I have been nursing a
similar concept for perhaps 25 years, which I had first conceived in a
sophomore economics class back in College in the early 80’s, when the
ideas of externalities and market failure came together for me.
I believe this principal
is as important and fundamental to understanding the general progress of
human civilization, as the concept of erosion is to geology.
Without further delay,
here it is:
UEMF; Recognizing and
Addressing The Universality of Environmental Market Failure. By Jay
Rappoport - 11/17/07.
Introduction
The question to be
addressed here is that of managing human generated global warming
specifically, and more generally the larger question of sustainable
growth, as all follow from the same underlying causes, and are amenable
of the same solution. What follows is a brief discussion of the issues,
and an effort to reframe, refine and build upon the emerging consensus
view concerning the ‘cap and trade’ approach, and to suggest the minimum
regulatory structure necessary to this end. The structure suggested here
may be public, private, or collaborative.
Economic vs. Natural property
The fundamental underlying
issue in this discussion is property rights. Everything that follows,
turns on understanding the role of property rights in the market.
So to begin, consider
everything in the world as a ‘good’, and falling into one of two types;
as either part of ‘The Economy’ and therefore an ‘economic good’, or
alternatively, ‘The Natural Environment’ and as such, an ‘environmental
good’. The only difference being, that ‘goods’ in the economy have a
defined property right, and that ‘goods’
in the environment do not. (Often referred to as “externalities”
in economics, examples of environmental goods might be the polar ice
caps, unpolluted water, the earth’s atmosphere, and so on).
An economic good can be
bought and sold, only because it is
owned by someone who had the
property right to sell it. An environmental good cannot be sold,
because no one owns it to sell it. As an example, imagine a stranger
offering to “sell you The Brooklyn Bridge”.
In order to sell an
environmental good, ownership must first
be established, at which point it becomes an economic good, and
can then be sold. So, until ownership has been established, an
environmental good cannot be sold, nor hold a price in the market.
Markets, Pricing & Incentives
Because environmental
goods lack a property right and are therefore unable to hold a price in
the marketplace, so far as the market is concerned, their ‘pricing’ is
effectively pegged at zero value. This perception of the pricing of
environmental goods as being at or nearly zero has
profound consequences in the economic arena.
To the extent that there
is model validity in saying relative profitability can be expressed as a
comparison of profit/cost, then as environmental costs are pegged at or
near zero, the relative profitability of environmental goods is
perceived in the market as ‘very high’, if not infinite. (Consider for
example the proliferation of spam email, with a marginal cost of zero
per email. How much spam would be eliminated if there were a cost of
0.001 cent per email?)
The strength of this
market incentive is phenomenally powerful. If behavior is proportional
to incentives at the margin, there can hardly be a stronger signal in
the marketplace. The incentive to consume environmental goods raises the
occurrence of environmentally consumptive behavior without limit.
I describe this condition
as a ‘market failure,’ though I do not believe that markets have in any
sense ‘failed’ or ceased to function. The frenzied activity of
consumption is a wholly rational and predictable result of the
underlying incentives to which the economy inevitably responds. I call
this global incentive effect, the
universality of environmental market
failure.
The overall effect of this
principle is as predictable as water rolling downhill. Economic activity
will be directed away from the consumption and exploitation of economic
goods, and flow into the sphere of environmental goods, because of the
relative incentives driving economic growth in that direction.
It is this underlying
landscape of incentives which directs the course of economic activity
everywhere. So whether we are talking about the extraction of natural
resources from the environment, or the discharge of waste into the
environment, they both follow from the same underlying cause; these
activities are all directed by the underlying landscape of incentives.
It is a legacy policy
handed down to us historically by default, and operates at a level of
efficiency undreamed of in modern planning. The excessive production of
carbon, as well as deforestation, and all forms of pollution, all result
from this principle of incentive driven hyper-accelerated consumption of
the environment.
Any solution, in order to
be fairly called ‘a solution,’ must compensate for this imbalance in
underlying incentives. Because if we do nothing, the incentive imbalance
remains, and the results are inevitable. The economy at large remains
programmed to consume the natural environment everywhere possible, as
quickly as possible, without limit. And no amount of individual goodwill
or conscientious central planning can be reasonably expected to outrun
the market effect of the underlying and unrecognized incentive
imbalance.
The solution then, is to
be found in re-balancing the underlying landscape of incentives, so that
economic activity is directed towards restoring the environment, and
rehabilitating the economic infrastructure towards this end.
To accomplish this, every
economic decision must sufficiently recognize the true scarcity of
environmental goods in its calculation. From the
individual consumer, to the
largest multi-national company, to sovereign nations: consuming
the environment must cost, and preserving the environment must pay. The
question is how much, and by what means?
The key to an optimal
solution is to have the cost reflect the true scarcity of environmental
goods. If the price is too high, the policy is unnecessarily
restrictive. If too low, then the incentive is insufficient. For this
reason, the ‘cap and trade’ approach seems most well suited to the
problem, as a general proposition.
However, what are the rights to be capped and traded, and where do they
come from?
To start with carbon
trading as a stop gap measure, simply because the global consensus
exists to move forward, makes sense as a starting point. But the amount
of permits should be based in principle upon the earth’s natural ability
to absorb and recycle carbon generation.
And the payment for these
rights, as established through market trading, should be directed to the
owners or caretakers of the environmental resources which perform those
recycling functions.
I envision a web-based
global system for monitoring the state of the natural environment around
the world; scientifically determining how much of the environment is
available for economic use; allowing those rights to be bid to their
natural level in the market; incorporating those environmental costs
into economic decisions; and channeling the money generated to the
holders of environmental resources, who are in effect, selling their
environmental goods and services to the world.
Like an enormous “bottle
bill,” an environmental deposit can be paid when the environmental
resource is utilized (or extracted), and returned when the resource is
restored to its natural state.
I see every citizen,
business entity and sovereign government having an account at a
centralized web-based agency. Each member has assets, and each has
liabilities. The economic payments for environmental uses can be borne
and shared by governments, businesses, and citizens.
I would like to see a
portion of the capital flow be made available to local citizens and
municipalities through local micro-investment institutions, like Grameen.
There are any number of
structures possible within this general framework. What is essential
though, is that every economic agent be incentivized at the margin to
participate in and support the global organization as a whole.
— Posted by Jay Rappoport
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