A range of policy instruments already exists: these have already shown their usefulness for example in encouraging energy efficiency, one of the most important means of decreasing greenhouse gas emissions. Such instruments can be characterized as penalties or incentives, and be implemented by fiscal or bureaucratic means (fig. 2). An example of a bureaucratic penalty, for example, would be regulation, perhaps through building performance standards. Conversely, a fiscal incentive might be a grant or tax break to support energy efficiency improvements.

There are pros and cons to each type of instrument. Bureaucratic instruments give predictable outcomes, and are seen as creating a “level playing field” for all participants. On the other hand, they can tend to be rigid, and thus lock in the assumptions made when the scheme was designed. Fiscal instruments are flexible and easily reversed, but are politically sensitive and less certain in their outcomes.

In recent years, there has been increasing interest in market-based mechanisms such as trading systems that aim to combine advantageous features of the different instrument described above. In the environmental field, the traditional approach has been one of bureaucratic “Command and Control”. A typical trading system substitutes this with a fiscal “Cap and Trade” (C&T) approach in which a cap of total desirable emissions is set, and organizations covered by the scheme are then permitted to trade allocations between themselves.