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.
The positive case
The Austrian case for emissions trading follows naturally
from
Murray Rothbard’sprinciple
that pollution rights, or more properly,
emissions easements, can
be established by “first use” or “homesteading.” Rothbard uses the example of
noise pollution from an airport. At time T, he imagines, an entrepreneur sets
up an airport in an open area with no one living nearby. The facility emits X
decibels into the surrounding unused airspace, thereby homesteading the right
to X decibels. If someone builds a house nearby at time T+1, says Rothbard,
they have no cause for action against the airport, since they have “come to the
nuisance.” However, if the homeowner bought the property for a price that
reflected ambient noise of X decibels, and at time T+2, the airport increases
its noise emissions to 2X decibels, the homeowner would have a cause of action
for 1 decibel of excess noise.
Rothbard specifies that emissions easements created by first
use are permanent and are transferable by sale, gift, or bequest. Furthermore,
they are separable, in the sense that their owners can sell them without
selling the airport itself.
As purchases and sales of emission easements for noise,
particulates, SO2 and so on became frequent, some entrepreneur would no doubt
set up an exchange to trade them in standardized units. Soon a fully developed,
fully private emissions trading scheme would emerge spontaneously, with the
supply of easements for each type of pollution capped by the number that had
been legitimately homesteaded. Once population density increased to the point
that no airspace remained unused, the caps would become permanent.
In short, if we accept the first use principle, then nothing
about emissions trading per se is offensive to Austrian
principles. To the contrary, the spontaneous emergence of trading would
vindicate the claim that clear definition and strict enforcement of property
rights can solve the environmental coordination problem.
Legal and institutional considerations
This Austrian version of emissions trading presupposes an
appropriate legal and institutional environment, including the following three
elements:
- Courts
would have to recognize transferable emissions easements created by first
use as a legal form of property, just as they now recognize scenic
easements, conservation easements, and access easements. Otherwise,
contracts to trade them would not be enforceable.
- Second,
there would have to be some kind of registry for such rights, just as
there are registries for land titles, trademarks, patents, and copyrights.
A registry would allow a potential buyer to check that a would-be seller
actually owned the easement offered for sale, that the same easement was
not being sold twice, and so on.
- Third,
and most important, there would have to be a set of rules for contesting
emissions in excess of validly established easements. Otherwise, there
would be no motivation for anyone to buy them.
The third element needs particular attention. As we saw in
the first post in this series, declaring pollution to be a tort against the
victim would be a meaningless formality if procedural rules made it a practical
impossibility for victims ever to prevail in court. Fortunately, the rules for
contesting excess emissions would not need to be as onerous as the Rothbardian
rules for tort suits. Without trying to construct a whole field of law out of
thin air, let me suggest a few general points.
- Plaintiff
A who complained that emissions from source B invaded her property would
no longer have to show actual harm. Instead, the question before the court
would be whether source B possessed enough registered easements to cover
its current level of emissions. If, for example, the court found that B
was emitting 2000 units of pollution but only owned enough easements to
cover 500 units, it could issue an injunction to cut back to the
authorized emission level.
- The
standard for proof would not need to be as high. In order to trigger a
check on whether a source owned enough easements, it should be enough to
show, by the preponderance of evidence, that the emissions detected at
plaintiff A’s property might have come from source B.
Since there would be no penalty if B were operating within its authorized
quota, and since a well-run registry would make it easy to prove
compliance, there would be no need to invoke the stringent standard of
proof beyond a reasonable doubt.
- There
would be no need for every victim to sue every polluter. The knowledge
that a single complaint could trigger a check of authorized emission
levels would be enough to prompt pollution sources to buy enough easements
to cover their current emissions.
How many easements?
The next question is how to set an appropriate cap on the
number of easements. Here are two approaches that I see as representing lower
and upper bounds.
