Common Tragedies

Thoughts on Environmental Economics

Archive for the ‘Markets’ Category

An introductory post/rant from a new contributor

Posted by Tim Kidman on April 16, 2009

To all of you in the Common Tragedies community I would like to introduce one more tragedy: my presence here as a contributor. My name is Tim Kidman, and I currently work at the Climate Action Reserve – an organization whose views and ideas I make no claim to represent in my posts here. What you read here are my thoughts alone, and do not represent my employer. This post has nothing at all to do with the Reserve. Of course, the Reserve has some pretty great ideas too, so I’d encourage everyone to check out our program. But you know the deal, so the above is my disclaimer.

When my friend Danny asked me to join the blog I immediately jumped at the opportunity. I am constantly intrigued by the power of economic theory to explain behavior and environmental issues, but I am far more amazed by the ingenuity and creativity of thinkers to employ these same theories to develop innovative remedies and policy mechanisms for the very same problems.

Now, none of what follows is to say that environmental economics is not one of the most valuable and powerful tools we have available to us today. I truly believe it is. What follows is simply to say that we need to always ask the question: are we trying to fit a square problem into a round solution? Because the truth is, no matter how many problems are round, a few are definitely square.

So, in my introductory post/rant I would like to echo a cautionary sentiment about market mechanisms, or at least our relationship with them, that Danny posted yesterday: “They are not a panacea, however, so don’t be afraid to be a little skeptical now and then.” The neatness and coherence of viewing environmental issues through a purely economic lens has immense intellectual appeal. It is scientific, structured, and at first glance offers a utopian vision of freedom, choice, environmental integrity, and that ever-present word – efficiency.

In grad school I definitely fell into this optimistic, almost religious faith in the ability of economics to explain and fix environmental problems as disparate as over-fishing and climate change – two that I actually believe it is particularly well suited for. In that context, I believe it served me and my classmates well; it allowed us to dig deeper, learn more, and think creatively without the constraints of the “real world.” But now that I am back in the real world, that optimism has been tempered. I still have faith in market mechanisms and am a strong believer in a cap-and-trade system. However, and this brings me back to Danny’s point, I think it’s important to recognize that certain issues, or certain aspects of issues, simply do not lend themselves to market mechanisms.

At a carbon conference a few weeks ago, Carl Pope of the Sierra Club stood up in front of a room of 850 attendees, and told us all that markets were not the only answer. It was, in my opinion, the best speech of the event. This was a room full of offset project developers, brokers, investors, regulators, and non-profits, all of whom had a vested interest in seeing the carbon market mature (myself included). It took courage to stand up as a keynote speaker and speak openly to this audience, but more than that it highlighted a paradigm shift that I think has gone largely unnoticed.

For decades, the environmental community and certain groups in particular have had the reputation of being idealistic, stubborn, and unwilling to place pragmatism over righteousness. In contrast, industry and investor advocates have cautioned against unbridled idealism and regulation– often very transparently – arguing instead that a pragmatic approach which balances societal and environmental goals should be considered. (I by no means condone the industry lobbying that has taken place, or the often disingenuous opinions proffered, but instead use this only to illustrate a point)

So back to Pope. The new environmental community, the one founded on economic theory, market mechanisms, pragmatism, and which has aligned itself much more closely with industry, risks falling into the same traps as past movements if we are not vigilant. Unbridled optimism and commitment to a single framework is risky. Whether that is a call for regulation, boycotts and protests, or a call for markets, no single framework provides all the answers. It may provide many, and I’d say most, but not all. Interestingly, it was an outspoken advocate of more traditional conservation that most recently brought this consideration into relief, grounding all of us and reminding us that results may be more important than the means.

Markets are great, and economics is a useful lens. But in the name of our ultimate goals, pragmatism and reality require that we recognize certain limitations. There are some issues that markets are simply ill-suited to solve. True, markets may not work because of imperfect information, too many players, etc. (not the theory itself, but rather its implementation), but if we really want to get something done then it is important to recognize that a different mechanism may be more appropriate. Skepticism of market mechanisms is important not just when considering the details of their implementation, but I would argue, even at the level of assessing their very appropriateness.

I recognize that this is a bit of a downer, especially for a first post, but I don’t intend it that way. There are more problems that can be and should be solved by employing and considering environmental economics than I can list. And because of that, it is important that as practitioners we focus our energy on those.

Posted in Economics, Markets, Political Economy | 6 Comments »

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.

Posted in Markets | 1 Comment »

 
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