Common Tragedies

Thoughts on Environmental Economics

How markets help save the world

Posted by Danny Morris on April 15, 2009

Josh has done a fine job carrying the water and the biofuel for the blog over the past week, so it’s time for me to stop being neglectful and say something marginally worthwhile (Economics is always most interesting on the margins anyway, right?) If it isn’t clear to you yet from my posts, I’ve been burying myself professionally and intellectually in cap-and-trade legislation and haven’t had much time to poke my head out of the carbon clouds to see what else is going on in the environmental world. One article that did catch my attention the past week is Robert Stavins’ take on why market-based environmental policies have become so popular over the past couple decades. The post is definitely worth reading, but I’ll break it down as simply as I can. Stavins lists seven reasons why markets have worked for the environment in the past (see SO2, CFCs, lead in gasoline):

  1. Increasing pollution control costs
  2. Strong support from parts of the environmental community
  3. Market-based solutions were designed to reduce pollution
  4. Separate consideration of goals and policy instruments
  5. No status quo exists for unregulated pollutants, so there is not constituency to fight for them
  6. Political shift to accept markets as ways to solve social problems
  7. Luck put the right people in the right place

Over the course of my academic and professional career, I’ve grown from completely mistrusting all economic solutions to solving environmental problems to understanding that markets work well a lot of the time. But I still keep a healthy dose of skepticism in my pocket for those times I find myself walking down a spooky theoretical economics alley by myself at night. Stavins’ points are excellent and perfectly applicable to an eventual cap-and-trade system, but my suspicious side has a couple points he’d like to make.

First, while technically there is no status quo for regulating CO2 or other greenhouse gases, you could argue that the status quo up to this point has been to do nothing, and there is definitely a big constituency for that. As with any regulation, regulated entities argue that restrictions will cost them and in turn, cost their customers a lot of money. This argument is particularly salient with climate change because cap-and-trade is going to cost people money. The other market examples (CFCs, SO2, lead in gas) were crazy cheap to regulate in comparison to controlling CO2. The cost burden on consumers means that these comparisons can only go so far.

Second, political shifts are difficult to identify while you’re in the middle of them, but I don’t think it’s a stretch to say that alot of people do not trust markets very much these days. It remains to be seen where the political center in this country will end up after the economy settles down, but using a market-based approach to fix a problem that many people are already suspicious of is going to be a long miserable slog.

Third, I have really crappy luck. I work on climate change policy. While I’m not saying saving the world is based on my ability to pick a winning NCAA tourney bracket, hoping luck will help the most important environmental regulation in the country’s history succeed leaves a bad taste in my mouth.

None of this is to say that I disagree with Stavins’ points or I doubt the power of a cap-and-trade market system. What I’m really trying to say is that these market systems do really cool and useful things. They are not a panacea, however, so don’t be afraid to be a little skeptical now and then.

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One Response to “How markets help save the world”

  1. Carlos Ferreira said

    My book says market mechanisms are preferred because they allow society to express its preferences, and they are also more cost-efficient. The book also says that if you need to really make sure something nasty and dangerous is kept in check, command-and-control (standards, of which outright bans are part) are the way. Makes sense: go around telling people you want to create a cap-and-trade in CFCs and you’ll be taken by nice gentlemen to a padded cell really quickly…

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