Wednesday, April 9, 2008

What Does It Mean to Advocate a Market Solution to Climate Change?

The purpose of this post will be to tie together some ideas I've been toying around with in other posts, in order to start working towards a coherent introduction to my thesis on the libertarian approach to thinking about climate change. Here goes nothing.

Moving Past the Science

As a group, libertarians have not dealt well with the prospect of anthropogenic climate change. As most of the world scrambles to find "solutions" to what they anticipate will be a serious problem for human civilization, the typical libertarian approach to the issue has been to deny that climate change is real, or to deny that humans have caused it. There are two problems with this position. First, the most vehement critics of what has become the "mainstream" view are not particularly well qualified for their missions, and often demonstrate a misunderstanding of their opponents' views which seem to indicate that they don't actually know what they're arguing against. Further, where there are well-qualified and well-informed "skeptics," their positions tend to be less vitriolic and more nuanced, being based more on uncertainty and imperfect knowledge, to the point where their views end up falling relatively close to those which are accepted by the mainstream scientific community. As far as I can tell, a relatively strong case can be made in favor of questioning our ability to know the precise truth about climate change, and our ability to predict future states of the climate; the same cannot be said about the position that climate change is not happening, or that humans are not causing it, or that it will not continue into the future in any significant way.

This leads to the second problem with the libertarian habit of questioning the scientific basis for concern about climate change: it does not address the question of what position libertarians would endorse if climate change were happening. There is no reason to believe that anthropogenic climate change, or some substantively similar phenomenon, could not happen. Accordingly, it seems extremely reasonable to ask what libertarians would say about such a phenomenon, if we knew that it was occurring right now. In this article, I will sketch the kind of answer we should be looking for.

Market Failures and Government Inefficacy

Where climate change has been discussed, by libertarians and others, it has generally been labeled as a market failure. Economic theory tells us that market failures occur whenever inefficient social outcomes result from individuals acting on their own desires. Looking at climate change from this paradigm, we would notice that for most individuals, the benefits of, say, driving a car instead of taking the bus more than outweigh any costs they would ever incur from their incremental contribution to climate change. Accordingly, it will be in everyone's interest to drive their car. But the predictable result of everyone making the sort of choices that result in driving everywhere, instead of using public transportation, is that we end up with climate change. As Garrett Hardin famously wrote "...we are locked into a system of "fouling our own nest," so long as we behave only as independent, rational, free enterprisers."

Simply recognizing this problem will not solve it. Mitigating climate change will involve sacrifices, and individuals will undoubtedly resist making these sacrifices if they do not have the assurance that others will follow suit. Unfortunately, getting individuals to voluntarily cut down on their contributions to climate change would be fraught with difficulties, ranging from the large costs of negotiating the agreement to the pervasive incentive to "cheat". These hurdles seem to rule out the kind of decentralized solution that the free-market is capable of providing. The most obvious and widely discussed solution is the one Hardin suggests: legislation. If we know that we will "foul our own nest" if left to our own devices, then it seems reasonable to impose rules on ourselves, and to punish those who violate those rules, in order to ensure that we don't bring about our own destruction.

But many libertarians bristle at the suggestion that central planning can solve the problems presented by market failures. It seems unreasonable, they argue, to suggest that we can fix an imperfect market by simply turning the matter over to the government. After all, governments have problems of their own. As Gene Callahan points out, "Government interventions and "five year plans," even when they are sincere attempts to protect the environment rather than disguised schemes to benefit some powerful lobby, lack the profit incentive and are protected from the competitive pressures that drive private actors to seek an optimal cost-benefit tradeoff."

Accordingly, a number of libertarians have apparently taken the stance that we cannot hope for an "optimal" level of climate stability, so our best option is to simply face the realities of our suboptimal state of affairs. And because, they continue, the free market is the most efficient system we know of for allocating resources to best suit the needs of society, the best way to face climate change would be to allow individuals the freedom to adapt in their own way. As George Reisman writes, "Even if global warming is a fact, the free citizens of an industrial civilization will have no great difficulty in coping with it - that is, of course, if their ability to use energy and to produce is not crippled by the environmental movement and by government controls otherwise inspired."

