Monday, July 13, 2009

Tragedy of the Commons, Part 3: Over-Pollution

The second manifestation of the “tragedy of the commons” is the problem of over-pollution. When human beings either extract resources from the environment or transform resources into artifacts a certain amount residual material is left behind. That residual material deposited in the earth, air, or water can be useless, useful, harmful, or harmless. We usually call the useless, harmful, residual “pollution.” Knowledge of whether that residual material is (in fact) useful or useless, and/or harmless or harmful is contingent upon conducting costly scientific research and acting based on that research. Moreover, in many cases the natural environment is capable of reducing or eliminating the harmfulness of pollution. Knowledge of Mother Nature’s timeline for the transformation of waste can often be discovered via research, but sometimes not. The holy grail of human extraction and production is to develop techniques that minimize; or, at least expel waste at a degree and rate within Mother Nature’s ability to transform it into more useful and/or less-harmful byproducts. Call it "sustainability."

The basic problem for the social and political management of pollution is how to provide incentives and disincentives that lead extractors and producers to conduct the research necessary to limit and or reduce pollution, and act based on this research. The “tragedy of the commons” predicts that political stewardship over the “commons,” is invariably inefficient and/or ineffective. Hence, when extractors and producers expel useless and/or harmful waste into “commons” there is little, if any incentive to conduct the research necessary to transform it, eliminate it, or act on that research. Here’s why. If it costs less to pollute than not pollute, extractors and producers will usually choose to pollute. They will invest in research to minimize pollution and/or convert it, if and only if, the cost of conducting that research, and the prospects of that research “paying off” is less than the cost of continuing to pollute with impunity. For example, it is difficult to extract minerals from the earth without polluting the adjacent air and water. If there is little cost associated with polluting the commons, mining companies will continue to pollute, and/or transfer the cost of cleaning up the mess to others (usually government). Therefore, pollution control policy is all about providing extractors and producers with incentives and disincentives that lead to acceptable levels of pollution.

There are two ways for societies to provide these incentives: one entails “more government” the other “less government.” Unfortunately, neither strategy is likely to succeed at a global level. There are two “more government” strategies that are often employed to raise the cost of polluting the commons. One way is to simply tax or fine polluters. This strategy entails that government "cap" pollution levels, monitor and enforce compliance with these caps, and either tax or fine extractors or producers that exceed those limits. This raises serious practical problems. At what level will government set those pollution limits? (Set caps too high and there will be no extraction or production.) How much will it cost for government to effectively monitor and enforce compliance with pollution limits? (It could cost more to monitor and enforce pollution laws than it would cost to clean up the mess.) At what level will the government tax or fine violators? (Set taxes or fines too low and there is no incentive to not-pollute, set it too high and black market polluters will appear.) Who pays the cost of monitoring and enforcement of pollution standards? (Taxpayers, polluters, stockholders, retailers etc.)

The second “more government” strategy is the policy now being pursued by the Obama administration, called “cap-and-trade.” The general idea is to “cap” pollution at a certain level, but then allow extractors and producers that generate pollution levels lower than the cap to “trade” or sell “pollution credits” to those extractors and producers that are unwilling or unable to meet those standards. This creates an artificial market, that in theory, provides an incentive to become a seller of pollution credits, and a disincentive to become a buyer of credits. Although, this resembles a free-market approach, it is really a contingent upon where government sets the pollution limits, how government manages the pollution credit market, and how much government spends doing all of this. Since the sellers of the credits are the primary beneficiaries of cap-and-trade, the question remains of how to pay for the army government watchdogs responsible for implementing this convoluted cap-and-trade system.

Critics of taxation, fines, and “cap and trade” argue that most serious problem with any strategy that involves setting, monitoring, and enforcing “caps” is that these standards are usually set by industry lobbyists rather than scientists, and therefore reflect political expediency and not science. Other critics argue that the cost of monitoring and enforcing the caps would require hiring an army of monitors and enforcers, which would require a massive tax increase, user fees of some kind, and/or increased borrowing from China! And, of course, all libertarians will point out that in recent years the United States government has proven to be less than reliable steward of the "public good" and an ineffective and inefficient monitor and enforcer of laws governing other undesirable forms of corporate behavior.

Libertarians therefore argue that the best “less government” strategy for the reduction of pollution would be to simply transform public property in private property, and thus eliminate "the commons." But private ownership of earth, air and water will not necessarily reduce pollution in the United States. If the short-term (or long-term) benefits of extraction outweigh the perceived costs of continuing to pollute, extractors and producers will continue to pollute. Moreover, if extractors and producers were required to pay the owners of the earth, air, and water, to clean up the mess, or purchase earth, air, or water from the owners, it would almost certainly reduce pollution levels, but where? If United States adopted this strategy, the most likely consequence would be that extractors and producers would simply move extraction and production to other countries that maintain “public property,” where government officials earn a handsome profit from graft and corruption. So when pollution is exported to nations that allow their governments to exercise stewardship over publically-owned earth, air, and water, “tragedy of the commons” predicts that pollution levels will rise in those countries. So although private ownership in the United States may reduce pollution levels in the United States, global pollution would continue to increase. In other words, global pollution will require global cooperation between nations and/or universal abandonment of "the commons,"which are both highly unlikely. Am I a libertarian or a cynic? What do you think?

