actually create a property right if there is any doubt on this count then firms will not participate in the market. Second, the question of initial allocations of permits must be handled equitably. Finally, there must be no artificial obstructions to trading permits.

Progress since Rio has not necessarily been smooth or easy, however, as policymakers have had to confront the sheer complexity of linking environment and development problems. The commitment of leaders from around the world to achieving sustainable development was embodied in Agenda 21, the centerpiece agreement that emerged from the Earth Summit. The action programs and activities of Agenda 21 are organized under six themes the quality of life, efficient use of natural resources, protection of the global commons, management of human settlements, waste management, and sustainable economic growth and in most themes both environmental and developmental concerns are addressed.

Markets are also useful in the establishment of performance bond and deposit-refund systems. In both cases a financial bond or deposit is used to guarantee compliance with the desired outcome such as meeting environmental standards, replanting forests after harvest, or by correctly disposing of waste products, as in Japan and Taiwan (China). The existence of the deposit or bond helps ensure that the financial costs of noncompliance are sufficiently high that firms and individuals take the necessary steps to protect the environment.

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