Climate Change: A Matter of Justice

This view of the issue leaves out an important consideration which is central to the libertarian paradigm: According to most accounts, climate change will have victims. This fact brings us out of the realm of mere economic efficiency and forces us to confront the issue from an ethical standpoint. Imagine if we were trying to determine the proper social response to a particular theft. It might be true that of all social systems, a victim of theft would be best equipped for dealing with her loss in an unfettered free-market. She would not need to consult a central planning board in order to replace the things that were taken, and her higher purchasing power – brought about by her participation in a thriving market economy – would enable her to afford the replacement with comparative ease.

But surely libertarians would not be satisfied with this “solution.” In our story, the thief violated the rights of his victim by stealing from her, and therefore he should be held accountable for fixing the damage he caused. It is crucial to acknowledge that holding the thief responsible does not represent a departure from the normal course of the free-market; the very functioning of the free-market is predicated on the recognition of rights. This reveals an important feature of the libertarian position that the proper response to climate change is to simply allow individuals the freedom to adapt to it: It assumes that climate change does not represent an injustice. If climate change were an injustice, then the proper response would not simply be to allow people to adapt: libertarians would need to advocate the enforcement of justice.

Accordingly, it seems like the proper libertarian stance on climate change needs to be stated in terms of justice. The scientific disputes and efficiency-based arguments which have thus far characterized the libertarian position are wholly unbecoming of a political philosophy built on the foundation of respect for individuals’ rights. The libertarian community needs to ask what kinds of rights, if any, are infringed by climate change, and what should be done about those infringements. Anything else would simply be unlibertarian.


Unknown said...

Thanks Danny. Surely libertarianism needs to be recycled into social democracy. I think that Bernard Shaw would be proud of your generous efforts.

Danny Shahar said...

Do I detect a hint of sarcasm? I'm not sure who Bernard Shaw is (perhaps you mean George Bernard Shaw, the socialist playwright?), or where you got the idea that I was advocating democracy of any kind. Perhaps you could point out something to which you take exception?

Or am I misinterpreting your comment completely? If so, then thank you for your support, but I'm not sure that social democracy is the structure which best embodies the notion that individuals are inviolable, and should not be sacrificed against their will for ends which are not their own.

Anonymous said...

Nice job Danny. I want to agree with you because ethically you are surely right but the reason Global Warming is so hotly debated is because there are no good solutions. Fundamentally I think the libertarian argument (even if not stated explicitly in this way) is that for the time being we should ignore the issue of justice because to do anything about it would be to retard the market mechanisms that, if left unfettered, will allow us to solve the market failure more quickly. I say solve the market failure because market failures are an issue of organization of information technology, not something inherent in the market. The way to solve an externality problem is to invent a way to internalize the externality. A commonly cited example is ebay might have had a market failure if buyers could not trust sellers and therefore no transactions took place, but a mechanism to track and display users' reputations allowed the ebay market to overcome this problem.

So my argument is that we have a global warming problem that is caused by an organization and informational problem. We can either attack the global warming problem directly, ignoring its root cause or we can allow the market to work on the informational problem by finding innovative ways to incent private actors to internalize their CO2 emmissions. Both approaches will probably take decades and in both cases injustice will occur in the meantime but the latter solution will allow our economy to emerge with a solution in good working order, while the former will hamper the economy with overregulation for many political cycles to come.

As an aside I think this is already happening as consumers demand "green" products and better tools allow people to effectively measure and certify their carbon output. As green products become more prevalent, not being green will be viewed as a mark on ones character, like someone who admits to eagerly stealing when no one is watching. The challenge is in allowing everyone else to identify reliably who is green and who is not so that those that are not can be efficiently ostracized.

Unknown said...

I like.

And I like what gregory has to say as well. This is a great jumping off point for a more serious libertarian debate r/e anthrogenic warming. Will you be publishing your thesis anywhere online? It looks really promising.

KUTGW Mt. Shahar!

-Alex from Liberating Minds

Danny Shahar said...

Thanks so much for the support and helpful comments!

