Royal Society Publishing

An overview of a free–market approach to climate change and conservation

Richard L. Sandor, Eric C. Bettelheim, Ian R. Swingland


This paper describes the convergence of environmental and financial markets, reviews the evolution of market–based environmental programmes as an example of the seven–stage evolutionary process witnessed in a variety of markets and summarizes the emergence of greenhouse–gas–mitigation markets and their potential role in advancing land stewardship, biodiversity and other environmental services.

Emissions trading has been developed to meet the demand to reduce pollution while avoiding economic disruption. Consistent with the seven–stage pattern of market evolution, the US programme to reduce the damage from acid rain established a standardized environmental commodity, developed ‘evidence of ownership’ necessary for financial instruments and provided the infrastructure to efficiently transfer title. The success of the system in reducing pollution at low cost has provided a model for other market–based environmental protection initiatives.

The demand for cost–effective action to reduce the threat of climate change has initiated the same evolutionary process for markets to reduce greenhouse–gas emissions. Many of the land– and forest–management practices that can capture and store atmospheric CO2 can also provide other environmental benefits, such as biodiversity preservation and enhanced water quality. The presence of a carbon–trading market will introduce a clear financial value for capture and mitigation of CO2 emissions, thus introducing a new source of funding for land stewardship and forest rehabilitation. The market is now emerging through a variety of ‘bottom–up’ developments being undertaken through governmental, multilateral, private–sector and non–governmental–organization initiatives.

The extension of markets to other emerging environmental issues is now underway, and the linkages between environmental sustainability and capital markets are being more deeply understood. The early evidence indicates that environmental sustainability can be compatible with maximization of shareholder value.