One approach would be to make a specific historical
investigation of the pollution emitted by every source to see if it complied
with the first use principle. For example, railroad X might be able to show
that its corporate parent burned Y tons of coal per year back in the nineteenth
century, when its tracks ran through unpopulated countryside. It would
accordingly receive Y carbon emission units. On the other hand, electric power
company Z might have built its first coal-fired plant just 5 years ago in the
middle of an area that was already densely populated. It would receive zero easements,
and would have to cease emissions entirely unless it bought easements from
someone like railroad X.
I can see two problems with the historical approach. One is
that it would be expensive and time consuming. Some special court-supervised
body would probably have to devote full time to reviewing applications for
validation of easements. Another problem is that a historical assessment that
stringently followed Rothbardian principles of first use would probably end up
authorizing a level of emissions far below what prevails today. Although such a
low level might be defended on grounds of libertarian justice, making the
downward adjustment too rapidly could be economically disruptive.
An alternative approach would be to grandfather in all existing
emissions. Before condemning that as too great a concession to polluters, it is
worth noting an important asymmetry that would make it much easier to lower the
effective cap on emissions than to raise it.
Once a cap were established, the only way to create new easements
by homesteading would be to establish a pollution source where the emissions
would not reach any populated area. That would always be hard, and it would be
impossible for pollutants that move globally. Theoretically, would-be polluters
could also obtain new emission rights by buying them from downwind residents,
but there might be thousands or millions of parties to deal with, each of whom
would have to give consent to creation of new easements within their common
airshed. A holdout by a single one of them would be enough to block an
agreement.
On the other hand, it would be easy to reduce the number of
permits available to polluters. Community organizations, not-for-profit
conservation groups, or even wealthy individuals could buy emissions easements
on the exchange and then hold them unused. Given the practical
impossibility of creating new easements by buying them from victims or by
finding an unused corner of the airshed, the number of easements outstanding
could only go down, never up.
Some misplaced Austrian objections to emissions trading
What is there about any of this for an Austrian
economist not to love? Still, it is a fact that Austrian
writers, by and large, have not looked favorably on emissions trading. Let’s
look at three of their most common objections, and the reasons they are
misplaced.
The calculation objection
First, there is the calculation objection. Cordato
states it this way:
Both [emissions trading and pollution taxes] are
fundamentally forms of market socialism and suffer from all of the problems
that Austrians have typically made against central planning. Most specifically,
a central authority must know in advance, what the efficient outcome is. In the
case of the tax, a central authority must know in advance the exact amount of
the externality costs being imposed by the polluter, and the correct price and
output, not only for the good in question but, since efficiency only makes
sense in a general equilibrium context, for all other affected goods and
services. In the case of tradable permits, the knowledge requirements are
essentially the same. This is because the central authority must first
determine the “efficient” level of emissions for the particular pollutant,
which also must be determined within the context of a general equilibrium
solution.
For two reasons, I think this objection misses the mark.
One is that the context is wrong. As Cordato himself notes,
the origins of the objection lie in the socialist calculation debate. There,
Austrian economists sought to show that real markets could solve the
coordination problem better than central planning. The debate centered on
ordinary goods like coal, wheat, or clothing, for which markets, backed by
clearly defined and enforced property rights, actually existed. In the socialist
calculation debate, Austrians rightly accused socialists of comparing real
market economies to an impossible ideal of optimal central planning. In the
case of air pollution, the shoe is on the other foot. Austrians are the ones
who pose an idealized vision of clearly defined and consistently enforced
property rights and then condemn real-world emissions trading because it falls
short of the imagined ideal.
Second, it is wrong to say that the administrators of an
emissions trading system would have to be able to calculate the optimal number
of permits. Instead, in an Austrian version of emissions trading, as explained
above, setting the appropriate cap on emissions easements would be a
qualitative question, not a quantitative one. The courts overseeing the
establishment of the system would rely on legal and historical evidence, not
mathematical modeling or econometrics.
The compensation objection
A second Austrian objection is that although emissions
trading could potentially deter pollution, it does not compensate pollution
victims. Failure to compensate is not only unjust; it distorts choices about
the use of environmental resources and inhibits coordination.
