The “Four E’s” Of Environmental Improvement

I recently attended a conference on common property resources where the majority of participants were skeptical, if not downright antagonistic, to free market principles. During one lengthy exchange in which I challenged the presenters to provide clear evidence that common property ownership led to superior environmental and social outcomes than private ownership, the moderator turned to me and asked what recommendations I, as an economist, had for improving the environment. It was an interesting moment because the participants had by now realized that I was somewhat of an anomaly at the conference (since I do believe in free market principles) and they were genuinely curious as to what I considered solutions to environmental problems.

After I laid out the four points that are summarized below, it struck me that most people who are involved in environmental work are largely unaware of the public policies that hold the greatest promise for environmental improvement. It is not because they are ignorant or incurious, but because of a general aversion to economic theory among many environmentalists, as well as a general failure by economists to clearly articulate the key policy levers that will deliver the greatest environmental bang for our collective buck. My hope is that these four points will eventually seep into the minds of all environmentalists and the greater public. When this happens we can look forward to a much improved public discussion on environmental policy and greatly improve our chances of making substantial gains in environmental protection.

The “Four E’s” of Environmental Improvement

1. Eliminate all natural resource subsidies

Subsidies to timber companies, fisherman, farmers, and the oil and gas industry are by far the most damaging environmental policies engaged in by governments around the world. Not only due these subsidies directly increase environmental degradation, but by artificially lowering the prices of natural resources they spur over-consumption, decrease conservation, and make it harder for substitute resources to compete. In addition, they cost taxpayers hundreds of billions of dollars a year; money that could be used instead for improving human welfare in myriad ways. (Many economists refer to these types of subsidies as “perverse subsidies” because they actually exacerbate bad behavior instead of encouraging good behavior).

2. Expand property rights in areas where they are weak or non-existent

The areas in the world where we witness the greatest levels of environmental degradation (the oceans, many large tropical forests, and the atmosphere) are those where property rights are absent, unclear, or poorly enforced. Without property rights resources are almost always treated as “open access”, which leads to a “tragedy of the commons”. While in many instances private property may be the best form of property rights from an environmental standpoint, property rights can also be held by the government (public property) or collectively by groups of individuals. They key is creating transparent and enforceable property rights for all of the world’s resources so that individuals, groups, governments, and corporations have the incentive to use the resources wisely and invest in their preservation.

3. Empower society with information

Basic environmental science is something that will be under-funded in a pure “free market” because it is rarely profitable, and therefore, governments should do more to support scientific research that helps us better understand the links between our actions and environmental outcomes. In addition, laws that mandate that companies disclose their pollution emissions and environmental impacts provide individuals, politicians, non-governmental organizations, and investors with information that can help gauge a company’s environmental performance and differentiate “green” companies from “brown” companies.

4. Enlarge green markets through government purchases

Since governments are some of the largest buyers of natural resources in the world (e.g. paper, power, food) their purchases have a huge impact on markets and the environment. If governments can increase their demand for “green” products (e.g. chlorine-free paper, power from renewable energy, pesticide-free food) they can push businesses towards much more environmentally-friendly practices at a greatly accelerated pace. In addition, governments can both save money and improve the environment by investing in state-of-the-art efficiency for all government buildings and infrastructure.

J.S.

Comments

[Dano]

Wow! Solutioning! I like it. Nice post JS.

Best,

D

[Dano]

BTW, here is a good expansion on JS' post & my comment, wrt to principles and application on the ground.

Best,

D

[J.S.]

Nice paper Dano- I don't agree with all of the axioms but they are instructive- thanks.

[joshua corning]

as well as a general failure by economists to clearly articulate the key policy levers that will deliver the greatest environmental bang for our collective buck.

yeah its those dang economists and there crumy speaking skills that ruin it for the rest us... Those dang economists!

Exellent article by the way.

[Lee A. Arnold]

I think you might start by making explicit two underlying points of your program: (A) you are talking about improving environments from which RESOURCES ARE STILL TO BE EXTRACTED. And you must also (B) distinguish the kinds of environmental damage, since some of it remains intractable to markets. These points may be obvious to you. But the correct answer to your question, "provide clear evidence that common property ownership led to superior environmental and social outcomes than private ownership," is of course: the National Park System. Or indeed, since there are reasonably biodiverse forests still standing, the National Forest System. You are not, of course, talking about the National Parks. But these distinctions should be made explicit, if you want to get more environmentalists on board. After all, there is very little evidence anywhere on the globe that the market leaves wildlife ecosystems intact and unvarnished, or even if it leaves them standing at all.

