Environmentalism in a Market Economy: Creative Ideas

February 4, 1997 • Speeches

Thank you for the opportunity to speak to you this morning. The EGA and I might not agree on everything, but one thing that you and I (and the protesters outside the hotel) do agree on is the fact that your organization is largely responsible for the political success of the environmental movement. Your decisions and actions today will largely determine the future direction of environmental policy in America and thus the future orientation of American politics. Accordingly, I am honored that you asked me to share my thoughts with you. Your willingness to open the gates of Rome, so to speak, to a perceived Visigoth took courage on your part, and I thank you for trusting me not to cause too much destruction in my rhetorical wake.

You have asked me to discuss creative uses of markets to achieve environmental ends, but there are dozens of other topics on your agenda that beg for my attention. I shall strive, however, to honor Judith Martin’s admonition: “Saying everything that is on your mind is one of the greatest sources of bad manners.” Perhaps during the question and answer session you will bait me to abandon Miss Manners’ advice.

The political terrain on which the environmental debate is conducted today is defined almost entirely by the premises of the orthodox environmental community. They maintain that ecological resources are by definition public commons that must be centrally planned and stewarded by bureaucratic agents lest they be recklessly despoiled by industry. Moreover, central planners must have not only nearly complete veto power over private actions that might affect the environment; they also must be empowered to stipulate how much pollution is acceptable and exactly how each business is to go about controlling emissions and even, in some circumstances, how products are manufactured. The inescapable differences between millions of pollution sinks, environmental carrying capacities, and manufacturing processes are inevitably blurred and “averaged” in one‐​size‐​fits‐​all regulations that — while not always efficient or environmentally optimal — at least have the virtue of requiring fewer than a million regulators.

The need for environmental regulatory reform is hard to ignore. The United States has invested almost $1.5 trillion in environmental protection over the past 25 years and will be spending more on the environment than on national defense by the presidential election of 2000. Environmental regulations now cost the average American household $1,800 annually. Yet continuing public anxiety over the health of environmental resources indicates that few of us — and probably few in this room — are satisfied that we’re getting what we pay for.

In keeping with this morning’s topic, let me offer three suggestions about how we can creatively use markets to improve upon current environmental policy.

First, Congress should take the environmental version of the Hippocratic oath: “First, do no harm.” The biggest and worst polluter in America is the federal government, which subsidizes a whole host of activities that arguably cause more environmental damage than all the actors in the “unfettered” free market. For example,

  • agricultural subsidies are responsible for excessive use of pesticides, fungicides, and herbicides and the corresponding increases in non‐​point‐​source pollution;
  • sugar import quotas, tariffs, and price support loans sustain a domestic sugar industry that might not otherwise exist, and the destruction of the Everglades is the ecological result;
  • electricity subsidies from power marketing the administrations and the TVA artificially boost demand for energy and thus are responsible for millions of tons of low‐​level radioactive waste and the disappearance of wild rivers in the West;
  • irrigation subsidies and socialized water management programs have done incalculable damage to western habitat while artificially promoting uneconomic agriculture with all the attendant environmental consequences; and
  • federal grants for construction projects — such as the river maintenance, flood control, and agricultural reclamation undertakings of the Army Corps of Engineers — allow uneconomic projects to go forward and cause an array of serious environmental problems.

It makes no sense for the federal government to subsidize environmental destruction on the one hand while establishing laws, regulations, and vast bureaucracies to mitigate it on the other. Reconsidering those subsidies would help not only the environment but the economy as well. One way, then, to make creative use of the market to control pollution is to simply not tamper or otherwise interfere with it.

Second, pollution is most efficiently controlled by businessmen, not centralized regulators, and market actors should be free to figure out the best ways to achieve environmental goals. Command‐​and‐​control regulations — which require regulators to determine exactly which technologies and manufacturing methods are to be adopted for pollution control in every single facility in the nation — place an informational burden on public officials that is impossible to meet in the real world. Every facility is different. Every air‐ and water‐​shed has different carrying capacities for different pollutants. Of necessity, centralized regulators must issue one‐​size‐​fits‐​all standards since there simply isn’t enough manpower or expertise to carefully weigh and mandate the most efficient technologies and manufacturing processes for each plant in each pollution shed.

Both common sense and experience tell us that individual plant managers are better equipped to discover the most efficient ways to control pollution at their facilities than are EPA technicians and consultants. That is not only because those managers have more direct knowledge of their facilities and the technology of production but also because competition forces cost minimization, and even the most dedicated EPA official isn’t go to lie awake nights searching for new solutions to pollution control problems.

As economists Daniel Klein and Pia Koskenoja point out, “When we go into a restaurant, for example, and order a crock of French onion soup, we specify only the desired output. We do not tell the chef how to slice the onions, grind the pepper, or grate the cheese. We do not tell the restaurant manager where to get the ingredients, how to store them, or how to train the employees. Customers merely specify the outputs, and as [Adam] Smith explained, entrepreneurs in the market attend to the inputs. Successful entrepreneurs are experts on local opportunities for effectively combining inputs, and they compete for customers by seeking to produce the outputs that customers desire.”

Economist Tom Tietenberg has calculated that “performance‐​based” standards — those that require regulators simply to decide how much pollution can be allowed from a facility and leave it to the facility to meet that standard in whatever way it desires — can reliably save from 50 percent to 260 percent on control costs. A 1990 joint Amoco‐​EPA study of a Yorktown, Virginia, oil refinery found that federal environmental standards could be met at 20 percent of current costs if the refinery were allowed to adopt alternatives to EPA mandates.

