Beyond the ‘Either/Or’ of Markets v. Regulations

There are a number of consistent questions that come up in conversations about environmental markets.  Are markets an appropriate ‘alternative’ to more traditional regulations?  Can compensatory mitigation really make-up for impacts that it ‘enables’?

Rather than being an alternative to regulation, environmental markets are a particular kind of regulatory solution.  Necessary development projects can move more quickly at lower cost if credits generated from restoration projects are a legitimate form of compliance with environmental laws.  The key point is that compliance credits are entirely the product of regulation: the financial, ecological, and legal standards that define the credit are set by the same government entities that otherwise regulate development.

While there is a necessary tension between economic efficiency and scientific rigor here – credit standards can be set higher or lower to reflect different levels of required planning studies, restoration success criteria, and monitoring – this is not a bad thing.  This tension informs regulators about what realistic alternatives exist for the avoidance, minimization, and mitigation phases of project permitting. 

As we refine credit standards through experience, we are ‘getting it right’ more often.  Both environmental and economic results are better because regulators have compliance options to offer. 

As we design and implement environmental market systems, we’re also creating opportunities for capital investment in the environment.  ‘Getting it right’ means that the more good they do, the more money they’ll make – and it creates a critically needed alternative to philanthropic or government sources of funding.

Author bio: 
Adam Davis is the President of Solano Partners, Inc., a consulting firm focused on environmental investment and the financial value of natural systems. SPI supports for profit companies, non profit organizations, government agencies and entities, and academic organizations by assembling teams of nationally recognized thought leaders to focus on environmental value issues. Specific areas of expertise include eco-credit design, registry and trading platform design, environmental market regulatory and policy issues, and environmental investment underwriting criteria.


scott lockert

This is an interesting

This is an interesting discussion Adam.  I would have to agree with you that what you are callng compliance credits are a direct result of application of a regulations, with all of the regulatory expectations and goals bundled into a tradeable unit.  As a result, regulators of resources have an opportunity to have positive affect upon natural systems through the thoughful monitoring and management of the credit market variables. 


Given that a market of any

Given that a market of any type relies on participants playing by the same rules of the game, the entire notion of markets as an "alternative" to more traditional regulations seems like a false dichotomy.  Objections to both traditional regulation and to environmental markets really have more to do with who bears the burden of the costs, including those associated with uncertainty. It would be far more constructive to reframe the entire discourse around fairness in the distribution of costs and benefits relative to achieving desired outcomes - and how to make rules consistent with this, given the specific characteristics of the services, whether that involves a market or not. That would also shift the focus to whether or not a market is more cost effective, or not, in comparison with other approaches.


This is really interesting to

This is really interesting to read discussion abut market. In finance industry such types of competitions are always happens. I think, market and regulations are two complementary things which varies on daily basis. These type of issues are also occurring in many other countries.

Paul Manson

Great post - I really

Great post - I really appreciate your observation of getting it right. So often these processes are seen as single-shot efforts. But it is a learning process, like all good systems.

I am reminded of the comment by the economist Daron Acemoglu, "Forgetting the institutional foundations of markets, we mistakenly equated free markets with unregulated markets."

Markets and regulations are intimately linked. The number and size of holes in swiss cheese are regulated, but we still think the grocery is a market. The same is an opportunity for environmental credits.

The trick is motivating the right institutions to make the market work and set the standards with proper experimentation and learning.

Adam Davis

Ha!  Really?  The number and

Ha!  Really?  The number and size of holes in swiss cheese are regulated?  That is so great... 


Paul Manson

7 CFR 36 is all about cheese

7 CFR 36 is all about cheese grading. I love it, it shows how the most simple things in life are buttressed by intricate sets of institutions and laws.

All the nitty gritty details from the USDA [PDF]: