Global warming is a market failure
For a while now I’ve considered myself rather libertarian where it comes to regulation of the marketplace–that is, the view that what’s “best” should be determined by the market forces of supply and demand. When something “bad” or “expensive” is bandied about, inevitably someone else will offer a competing product that is cheaper, better, whatever…and solve the problem.
On the other hand I’ve also passionately advocated government regulation in certain other areas, most notably the environment and global warming. This non-libertarian view was a contradiction I intuitively embraced, but found hard to defend when debating libertarian principles. An article in today’s New York Times (“The Cost of an Overheated Planet”) crystallized the issue for me and resolved the contradiction.
Market competition requires that alternatives carry a cost that can be compared against other alternatives in order to judge what is “best.” The problem with carbon emissions and global warming is that while the costs are very real over the long term in terms of land loss and desertification, decrease of agriculture, etc. they are not quantified or recognized by the market. Why not? Because spewing carbon dioxide into the air is absolutely free.
Because pollution is free and there is no incentive to account for future costs, there is also no incentive to do anything different. Free always beats an alternative of any cost whatsoever. Why should the market push for costly energy alternatives, increases in efficiency, and decreases in emissions when the alternative cost of doing nothing is nothing?
The market, then, is doing exactly what it’s supposed to–it is encouraging that which is “best” and least costly. Until that changes, there will be little headway in tackling carbon dioxide emissions. The failure here, then, is in a wrong value of $0 being put on the pollution alternative–it’s not a failure of the market itself or of libertarian principles.
The answer, then, is to make carbon emissions NOT free, so that the cost of polluting can then be compared against other alternatives in a fashion that takes into account the very real long-term costs posed by global warming. That’s where carbon taxes and carbon trading systems come in–they impose a penalty where none existed before, and depending on how punitive it is it may or may not encourage alternate technology and efficiency.
Under a carbon tax regime, you simply fine companies for each ton of carbon dioxide emitted. A $14 per ton tax would amount to about a 100% tax on coal, and a 12 cent tax per gallon of gasoline. It would generate $80 billion a year for the United States, which would ideally be put to fund research into “green” energy alternatives. The disadvantage of this approach is, unfortunately, the political repercussions of a flat-out tax increase.
Under a carbon trading/”cap and trade” system, an absolute limit on emissions is decreed, and all polluters are granted permits with accompanying carbon quotas. Companies able to operate at below quota can sell their excess carbon capacity to other companies who cannot. Since permits are the equivalent of cash, governments will gain support from those who stand to profit (i.e., low emitters) and doesn’t need to justify a tax increase. This system has also been used successfully in other scenarios such as reducing acid rain.
Under either system, polluting companies will suddenly have an incentive to invest in clean technology and energy efficiency so as to reduce the costs for pollution they are paying or being forced to pass on to consumers. Rather than being free, emitting carbon will bring with it the acknowledgment that a very real cost is being imposed on the marketplace as well as our environment.
I love it–a market-based policy that is environmentally friendly!
Even though Bush has his head stuck in the sand about global warming the same as he does about everything else, the incoming Democratic Congress along with the positions taken by both Republican and Democratic candidates for president in 2008 promise to lend new life to imposing a cost on carbon pollution. If you care about global warming and are wondering what to do about it, one great way to start is to make sure that whatever candidates you support are in favor of making sure the market deals fairly with carbon dioxide by imposing a cost on it that accounts for the damage being done to the Earth and future generations.
Sphere: Related ContentTags: cap-and-trade, carbon-dioxide, carbon-tax, economy, environment, global-warming, pollution, tax
Your idea is very interesting. I’d like to see it or something like it put into law. But even with a Democratically controlled Congress, I’m doubtful that anything like this would survive a veto. Because there’s another element to the market that has to be accounted for here, namely the incentive on the part of the polluters to manipulate politicians to their advantage when doing so lets them dodge putting a price on their pollution. Then there is a cost-benefit analysis that wonders if it’s cheaper to pay for politicians than to pay for pollution.
I wouldn’t dispute your view of the market. But I take a different view of the problem. In a play I enjoy, Queen Eleanor of England says “A nation is a human thing. It does what we do and for our reasons.” The market is not, in spite of efforts to anthropomorphize it, a living thing. It is the product of human activity and is under the operation of human wills. And like most any human activity, it needs and should be bounded by the ethics of the society from which it arises.
There is conduct that human societies can and should simply prohibit on ethical grounds without regard to how it meddles with a free market. For example, while the practice of slavery has shown itself to be a source of pretty cheap labor in the past, we have come to view such a practice as morally bankrupt and consequently forbid a free market from making use of that practice. The same can be said of child labor. Or unsafe working conditions. The wishes and benefits to a free market should not be the final word on human affairs. Some things are simply wrong and there’s nothing wrong with forbidding those things without regard to what a free market would do if left to its own devices.
I agree wholeheartedly that pollution should bear costs that provide incentives to not pollute. But we must take pains to ensure that a market which is the product of human beings and which exists to serve human interests is bounded by ethical behavior. The value of those ethics must be made to trump the financial incentives to politicans to line their pockets at the cost of raping the planet.
You are (conveniently) ignoring that there is already a cost for carbon emissions — that of the buyers saying that they don’t want a certain type of product, or boycotting something that they feel doesn’t meet their needs. The market is doing what the players in the market — both the customers and the suppliers want — looking at short term profits and ignoring long-term costs that may or may not be paid by the current customers or companies. People buy cheaply made goods from other countries either ignoring or actually deciding that it is OK that those workers don’t have decent working conditions. Many people are content to do this because it gives them something even at the cost of someone else.
Adding carbon taxes doesn’t make the whole thing “libertarian” — it is the same thing as any one of a number of cases where the government gets involved in the market.
Don’t get me wrong — I’m not against thing like carbon taxes; that is precisely the reason that I’m not a libertarian. I believe that the “masses” will often make a bad short-term decision, and that it is up to the government to move things in the right direction. Civil rights wasn’t brought about because “the majority” wanted it. It was brought about because a few brave people were willing to make a stand, and the courts and a few government officials did something.
So, yes, I believe that there should be carbon trading, and I believe that the government should give incentives (in the form of reduced taxes) to encourage higher MPG for cars. But don’t try to cloak it in terms of “we’ve still got a free market”.
I don’t know about you, but I’d find it pretty hard to boycott anything that produced carbon (if I follow your point.) Cars, obviously. Food? Yep…all that agriculture generates lots of carbon. Clothes, housing, all the necessities of daily life produce carbon. So I’m not seeing where you think consumers have a choice…I suppose I could choose not to have an IPOD, but that’s about it.
If you have a captive market it’s hard to make any definitive statements about that “cost.”
A market depends on all facts being fully known and accounted for in order to be fully efficient. The theory I espoused simply said that the market was not accounting for something–the hidden cost of carbon. Say what you will, but it doesn’t cost companies a dime to spew carbon, and that has to change.
You can call it a tax, or something that brings balance to the marketplace. It doesn’t matter. It is simply a valid cost being imposed on something that shouldn’t be deceptively free. I don’t think that advocating this therefore means the market isn’t free. It’s simply getting the market to recognize a factor it did not before.