How to create effective markets for sustainability - Ch. 4 Well-being & Ch. 2.4 Institutions

Although we have not focused explicitly on markets to internalize externalities, such as carbon markets or payments for ecosystem services, such policy instruments seem critical to valuing natural capital as part of a social well-being / sustainability function, allowing for society to make rational decisions as it trades off amongst goods and services and natural capital (since a price is given).

How can markets for environmental goods or markets that internalize externalities (environmental "bads") be designed to respond to local, institutional needs and minimize potential negative consequences / maximize co-benefits (as in Tara's question) for both human and environment systems?

For example, ITQ research with fisheries has shown that giving the rights to access a fishery can lead to permits flowing out of local hands. This, in turn, could lead to higher exploitation of resources, since those accessing the resource are not tied to the local community or ecosystem (e.g. herring in Alaska). How does this change the effectiveness of the market? Are resources protected adequately (in a way that maximizes the NPV of the wellbeing function)? While some of the literature in this area can be a strongly worded, the overarching point - that there are negative effects from pricing natural capital - could be explored with particular reference to institutions literature.

Similarly, with pricing carbon, the structure and price in a carbon market can affect how resources flow. What projects are supported, given the structure and price, and how does this affect the 'sustainability' the market promotes? How do these markets interface with technology transfer and what kind of technologies do they deploy? How could the market be designed to maximize co-benefits and respond to existing local institutions? Literature on REDD already explores some of these questions in specific contexts; more broadly, sustainability science could seek to find best practices or generalizable knowledge on how markets can be designed to minimize negative, unintended consequences.

This question would presume/require natural capital or externalities are being priced, and would then ask how such a revealed price could best respond to local needs and existing institutions.