Gregory, I think you're right to point out that in many cases, the market can come up with its own mechanisms for enforcing property rights. In his essay, "Liberty, Markets, and Environmental Values: A Hayekian Defense of Free-Market Environmentalism," Mark Pennington echoes your point when he writes:

"Although proponents of free-market environmentalism recognize that environmental markets have limits owing to the prevalence of transaction costs, they contend that these problems are more likely to be overcome within an institutional framework supportive of private contractual arrangements. In this perspective, all environmental externalities represent potential profit opportunities for entrepreneurs who can devise ways of defining private-property rights and arranging contracts (via technological innovations, for example) so that those currently free riding on collective goods or imposing negative external effects (for example, water pollution) on their neighbors are required to bear the full costs of their actions...In the market economy, therefore, if people are imposing costs on others or are benefiting from the provision of certain goods without payment, entrepreneurs have incentives to find ways of eliminating such involuntary transfers over time."

I think that this is a very important point. And in his essay, "Market-Based Environmentalism and the Free Market: Substitutes or Complements?," Peter Hill augments it by noting that "...government action is a two-edged sword, with both benefits and costs. The use of coercive power can lower transaction costs, but it can also substantially increase them and obstruct the development of private property rights."

With all of this, I am in full agreement. I would qualify this by saying that I also agree with a point Hill makes elsewhere in his essay, that "...the transaction costs of defining and enforcing rights in some cases are very high and...the coercive power of government can be used productively to give us solutions that are better than not taking any action at all." But in many cases, it may indeed be better to leave the definition of property rights to the market.

However, I am a believer in the idea that justice is more or less objective, and so we should be able to discuss what kinds of property rights should be enforced, and how, without necessarily advocating government intervention. That thieves ought to be accountable for returning what they stole from their victims, and for paying for any damage they cause, does not require government intervention, nor would it require such intervention if we currently lived in a society which did not apprehend thieves and bring them to justice. So in discussing potential rights violations associated with climate change, I don't think it's necessary to specify how these rights should be enforced.

On your point about the use of social pressure to bring about solutions to market failures, I think that those kinds of solutions may be acceptable reactions to situations in which public goods are not being provided in sufficient quantities, or other instances in which sub-optimal outcomes can occur without violating anyone's rights. But at least in my view, if rights are being violated, then we have to take seriously the alternative of coercive intervention to protect victims from unjust treatment. So while it's a good thing that people are voluntarily taking measures to lessen their contributions to climate change, and while it would be great if the entire problem could be solved through such measures, I don't think we can take coercion off of the table if we're dealing with injustice.

Alex, I'm not sure if I'll post the thesis online, since it'll probably be a pretty big file. But when it's done, I'll probably post an announcement, and I would be glad to e-mail it to you then. Thanks for the interest!

Anonymous said...

Thanks for the reply Danny. I agree that there is a generally agreeable concept of justice and that where injustice occurs we should evaluate the situation very carefully. I however do not always agree with your statement that people ought to be held accountable for injustice. I look at these situations in an almost opposite way: That "oughts" are not free and cannot be evaluated outside the context of their costs.

To take the simplest example, I certainly think that our society ought to respect property rights. But, the defining, tracking, and enforcing of those property rights certainly is not free. Therefore any discussion of the merits of property rights must include a discussion of the costs of property rights. In a market based system these costs might be imperfections, inconsistencies, and inequalities while in a collective action system these costs include the abuse of power by the enforcing body and the costs of publicly funding the enforcing body.

I might be rambling a bit so I will sum up. If injustice occurs I agree wholeheartedly that we ought to be aware of the situation, but we ought not consider any specific action without first considering whether the costs (injustice) resulting from the cure might not be greater than the original injustice itself.

A quick example should make the point very clear. I might coherently argue that birth defects are a grave injustice and that all birth defects ought to be cured. But, any effort to cure all birth defects beginning today would surely result in greater injustice to those who would immediately be subject to forced genome screening, prohibition of possible double recessive breedings, policing of drug and alcohol use during pregnancy, etc. This is clearly an issue of technology and the injustice will only be cured by time and research.

Danny Shahar said...

I see your point, and I think it's a fair one to make. In his essay, "Restitution in Theory and Practice," Bruce Benson conveyed a similar idea when he wrote, "...criminals should be responsible for their actions, individuals must also take responsibility for protecting themselves and their property. Individuals reap the primary benefits from secure property rights and therefore they should have primary responsibility for that security. They certainly may cooperate with others in fulfilling this responsibility, but the cooperation of others should come at a voluntarily agreed-upon price; it should not be expected to be provided free upon demand."

