Emissions trading, water trading, nutrient trading. These new policy instruments have enormous potential but are frequently misunderstood. They can induce scepticism, fear or unrealistic expectations. Suzi Kerr will clarify the mechanics of a cap and trade system, and outline benefits, limitations and challenges when implementing environmental markets. She will illustrate these issues with detail from potential applications in cleaning up Lake Rotorua's water quality and for New Zealand climate change policy. The presentation draws on Motu's extensive research programmes on the design, assessment and valuation of environmental markets. The talk also draws on practical experiences working with stakeholders in the Rotorua catchment and with private, public and NGO sectors on the emissions trading system.