There are two other reasons why the distinction will be important.

First, in the future, ever more local ecosystems will be beleaguered, and to keep them intact, we are going to be see more local restrictions on resource extraction and land use. This will result naturally from your number 3 on better scientific information. Market solutions will barely apply. So you may as well have your argument ready to be trumped, in certain instances, by ecological science.

Second, your question to the environmentalists includes the phrase, "superior...social outcomes." Are you referring to allocative efficiency under the theory of general welfare? Then you are perhaps talking at cross-purposes to many environmentalists and other people as well. This is a highly specialized definition which leaves out a lot of amenities which are essentially non-monetizable -- now including the conditions under which reciprocal exchange and altruism are revealed by experimental economics.

[K.S.]

I like the post. As a compliance and technical assitance provider for a nonprofit dealing with small businesses, I find it very frustrating the number of so called environmentalist in the government and academia who don't realize the power of understanding free market principles and applying them to environmental and social issues

[Dano]

In reading Lee's excellent comment, I'm mad aware of the intractable issue that didn't get mentioned here (and I failed to notice), and therefore respectfully submit a fifth 'E':

Empower women to help ensure lower birth rates.

It is, after all, our huge numbers that are creating this problem.

Best,

D

[Brad Ewing]

J.S.,
Very nice post. I plan to share this with a few of my friends who care deeply about environmental issues, but show an 'aversion to economic theory'. Thank you.

[joshua corning]

Empower women to help ensure lower birth rates.

Empower free markets to help ensure lower birth rates.

With the added bonus that free markets empower women....as well as reduce poverty increase education level, increase life expectancy, and on and on and on.

It is, after all, our huge numbers that are creating this problem.

What was the population of the US when most of the deforestation occured in the early 1900's?

Oh yeah about a third of what it is today.

[joshua corning]

First, in the future, ever more local ecosystems will be beleaguered, and to keep them intact, we are going to be see more local restrictions on resource extraction and land use. This will result naturally from your number 3 on better scientific information. Market solutions will barely apply. So you may as well have your argument ready to be trumped, in certain instances, by ecological science.

If you already know the outcome of the science then why even do the science?

I kid you...there is no way in hell you could know the outcome before hand...that would be like saying 20 years ago we should write off india and let them all starve...oh wait!

[Roy Morrison]

On the Four E's and Ecological consumption taxes

I'd add a fifth --

End Price Externalites

Central to our future is for economic growth to mean ecological improvment, not ecological desturction. Until the price system works and makes what is sustianable less costly than the unsustainable by monetizing in prices the costs of pollution, depletion, ecological damage "rational" market behavior is leading us to self-destruction.

What can a "free market" mean if buring coal is "cheaper" and "more ecnomic" than wind power, for example, because we don't include in the price the consequences of it's land raping mining or its buring and pouring gigatons of carbon , particulates , SOX and NOX, and tons of mercury ,and the desposal of toxic ash.

I suggest we need much more than information or government purchasing or stronger property rights to make the market system tend toward the sustianable when megapolluters get away with shifting costs both downwind, downriver and to peole in future generations.

Look the high profit centers of 21st century are in comparatively low polluting information -- in companies like microsoft, google, disney , citibank et. al.

As far as i can tell the way that we canmove in a market system from an afflicted present to a sustainable future is to get the prices right.

In my case, I've been working on an ecological value added consumption tax (or E-VAT for short) to do this. I would vary the rate to tax what is more poluting, depleting or ecologically damaging substantially more and what is sustainbale less and then let the price system do its work.

Note this is a tax on all consumption of goods and services (final sales to domestic pruchasers --$13.2 trillion in US in 2005 based on how polluting, depleting or ecologically damaging. I estimate an 18% average E-VAT could replace all federal income based taxes and set up a market dynamic that would reward sustianability.

Our heats tell us what we want to do. Market prices tell us what we will do. Until we can get the prices right we are screwed.

I'm working on a paper (around 40pages)on an Ecologicval VAT to replace income taxes that I can share shortly if anyone is interested, and I hope people are.

By the way, I find that an ecological VAT is progressively reinforcing - to maintain revenue tax rates are increased on moderately polluting items after the highest polluting items lose market share or arethe on them forced from market by high taxes. Eventually an E-VATwould tend to close to a flat tax on most now sustiable items with very high taxes on remaining polluting outliers.

The concept is discussed in my new book Eco Civilization 2140 (available from amazon).

[Dano]

End Price Externalites

Ooooh! good 'un!

Best,

D