Market Mechanisms: Options for Climate Policy

Climate change poses a significant risk for a broad range of human and natural systems. Policies to reduce emissions are critical if we are to avoid the most costly damages associated with a rapidly changing climate. Compared to traditional command-and-control regulations, market-based policies can more cost-effectively reduce greenhouse gas (GHG) emissions by creating financial incentives for GHG emitters to emit less. Ten U.S. states and many jurisdictions outside the United States have established market-based programs to reduce GHGs. This brief—an update to our 2015 brief—describes the theory behind market-based approaches; their success in cost-effectively reducing GHGs and other emissions; and a range of market-based options, including: a carbon tax, a cap-and-trade program, a baseline and credit program, and a clean energy standard.