Institutional Failure and the Tragedy of Climate Change

I am a Libertarian. I believe that market processes based on secure property rights and competitive ‘exit’ provide the best hope of discovering ‘solutions’ to the vast majority of socio-economic problems including environmental ones. Profit-driven capitalism and its desire to ‘make people pay’ for goods they were previously consuming ‘for free’ provides the key to solving most environmental dilemmas – it is the embodiment of the ‘polluter pays principle’. Seen through this lens, there are many environmental assets currently held under ‘open-access’ conditions or subject to government ownership and/or regulation that could and should be ‘privatised’ – whether at the level of individuals or companies, or as suggested by Elinor Ostrom at the level of cooperatives and mutual associations. These include land-based assets such as forests, minerals, and wildlife, which can be subject to various ‘fencing’ technologies; stationary resources such as oyster beds; and water-based assets such as rivers and inshore fisheries that are also relatively excludable with existing technology. Empirical studies of such assets under open access, government ownership and private ownership show that tradable property rights promote more sustainable management practices (for a summary of this evidence, see L. De Alessi, 2005). As exclusion technologies evolve this class of assets may be extended to include even such resources as offshore fisheries and some regional forms of pollution.

All this said, as a Libertarian I have no hesitation in recognising that anthropogenic climate change presents a potentially serious ‘market failure’. Even allowing scope for entrepreneurs to develop new techno-institutional devices Libertarians need to bite the bullet and recognise that ‘privatising the atmosphere’ is a fantasy. To make this admission, however, is not to suggest that there is any realistic non-libertarian solution to the problem. On the contrary, in order to reach this conclusion one would need to subscribe to at least three assumptions that are no less fantastic than the idea of privatising atmospheric resources. The first of these assumptions is the belief that government’s can be trusted to develop cost effective schemes to reduce emissions given their abysmal record at estimating accurately the costs of much more basic public infrastructure projects. The 1% of GDP estimated by the Stern Report to be the annual cost of reducing carbon dioxide emissions seems remarkably optimistic in view of the recommendation that cuts in emissions per unit of output need to reach the order of 80% by 2050. If Stern’s projected costs turn out to be as inaccurate as was the much simpler task for UK authorities of estimating the cost of the Scottish parliament building (and countless other similar schemes) – which came in more than 1000% above target – then the economic costs of climate change policies may turn out to be far greater than the costs of climate change itself.

Read the rest of the article on the Pileus website.

Mark Pennington is the author of Robust Political Economy: Classical Liberalism and the Future of Public Policy

IEA Fellow of Political Economy

Professor Mark Pennington is a fellow in Political Economy at the Institute of Economic Affairs and is also a lecturer in Political Economy at King's College, London. Mark holds a PhD from the London School of Economics, has been published in a number of publications and is co-editor of The Review of Austrian Economics.

2 thoughts on “Institutional Failure and the Tragedy of Climate Change”

  1. Posted 23/05/2011 at 18:38 | Permalink

    As the writer says the solution lies in the market. But if the market is to work efficiently the global economic model based on ever increasing consumption at an accelerating rate funded by personal and sovereign debt must be abandoned.

    When we have to pay realistic prices for our clothes, food flown in from Indonesia, the gadgets from which so many people gain their self esteem and all the rest, when credit companies set realistic limits on what people can owe, then as people start to live within their means carbon emissions will soon start to fall.

  2. Posted 24/05/2011 at 13:15 | Permalink

    Ed, thanks for the comment. I didn’t say though that the solution lies with the market. I think most environmental problems have market solutions or potential market solutions. In the case of climate change though, I claim that there is no institutional solution. To have a market solutuion would require property rights to the atmosphere – but this is impossible (note I do not count carbon trading as a ‘market solution). Equally though, I don’t believe there is a state/political solution either – for all of the reasons set out in the second half of the post (on the Pileus site). I should add that these same reasons lead me to question your own faith in ‘reducing excessive consumption’ – who is to decide what counts as ‘excessive’ consumption or what the ‘right price’ is for clothes, food flown in from Indonesia etc …? There is certainly no reason to believe that politicians/the state can do this effectively. So, we can’t rely on the market in this case and we can’t rely on the state. So what do we do? I don’t profess to have an answer, and I wish others wouldn’t do so either.

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