Canadian polluters compensate for their sins by paying hundreds of millions of dollars every year to help the environment, but Canada is still a laggard when it comes to using market systems to protect its natural capital, a new study says.

Sustainable Prosperity, a Canadian environmental and economic think tank whose steering committee includes such people as former Reform Party leader Preston Manning, has completed its first assessment of environmental markets in Canada and concludes that they amount to about half a billion dollars annually.

The organization defines an environmental market as a situation in which money is paid by one entity – whether a government, a private corporation or an individual – to someone else for providing a service that is beneficial to the environment. The report looks at markets for improving the quality of air and climate, water and biodiversity.

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"The logic of this is to achieve a particular environmental objective in a more cost-effective way than a regulation," said Alex Wood, one the the authors of the report. Markets allow more flexibility than simply fining companies that cannot keep within the mandated pollution limits, Mr. Wood explained.

"In a trading system for water, for air pollutants," he said, "you are going to have the option of looking at your operation and saying 'Okay, I can limit this [pollution] at a certain cost,' and then decide whether, in fact, buying a credit from someone who can do it more cheaply is a better alternative for you."

Sustainable Prosperity estimated that the amount paid by Canadians and Canadian companies for this type of positive environmental action runs between $462-million and $753-milion a year. That is a broad range, but most of the gap is attributed to the difficulty in assessing how much is spent to compensate for damages caused to fish habitats.

"For a lot of people, just the fact that these markets exist is news," Mr. Wood said. And despite the hundreds of millions of dollars that are spent on environmental markets in this country, he said, "Canada is a laggard in this area."

Mr. Wood's group wants governments to track these markets in a more systematic way to generate and channel investment into environmental protection.

That may be a hard sell with the federal Conservatives, who have spent much time attacking the cap-and-trade system for carbon that was in the New Democrats' election platform. But, Mr. Wood said, "we would hope that the logic of this policy will overcome its use as a political wedge issue."

In some environmental markets, governments establish the maximum amounts that companies are allowed to pollute. Firms that exceed those limits must pay while those that are fall short are compensated.

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In other cases, governments pay people directly for environmental improvements. Farmers are paid to prevent run-off from their lands, conservation authorities are paid to restore wetlands, and property owners are paid to address threats to drinking water.

Sometimes, Canadians are paid for what they contribute to the environment – when the renewable energy they generate is added to the electricity grid, for instance. And sometimes they pay for what they take out of it. That's the case in Alberta where a tradeable quota system has been established for hunting rights.

When conducting its tally, Sustainable Prosperity did not count schemes like carbon taxes or fees on plastic bags because the money collected does not go directly to improving the environment.

Jeff King, the managing director of environmental markets at Scotiabank in Toronto, finds ways for his clients to comply with environmental regulations without spending more money than required. "The intent of having a market," Mr. King said, "is to make it the lowest-cost mechanism to meet the same goals."