Thursday, July 9, 2009

Tragedy of the Commons, Part 2: Over-Extraction of Resources

One manifestation of the “tragedy of the commons” is that human beings tend to over extract resources. Resource depletion can often be blamed on the fact that we often have imperfect information, as to the exact quantities of available resources at our disposal and the natural capacity for replenishment. How many salmon can be extracted before the species is no longer able to sustain itself? I wish imperfect information was the only source of unsustainable resource depletion. Unfortunately, we all over-extract in order to reap known short-term benefits at the expense of the unknown long-term costs. As evidenced by the universality of this kind of behavior, I’m afraid that human beings (individually and collectively) are naturally predisposed to unsustainable over-extraction.

In a free market, one would expect that the extraction of increasingly scarce resources would become prohibitively expensive and, therefore, extractors would be incentivized to pursue less-expensive substitutes. However, technology extends the ability of extractors to find increasingly scarce resources, while other technologies make it possible to efficiently over-extract those remaining resources. Hence, technology also plays a role in over-extraction. Governments encourage investment in these technologies by offering tax write-offs and other less visible incentives.

But then again, we might question whether the long-term extinction of any one resource is necessarily tragic. Although the over-extraction of oil would be tragic to the oil industry and its stockholders, over the long-run, it would be a godsend to the coal industry and other alternative energy industries. If those alternatives turn out to be onerously expensive, we can always alter out consumption patterns. Unfortunately, this natural process is often short-circuited by governmental tax policies, subsidies, and licensing that provide perverse incentives that lower the cost of continuing to extract increasingly scarce resources at the expense of other potentially viable substitutes. Libertarians argue that viable substitutes must be discovered via free market competition. But welfare liberals cling to the false belief that government experts possess perfect information, and therefore can choose the best substitutes. When governments choose the wrong substitutes, we invariably end up with resource shortages, higher prices, and/ or higher taxes. F.A. Hayek called this governmental tendency to over-estimate its ability to manage markets,
“The Fatal Conceit.”

In the United States, the over-extraction of natural resources is also fueled by public ownership of resources, coupled with the government charging favored extractors ridiculously low license fees to extract publically-owned oil, coal, and timber. Sometimes these “sweetheart deals” can be attributed to outright corruption of public officials, but most often it’s a matter of legislators trying to protect extraction jobs in their districts by artificially lowering the cost of extraction and thereby fighting off viable competing substitutes offered by other districts. Hence, onerously expensive off-shore drilling for increasingly scarce oil is incentivized by government by lowering extraction fees, water pollution standards, and taxes etc. Despite years of tragic over-extraction, environmentalists continue to express unbridled faith in governmental stewardship over resource extraction, while in reality they are more likely to end up with “corporate welfare,” which is how governments make the “tragedy of the commons” even more tragic.

Monday, July 6, 2009

Environmental Policy and the "Tragedy of the Commons" Part I

Any libertarian-based environmental policy begins with a foundational principle called the “Tragedy of the Commons.” Let’s break it down into its basic components: “commons” and “tragedy.” In the Western world, the cultural origin of the concept of collective environmental ownership can be traced to the Biblically-based tenet that God gave the earth to mankind. Over the centuries this has been interpreted to mean that caring for the earth is our collective responsibility: call it “stewardship.” Unfortunately, the problem with collective responsibility is that we have repeatedly proven to be irresponsible stewards. That’s why when human beings assert collective dominion over the environment the consequences are inevitably tragic. Hence, the familiar libertarian mantra, “When everyone owns it, nobody owns it.”

Human beings utilize our common earthly environment in two different ways. We extract resources and expel waste. Throughout human history, environmental tragedy has resulted from our over-extraction and over-expulsion. In recent years, the over-extraction and over-pollution have become more problematic than in the past because we’ve become much more efficient extractors and polluters. The root of the problem is that, when given the option, we humans would rather reap benefits than pay costs. In the case of over-extraction and over-pollution the costs are usually transferred (shifted) to other humans, and most often to future generations. Most libertarians argue that the only way to avoid “tragedy of the commons” is to abandon collective ownership and stewardship in favor of private ownership. I’m not sure about that. Private ownership alone will not necessarily lead to non-tragic environmental policy. After all, individual owners are also prone to over-extraction and over-pollution of their own property, as they willingly risk less-certain long-term tragedy in pursuit of certain short-term benefits.

So the real problem arises when opportunistic owners over-extract and over-expel at the expense of other adjacent property owners. Therefore, other libertarians argue that private ownership must be accompanied by the empowerment of adjacent property owners to exact retribution. When my neighbor builds a dam upstream to divert water for his private fishing pond, why can’t I sue him for over-extraction? When the coal-fired utility plants along the Ohio River pollute the air over my property why can’t I sue Duke Energy Corporation for polluting my air? But it's not that simple. The two manifestations of the “tragedy of the commons” are so different that they require more detailed, separate analyses. Therefore, my next two blog entries will cover over-extraction and over-pollution, respectively.