Environmental policy instruments generate transaction costs to public and private parties. Transaction costs are the non-production costs of an exchange. These are the costs of time and effort invested in researching, creating, implementing, administering, monitoring and enforcing a policy or learning about and complying with the policy. There is a growing literature reporting on the size of transaction costs produced by environmental policy instruments. Policy maker transaction costs have been reported to range from 1 to 110 percent for farm payment schemes (Rorstad, Vatn, & Kvakkestad, 2007). For the private landholder, transaction costs have been shown to be up to 15 percent of the total cost of being involved in a policy (Mettepenningen & Van Huylenbroeck, 2009). This research extends that literature through an analysis of the factors that influence transaction costs in environmental policy and how this influence occurs. The theory based factors that influence transaction costs are categorised as: 1) transaction characteristics; 2) transactor characteristics; 3) nature of the institutional environment; and 4) nature of the institutional arrangements. How these factors influenced transaction costs was examined through the analysis of two Australian-based development offset schemes with different policy designs. Evidence was found of all four theory-based categories of influence in the policy case studies. The degree of influence and how each factor influenced transaction costs varies across the two policies and between parties. Policy design as a component of the institutional environment had a particularly large bearing on transaction costs of offset buyers and the policy administrator. An important contribution to transaction cost theory which assumes the institutional environment as given.

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