ABSTRACT
Climate change and other global environmental imbalances testify that markets fail to manage resources sustainably and efficiently. The Stern Review on the Economics of Climate Change (Stern 2007) called climate change the biggest market failure of all time. There is increasing agreement that where markets fail, government needs to intervene. There is, however, no agreement on how best to intervene. What is the most promising approach? What can environmental taxes and cap-and-trade systems do, and where do we need technology-specific support? How big an intervention is needed to correct the market failure, and for how long? Under what political conditions can intervention work? What capabilities are needed to make it work? How can the intervention be made cost-effective and how can misallocations be avoided?
