Market Mechanisms and Incentives for Environmental Management

Opening Date: November 2, 1999
Closing Date: February 2, 2000

1.0 Introduction
2.0 Market Mechanisms and Incentives
3.0 Eligibility
4.0 Instructions for Application Submission


The Environmental Protection Agency (EPA) Office of Research and Development, National Center for Environmental Research (NCER), in cooperation with the EPA Office of Policy and Innovation, announces an extramural grants competition supporting research in the area of market-based mechanisms and other incentives for environmental management (MM&I).  This is the first year of this particular competition.

EPA has supported similar socio-economic research in prior years through the EPA/NSF joint program on Decision-making and Valuation for Environmental Policy.  This year, subject to available funding, EPA also plans socio-economic solicitations addressing valuation of children's health and the determinants of environmental behavior and the influence on environmental performance of governmental interventions such as enforcement and compliance assistance.  Information on announcements and awards made in these competitions may be found on the Internet.

2.0 Market Mechanisms and Incentives

2.1 Introduction

The MM&I competition encourages research that will contribute to the development of practical, credible approaches for designing environmental programs that will meet the Nation's environmental goals cost-effectively.  The terms "market mechanisms" and "incentives" refer to approaches that are alternatives, complements, or supplements to traditional environmental regulation, and that rely on market forces, financial mechanisms, or other instruments to encourage regulated entities to reduce emissions, discharges and waste generation, or generally improve environmental performance.  Existing and suggested MM&I approaches have included: pollution fees, charges and taxes; deposit-refund systems; pollution allowance trading; subsidies; performance bonds; extension of property rights to environmental resources; liability approaches; information approaches, environmental management systems and voluntary programs, among others.

The competition encourages proposals from researchers from all behavioral, social, and economic sciences. It encourages collaborations with non-social science disciplines when needed to answer social science-based questions.  It supports both research conducted within a single disciplinary tradition, as well as novel, collaborative, and interdisciplinary scientific efforts.

2.2 Description

Environmental economists have long suggested that MM&I approaches could reduce the compliance costs and/or improve the environmental performance of regulated entities, when compared to traditional command and control regulation.   This has been validated by recent experience with fee systems in Europe and sulfur dioxide and nitrogen oxides trades in the United States, the latter representing savings of over $5 billion, compared to command and control regulations (Anderson 1999).   The total relative potential savings from MM&I programs is estimated at approximately $40 billion (Anderson 1999).

The Vice-President's Reinvention initiatives have emphasized the use of MM&I approaches in environmental management, due to the significant potential savings they represent.  The Global Environmental Management Initiative, a non-profit organization of leading companies, has produced a set of recommended incentives to improve corporate environmental performance.

The U.S. experience with MM&I approaches is still limited, however, compared with their potential applications.  The various potential applications of MM&I mechanisms, as well as their efficiency advantages, potential disadvantages and their distributional effects need to be better understood.

This competition is soliciting proposals for theoretical and empirical research that will accomplish several logically related objectives:

(1) identify potential applications of MM&I approaches to environmental issues that federal, state, and local agencies must address;

(2) estimate the impacts of MM&I programs on the environment, innovation, technological change, trade and competitiveness, and consumer behavior;

(3) estimate (ex ante) or verify (ex post) the costs, including transaction costs, and cost-savings (relative to existing command and control programs alone) of MM&I applications in the U.S. and abroad;

(4) identify who will bear the costs or realize the savings of MM&I programs;

(5) investigate the underlying theoretical issues that will determine the relative effectiveness of MM&I programs in protecting the environment; and

(6) develop realistic models that will demonstrate the relative effectiveness of MM&I programs in novel situations.

Applicants are encouraged to submit proposals that achieve several of these objectives and involve experts from economics and other disciplines.

Examples of research topics of particular interest include:

  • The feasibility of trading systems for achieving water quality standards, particularly total maximum daily loads (TMDLs), through point-point, point-nonpoint, and nonpoint-nonpoint source trades.
  • Administrative and other transaction costs, monitoring requirements, enforcement aspects, and paperwork burden of taxes, fees, and trading systems.
  • The effectiveness of MM&I programs in achieving improved environmental performance and compliance with environmental standards.
  • Lessons learned from existing MM&I programs and implications for theoretical development.
  • Relationships of fees, charges, and trading schemes to pre-existing economic policies (e.g., income taxes, industry subsidies, depletion allowances, depreciation).
  • The efficiency of fees and taxes relative to the uses of funds collected (e.g., revenue enhancement vs. pollution disincentives) and other fiscal aspects of MM&I programs.
  • Applications of fees and charges to achieve water quality, drinking water quality, or air quality standards.
  • Improved designs of trading systems for specific air pollutants, including rights distribution systems.
  • Applications of liability approaches to managing human health and environmental risks associated with toxic chemicals, pesticides, food quality, air, water, drinking water, and hazardous waste, including the influence of reporting requirements on the ability to raise capital.
  • The economic and environmental effects of providing information on environmental releases or risk information to consumers, investors, and/or producers of goods and services.
  • The effectiveness of information dissemination, including linkages between information provision and risk-reducing behavior, willingness to pay for information, the effectiveness of information dissemination policies, the influence of information on innovation, the efficiency of using education programs to change behavior, public response to standards that communicate risk information, and the characterization of information asymmetries as they relate to environmental risk.
  • Development of economic measures or indexes to compare the effectiveness of MM&I and regulatory approaches in reducing environmental risk.
  • Methods to evaluate benefits of voluntary compliance programs (e.g., agricultural best-management-practices, ISO 14000, EPA's 33/50 program), along with assessments of why some voluntary programs work better than others.
  • Attitudes and underlying motivations towards MM&I approaches from industry, environmental groups, and the general public.
  • The potential environmental benefits and social costs of other incentives desirable to regulated entities (e.g., flexibility, increased compliance times, early reduction credits, pollution prevention incentives).
  • The cause and effect relationships between corporate environmental performance, including emphasis on sustainability, and corporate financial performance.
The results of this research are expected to inform federal and state policy-makers in both executive and legislative capacities, as well as members of regulated communities, the academic community, and public interest groups, all of whom will be stakeholders and participants in the debate on uses of MM&I approaches.