It is correct to say that the organizers of an Austrian
emissions trading system would have to keep the issue of compensation in mind,
but the difficulty is not insurmountable. It could be handled in one of two
ways.
One way would be to take the historical approach to
allocating emission easements. That would minimize concerns about compensation
of victims, since the only emissions would originate from holders of permits
that were valid under the first use principle. Under the “coming to the
nuisance” rule, victims of pollution from such sources would have no claim to
further compensation.
Matters would be a little more difficult if organizers
decided to grandfather in all existing pollution. In that case, the initial cap
on easements would exceed the level that could be justified on a first use
basis. Victims of the excess pollution would then deserve compensation. One
possibility would be to auction off a portion of the initial allocation of
easements rather than approving them without payment. The revenue from selling
the “excess” permits could be placed in a court-supervised victim compensation
fund, somewhat like that set up to deal with the Gulf oil spill disaster.
The stolen property objection
Walter
Block raises yet another objection to emissions trading. Markets in
emissions easements are illegitimate, he says, not because trading itself is
objectionable, but because they are trading in stolen property, like selling
stolen televisions from the back of a truck.
On examination, we see that the “stolen property” objection
is a close cousin of the compensation objection. Resolving it depend on one’s
views as to who the tradable easements are stolen from.
If the initial allocation of easements includes only ones
that are legitimate under the first use principle, there would be no problem,
because there would be no stealing. Nothing in the trading system would compel
the owners of easements to put them on the market. They would have complete
liberty to hold them for their own use or leave them unused altogether.
On the other hand, if the initial allocation grandfathered
in all existing pollution, then tradable easements in excess of those justified
by first use could be viewed as “stolen” from victims. Block’s objection is
thus valid against the grandfathering approach to setting the initial easement
cap, even though it is not valid against easement trading in general. The only
way to meet the objection in full would be to take the historical approach to
setting the cap. Alternatively, the objection could be overcome in part
by means of a court-supervised victim compensation fund, as suggested above.
The bottom line
The bottom line is that the concept of
emissions trading is not only consistent with the Austrian paradigm, but is in
fact a natural outgrowth of it. An ideal Austrian world of clearly defined and
strictly enforced property rights would see emissions trading emerge
spontaneously through entrepreneurial initiative. However, overcoming Austrian
objections to emissions trading on the level of ideals is not the end of the
discussion, but only its beginning.
The next phase should be to draw Austrian economists into a
discussion with one another, and with environmental economists from other
schools of thought, about the practical implementation of emissions trading.
That part of the discussion should focus not on ideal concepts, but on the
relative merits of alternative policies and institutions that now exist, or
could plausibly be introduced, in the real world. It would mean addressing
questions like these:
- What
is the best way to establish the initial allocation of emission rights? By
historical analysis of each individual case? Grandfathering? Auction? Mathematical
modeling? Something else?
- What
would be the best way to set up a registry of emission rights? Who should
administer it? Who should have standing to challenge alleged excess
emissions? What should be the remedy when excess emissions are proved?
- As a
tool for promoting coordination, would a real-world version of emissions
trading (taking into account any imperfections relative to the ideal
version) be better or worse than the current mix of command-and-control
regulations—CAFE standards, ethanol blend rules, clean energy mandates,
and the like?
- How
would a real-world version of emissions trading stack up against taxes,
which are another real world option for introducing a price on pollution?
- Which
would better promote economic coordination, a real-world version of
emissions trading or a property-rights-based system without trading but
with procedural rules like those proposed by Rothbard, which give victims
of excess air pollution little or no chance of prevailing in court?
By discussing questions like these, Austrian economists
could make a real contribution to debates over environmental policy. I hope
someone will take up the challenge.
Last week Darby Beck of LEAP (Law Enforcement Against Prohibition) sent me a statement on drug legalization by Major Neill Franklin (Ret.)
Franklin, now LEAP’s executive director, is a 34-year veteran of the
Maryland State Police and the Baltimore Police Department. Like other
members of his organization, he now advocates ending the war on drugs,
after years of fighting on its front lines.
