Constructing Green Markets: Design Challenges and Pioneering Experience

Introduction Following deregulation of the principal energy markets, and EU failure to impose harmonised taxation on polluting emissions, some European countries have moved towards market based greening of energy supply. This move is demanding, however, as political authorities thereby engage extensively not only in market regulation, but also in market construction, even to the extent of taking responsibility for creating demand and balancing it with sufficient supply. Based on experiences from the Swedish electricity certificate market, this paper discusses challenges facing “green” market construction, including such issues as: Static efficiency versus dynamic innovation and the challenge of immature green technologies; market functioning and competition; the challenge of matching commercially based investment with political commitment; the problem of market calibration; effects of the certificate system on the power market; and distributive issues. The paper also explores how these issues and challenges reflect underlying goal conflicts and theoretical assumptions.