2.3 Relationship to Current EPA Activities

The MM&I research effort relates to several EPA programs, including:

  • the economy and environment program and the reinvention policy program of the Office of Policy and Innovation, Web homepage;
  • economic analysis programs in several EPA program offices;
For a list of MM&I reports see:!OpenView&Start=30.

For two recent MM&I reports see: and


Academic and not-for-profit institutions located in the U.S., and state or local governments, are eligible under all existing authorizations.  Profit-making firms are not eligible to receive grants from EPA under this program.  Federal agencies and national laboratories funded by federal agencies (Federally-funded Research and Development Centers, FFRDCs) may not apply.

Federal employees are not eligible to serve in a principal leadership role on a grant.  FFRDC employees may cooperate or collaborate with eligible applicants within the limits imposed by applicable legislation and regulations.  They may participate in planning, conducting, and analyzing the research directed by the principal investigator, but may not direct projects on behalf of the applicant organization or principal investigator.  The principal investigator's institution may provide funds through its grant from EPA to a FFRDC for research personnel, supplies, equipment, and other expenses directly related to the research.  However, salaries for permanent FFRDC employees may not be provided through this mechanism.

Federal employees may not receive salaries or in other ways augment their agency's appropriations through grants made by this program.  However, federal employees may interact with grantees so long as their involvement is not essential to achieving the basic goals of the grant.1  The principal investigator's institution may also enter into an agreement with a federal agency to purchase or utilize unique supplies or services unavailable in the private sector.  Examples are purchase of satellite data, census data tapes, chemical reference standards, analyses, or use of instrumentation or other facilities not available elsewhere, etc.  A written justification for federal involvement must be included in the application, along with an assurance from the federal agency involved which commits it to supply the specified service.

1EPA encourages interaction between its own laboratory scientists and grant principal investigators for the sole purpose of exchanging information in research areas of common interest that may add value to their respective research activities.  However, this interaction must be incidental to achieving the goals of the research under a grant.  Interaction that is "incidental" is not reflected in a research proposal and involves no resource commitments.
Potential applicants who are uncertain of their eligibility should contact Dr. Robert E. Menzer in NCER, phone (202) 564-6849, e-mail:

4.0 Standard Instructions for Submitting an Application

A set of special instructions on how applicants should apply for a NCER grant is found on the NCER Web site.

Sorting Codes

The need for a sorting code to be used in the application and for mailing is described in the Standard Instructions for Submitting a STAR Application.  The sorting code for applications submitted in response to this solicitation is 2000-STAR-C1.  The deadline for receipt of the application by NCER is no later than 4:00 p.m. ET, February 2, 2000.


EPA anticipates making approximately 10 awards for MM&I research, totaling about $2 million.  The projected range is from $50,000 to $200,000 per award per year, with durations from 1 to 3 years. Field experiments, survey research, and multi-investigator projects may justify the higher funding level.  Awards made through this competition will depend on the availability of funds.


Further information, if needed, may be obtained from the EPA officials indicated below. E-mail inquiries are preferred.

Dr. Matthew Clark
EPA National Center for Environmental Research and Quality Assurance
Fax (202) 565-2447, Voice (202) 564-6842

Dr. Robert E. Menzer
EPA National Center for Environmental Research and Quality Assurance
voice (202) 564-6849

4.1 Additional Requirements: Policy Relevance

To assist in the evaluation of how the research contributes to the needs of environmental decision makers, proposals in response to this solicitation must include a special section entitled, "Policy Relevance."  This discussion is limited to two pages and must contain an explicit statement on the policy relevance of the proposed research.  In particular, the applicant must identify how this research will contribute to making environmental policy more efficient or effective and "target groups," or sets of policy makers and/or policy analysts likely to benefit from this research.  Once identified, the applicant must elaborate the potential benefits of the research for the designated target groups and address ways that members of the research team intend to communicate the results to these groups.  These additional pages are in addition to the 15 pages permitted for the project description.

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The  "Standard Instructions for Submitting a STAR Application"  and the required forms are found on our FORMS DOWNLOAD PAGE

Last Updated: January 28, 2000