I'm not completely sure what I think about the argument, because I haven't really thought about it. I guess my main objection would be that some people might be unable to obtain justice, and I can imagine a number of potential mechanisms by which that simply wouldn't be true. But anyway, I don't want to get into a debate over the provision of justice.

I suppose the best thing I can say is that I haven't taken a position on how justice should be enforced. I've only said that we should advocate the enforcement of justice. I think that's generally right. I can say that something ought to be done without implying some that collectivistic agent should actually do it. Right? I mean, as libertarians it seems we should at least come out as objecting to rights violations, even if we don't want to say exactly what ought to be done about them.

Anonymous said...

I certainly agree that we should aim to create a world with as little injustice as possible and I think you are right to point out that the externalized costs of greenhouse emmission will likely acrue more heavily to those least able to bear them and least responsible for them.

Anonymous said...

"Where climate change has been discussed, by libertarians and others, it has generally been labeled as a market failure"

Oh my. Can't you stop spouting nonsense ? "climate change" is a natural phenomenon - the climate just changes - people who label climate change as a 'market failure' are badly confused

AND there's no such thing a as market failure in free-market economics. Market failure is just another statist fantasy.

Danny Shahar said...


Regarding the possibility of anthropogenic causes of climatic changes, as Stephen Gardiner wrote in his essay, "Ethics and Global Warming":

"The skeptics are right...when they assert that the observational temperature record is a weak data set and that the long-term history of the climate is such that even if the data were more robust, we would be rash to conclude that humans are causing it solely on this basis. Still, it would be a mistake to infer too much from the truth of these claims. For it would be equally rash to dismiss the possibility of warming on these grounds. For, even though it might be true that the empirical evidence is consistent with there being no anthropogenic warming, it is also true that it provides just the kind of record we would expect if there were a real global warming problem" (567).

I take this to be entirely uncontroversial. If you can find me a single person who has published peer-reviewed work in the field of climate science who will object to that on the grounds that we know that climate change is not occurring due to anthropogenic causes, but rather solely due to natural influences, then we can take that up. Otherwise, I recommend that you do some learning before spouting a tired and overly simplistic objection to the scientific basis for concern about climate change. Remember, this is what I study. I've heard it before.

Regarding the theory of market-failure, I would point out that the existence of transaction costs is entirely uncontroversial among economists, including free-market economists. There is nothing "statist", then, about the idea that actual market prices do not always reflect the prices that would exist in the absence of transaction costs. The objection raised by free-market economists to the doctrine of market-failure is precisely the one I addressed in my post, which is that markets must not be compared to an idealized, perfect government, but must rather be compared with the existing imperfect government, complete with knowledge and incentive problems, and with the full awareness that government solutions involve the use of coercive force. In other words, the objection is essentially that the word "failure" implies the need for some solution, and the standard which produces the pronouncement of failure cannot be met by any system. That is, according to market failure doctrine, all markets fail. But that doesn't mean that transaction costs don't exist and that market failure is not a coherent concept. Rather, it just means we need to be careful when we talk about it not to commit the Nirvana fallacy. Again, I will gladly take this up with any published economist who disagrees, because there aren't any. And again, before spouting a two sentence long objection to a universally accepted concept in economics, you might want to do a bit more learning.

Anonymous said...

Danny, climate change may also have beneficiaries. It is unclear that the benefits of climate change will not outweigh the costs. Perhaps the best solution is to have the winners compensate the losers somehow. Even if there are no winners, the government could subsidize the relocation of folks from areas negatively affected by climate change to less hostile places. This may be far cheaper than draconian regulation.

I mean, if are no longer even talking about global warming, then the situation degenerates into Obama-like "change": is it a change for the better or the worse? If for the worse, then controlling and even predicting the weather, especially global temperatures, is so much beyond human power that it is little more than science fiction. I think that adapting to "change" is the best we can do.

But even if human beings do affect the weather significantly and for the worse, resorting to government planning may not necessary. One solution is (1) ideology which affects the demand, as gregory pointed out, and (2) technology which affects the supply. See Honda Clarity for an example of the latter.

Not every negative externality is a right violation. But suppose climate change can be conceived in this manner. Still, the costs of steering the change in a better direction can be astronomical, and I agree with Mises that Fiat justitia, ne pereat mundus.

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