Wednesday, April 2, 2014

Austrian Environmental Economics (Part 2): A Positive Case for Emissions Trading

In the first post in this series, I explained that Austrian economists view air pollution as a coordination problem. Polluters and their victims have conflicting plans for use of the atmosphere or other environmental resources. The former want to use the air for waste disposal, the latter for breathing. Both set of actors cannot realize their plans in full, but if they can find a means of coordination, both can end up better off than if each proceeds without regard for the other.

Sometimes, when the parties involved are few, environmental conflicts can be resolved through direct negotiation, backed by tort law. However, as explained in the first post, when the parties are remote and numerous, as they are in cases of large scale air pollution, those mechanisms are not enough. The only effective way to coordinate the plans of thousands or millions of actors, who do not even know each other’s identities, is through the price system.

If, then, we begin from the Austrian premise that air pollution is a coordination problem, we arrive at the conclusion that the solution lies in bringing price system to bear. How best to do so?
Regular readers will know that I have often written favorably of taxes as a way to put a price on pollution. However, taxes of any kind do not sit well with Austrian theorists. At most, it might be possible to persuade them that pollution taxes are not the worst of all possible taxes, but even that would be a hard sell, and I will not attempt it here.

Instead, this post will explore another way of putting a price on pollution, emissions trading. In my view, it is possible to develop a version of emissions trading that is entirely consistent with the Austrian paradigm. I will begin by making a positive Austrian case for emissions trading and then turn to some of the objections that Austrian writers have raised—objections that are largely misplaced, in my view.>>>Read more

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