Adelberg: Clean Freedom

Market principles must be mobilized against climate change.

by Steven Adelberg | 4/24/18 2:00am

Climate change is not a regional or partisan problem: it is a human and economic one. Climate change threatens to damage the environment of everyone on the planet. Not only is climate change the product of 150 years of worldwide carbon-fueled industrialism, but it will also wreak havoc on the globalized economy of tomorrow — it would be difficult to maintain global supply chains and international financial markets if coastal industrial centers faced hurricane after hurricane and the New York Stock Exchange were underwater.

Despite these clear shared costs, the two-party system in the U.S. has managed to make climate change a divisive issue by reducing the complicated environmental question to the turnout-boosting but intractable debate over the proper size of government. This is irresponsible and tyrannical to the core: such frameshifting rests on the assumption that social crises can only be averted by centralizing federal power at the expense of free individuals and free markets. Rather than let the political system remain divided by this un-American notion, the public would do well to remember a basic lesson from Adam Smith: markets exist because they are the best engine for maximizing welfare. Society must not irrationally throw away market principles in the face of climate change: it can use them as the most powerful weapon against the coming crisis.

By establishing a national market for the right to emit carbon dioxide, people can control emissions without impeding human productivity. A cap-and-trade program could apply the principle of scarcity to carbon emissions, turning the right to emit into a scarce commodity, like land or copper, that can be efficiently distributed and traded through market processes. Under such a program, the federal government would pick an emissions target and sell carbon credits to individual producers; after this initial auction, individual producers could buy or sell credits on the private market. Only the most beneficial carbon-emitting activities would occur, allowing market forces to arrange the most efficient pattern of production possible within the government’s singular regulation. Cap-and-trade has already enjoyed tremendous success in reducing national sulfur-dioxide emissions: emissions markets can succeed where regulation has faltered. Cap-and trade promises to reduce emissions, ensure economic efficiency, raise federal revenues and cut red tape by applying the market principle of scarcity to carbon emissions.

If people would rather fix existing markets than establish new ones, they can apply the market principle of externalities to carbon-emitting industries by using carbon taxes to incorporate the social cost of emissions into the market price of fossil fuels. Markets work by encouraging the production of goods at the exact price and quantity at which buyers and sellers value them equally. In ordinary settings, buyers are proxies for the social benefits of a good, and sellers are proxies for the social costs of a good — this happy alignment between individual and social interests underlies Adam Smith’s famous Invisible Hand defense of the welfare-maximizing power of markets. This happy alignment is out of balance in the fossil fuels market: the price a commuter pays for gasoline accounts for the industrial cost of refinement, but not for the environmental cost of exacerbated droughts. An environmental tax on fossil fuel consumption would quickly correct this lack of equilibrium between social costs and benefits, bringing markets back into welfare-maximizing equilibrium.

The revenues from these proposals can be used to create a new eco-efficiency market where the federal government would pay firms to keep emissions out of the atmosphere, magnifying the impact of cap-and-trade or a carbon tax. By creating monetary incentives for carbon-capturing firms, an eco-efficiency market would spur investment in reforestation and carbon-capture technology. Whereas cap-and-trade and the carbon tax can only reduce a country’s contribution to climate change, carbon-capture firms could hypothetically help America reach negative emissions and reverse past damage to the environment. The possibilities are bounded only by the ingenuity of the free market: imagine rolling waves of tree farms, pipelines pumping emissions back into the ground, carbon-capturing scrubbers on every smokestack, an auto industry tripping over itself to increase the fuel economy of its vehicles. By using the market mechanism to offer simple, guaranteed monetary rewards to firms that heal the environment through emissions-reduction, the American public can go on the offensive against climate change and chip away at the hidden cost of the Industrial Revolution.

During a recent Dartmouth talk on “Capitalism and Nature,” Marxist theorist Dr. Nancy Fraser argued that the environmental crisis is a product of the contradictions of capitalism that can only be resolved by widespread communist revolution. In one sense alone she is right: a market system that ignores the externalities produced by carbon emissions does not live up to Adam Smith’s promise. Climate change is not the failure of market principles — it is the failure of the American system to apply market principles. The Invisible Hand does not need an amputation, it just needs some help; any incorporation of environmental costs and benefits into the price system would swing markets toward sustainability. The American people enjoy any number of alternative paths to market-driven sustainability — cap-and-trade, carbon taxes and eco-efficiency markets are just the beginning of a massive body of market-oriented climate policy proposals. Rather than sweep away a vaunted system of democratic capitalism, people should use it to enact bipartisan climate policy that achieves the sustainability goals of progressives by vigorously applying market principles to today’s climate problem.

These common-sense reforms languish in obscurity because in a partisan world where one side of the debate uses Fraser’s argument and the other side concedes to it through climate change denial, electioneers do not believe market-oriented reform can generate majorities. The American public would do well to prove them wrong. People can have environmental sustainability, freedom of enterprise and a middle-class way of life at the same time because they can have life, liberty and the pursuit of happiness at the same time. Climate change is a daunting challenge, but it is one that can be met through a wholehearted application of American values.