MBIs

Market-based instruments (MBIs) are policy tools that use market signals to achieve environmental objectives by internalizing the costs of pollution and resource use. MBIs aim to improve cost-effectiveness and provide flexibility, allowing firms and individuals to choose lower-cost options while meeting environmental targets.

MBIs are typically grouped into price-based and quantity-based instruments. Price-based instruments set or influence the price of emissions or resource use, for example through carbon taxes, pollution charges, or subsidies for green technologies. These create predictable costs or incentives that steer behavior toward cleaner options. Quantity-based instruments cap the total level of pollution or resource use and allocate or auction allowances, generating a tradable market for emissions rights. The main example is cap-and-trade programs, though baseline-and-credit schemes also fall under this category.

Common MBIs include the European Union Emissions Trading System (EU ETS), which covers power and industrial sectors; carbon taxes such as those in Sweden and British Columbia; and regional programs like the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States. MBIs are valued for providing flexibility, generating government revenue, and leveraging private sector innovation. Effective design considerations include broad coverage, credible MRV (monitoring, reporting, and verification), transparent governance, and the use of revenues to bolster legitimacy or fund green investments. Potential drawbacks include price volatility, leakage where emissions relocate, administrative complexity, and distributional effects on households and industries.

In practice, MBIs are a central tool in climate and environmental policy debates and are used alongside regulations and subsidies. Note: MBIs can have other meanings in different fields; this article focuses on the environmental policy context.