‘This is a wonderful book that should be on the desk of every architect and planner. It shows how

In any case, aren’t trading systems better than regulations overall? 
Markets are not independent; they cannot really operate outside a regulatory framework.
20
Trading 

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192
Positive Development
systems only work where there is a regulatory framework that sets a cap, and a means of reducing the 
cap. These amounts are established through a political process and involve at least de facto regulatory 
‘negotiation’. It is the regulation that is actually achieving the reduction. The market only makes the 
transactions. Ultimately, of course, it is the market that sets the monetary value of the credits. For 
example, the EU began selling carbon credits a few years ago. This meant a windfall for the big energy 
producers who were given free credits (as was perhaps deemed necessary to get them to accept the 
new system). Increasing demand for energy led to an inflation of permit prices. In fact, through 
market mechanisms, the cost of carbon credits can actually exceed the cost of the coal. In the case 
of Southern California’s emissions trading scheme, for example, the skyrocketing carbon prices led 
to a return to a regulatory scheme of penalties and pollution control requirements. Trading schemes 
can also create windfalls and speculative profits. Yet, at the same time, they do not avoid transaction 
costs. The costs of implementation are not eliminated; they are just more dispersed and less 
visible
than the costs of regulations. Trading systems can still involve a lot of regulatory, monitoring and 
enforcement costs, and often legal processes. Trading mechanisms should not conceal the costs to 
government that are ultimately paid for by the taxpayer [Box 41]. 
If consumers pay in the end anyway, why are trading systems preferred?
Industry is justifiably more comfortable with flexible systems that enable a choice of responses. The 
caps on trading schemes create commercial imperatives, but industry can meet them through various 
strategies that take into account their unique business risks and opportunities. Moreover, industries 
can benefit several times over from trading schemes. They:
•
Do not forego any of the commercial benefits flowing from the externalities they created
in the past when establishing their market power and competitive advantage 
• 
Capture the value of the credits which, in some cases, are even allocated to polluting
industries for free (as in the EU carbon trading programme) 
• 
Are able to make economic gains just from credit inflation or price increases, as energy
and resources become more scarce 
• 
Have new opportunities for ‘creative’ activity, for example where brokering and
speculation enables wealth creation without any real production (eg the case of Enron)
• 
Are able to create wealth ‘out of thin air’ without buying the resource base itself
(ie land, air or water); 
• 
Can, in effect, obtain ‘indulgences’ for extra waste and pollution;
• 
Gain control of the productive functions of the ecological base and thus remove public 
options, as we become more vulnerable to environmental change.
In the 1970s, the early days of environmental regulation, some firms invested more resources in 
avoiding compliance, by opposing legislation in court, than it would have cost to install the required 
environmental technologies. A parallel risk attaches to market-based solutions. Middlemen may 
invest their creative energy in finding ways to exploit the new schemes, instead of achieving the spirit 
of the legislation.