I am mystified that orthodox environmentalists remain suspicious of performance‐​based regulations. If businessmen are truly the narrow‐​minded profit maximizers imagined by the environmental left, they will do a particularly good job finding efficient and imaginative ways to meet environmental objectives at the lowest possible cost, as though “led by an invisible hand” to promote an ultimate end –environmental protection — “that was no part of their intentions.” As long as performance‐​based standards can be monitored and policed by enforcement agencies, there is no reason to fear.

The second “creative idea,” then, is to harness the creative energies of the market to achieve environmental standards.

Third, privatizing the environmental commons is preferable to socializing it. It is important to remember that the marketplace is not an inanimate object to be manipulated by regulatory engineers; it is instead shorthand for the arena in which people are free to make mutually beneficial transactions. “Regulating the economy,” as Cato constitutional analyst Timothy Lynch notes, “is government doublespeak for regulating people.” Perhaps the best and most creative means to use markets to protect the environment, then, is to allow individual Americans — not political bodies — to establish environmental standards in the first place.

By way of explanation, pollution should be thought of as a kind of trespass: the disposal of one’s garbage or waste on the property of another. The fundamental premise of environmentalism is that it is the legislature’s role to determine to what extent such trespass should be allowed, and it is the executive branch’s job to enforce those limitations on trespass. The assumption of modern environmentalism is that “environmental” property (air, water, and even land) is really public property, and the trespass that occurs is a trespass against society as a whole. Accordingly, remedies for those trespasses are matter of political — not private — concern.

But there is no reason why environmental resources cannot be owned by private parties. For example, the legal mechanics of private groundwater rights are conceptually no more difficult that the existing legal mechanics protecting private oil field rights. In England, private organizations such as fishing clubs own large stretches of rivers and streams and have filed thousands of successful law suits enjoining others from harming the delicate habitat they rely upon for their sport. And the right of ownership to air above one’s property is frequently legally recognized. Use of chemical “tracers” in pollution discharges (an increasingly common practice in various studies) allows even difficult‐​to‐​detect emissions to be “branded” or “fingerprinted” and thus be traced back to the source.

An alternative environmental paradigm would hold that, if pollution is essentially a trespass upon private property, the private property owner — not governmental agents — should determine what is or is not acceptable and under what circumstances (or contractual arrangements) such trespass is to be allowed. Disputes should be brought to civil courts — not politicized legislatures — for adjudication.

Pollution problems caused by discharges from multiple sources (which would make problematic the straight application of trespass law) have often been controlled by the “condominium” model of property ownership. For example, German communities currently maintain private associations for protecting the Ruhr, Wupper, and Emscher Rivers; polluters are required to own shares in those associations and are assessed costs for maintaining water quality. That regime has worked admirably in terms of both economic efficiency and environmental quality.

Unfortunately, courts have generally held that regulatory standards preempt common law actions since regulations implicitly “nationalize” (and thus remove from the realm of private tort action) those resources that would otherwise be left to private parties to police.

If your neighbor started dumping his garbage in your back yard, for instance, you wouldn’t immediately think of going to the local government to lobby for regulations to control the time, place, manner, and content of his dumping. You would probably consider your back yard your property and threaten to file a nuisance complaint or take your neighbor to court, or both, to enjoin the violation of your property.

Granted, the example is a bit simple, but it neatly illustrates the essential point I am making. Pollution properly understood is a trespass, and such trespasses are properly enjoined by courts of law, not refereed by political bodies. Individuals should decide for themselves how much pollution (trespass) they are willing to allow. If a person can demonstrate in a court of law that the trespass crosses a certain threshold of significance and is potentially harmful (ruling out, for example, absurdities such as arguing that radio waves transmitted by a radio station represent a trespass), then courts should be empowered to enforce the property rights of that person and either require compensation for the trespass or even force the polluter to cease and desist. On the other hand, if the polluter offers to pay the party in question to accept the discharge, then no trespass has occurred. In a sense, the property owner has “sold” part of his property to the discharger.

Businesses would naturally face strong incentives to reduce pollution to the extent possible, innovate to discover cheaper and more efficient practices and technologies, make prior contract with potentially affected parties, and locate operations where the least amount of environmental harm would be done. The current regulatory regime has not proven particularly effective at achieving any of those desirable goals.

“Free‐​market environmentalism” is anchored in the belief that the right of the individual to live free of unhealthy or environmentally threatening pollution supersedes any concern for the “greater good” or the economic well‐​being of industry. Carl Pope, president of the Sierra Club, agrees that this sort of approach “would yield restrictions on pollution more stringent than those embodied in any current federal and state pollution laws.” That’s certainly true if a pollutant is truly harmful or a significant nuisance, since individuals — not governmental authorities — would have the final say over how much pollution they were willing to tolerate on their property or person. That approval would also have the benefit of allowing an array of voluntary contractual relationships between polluter and polluted, internalize the cost of pollution (the holy grail of environmental economics), and minimize the transaction costs and inefficiencies caused by politicized rulemaking.

Many of you, however, probably agree with Jimmy Breslin, who once warned, “Don’t trust a brilliant idea unless it survives the hangover.” Does free‐​market environmentalism pass the hangover test? Yes. Before the progressive era, environmental pollution was controlled primarily not by public regulation, but by the kind of common‐​law trespass and nuisance suits that I have just described. They were abandoned, according to Morton Horwitz, author of The Transformation of American Law because they worked too well for the tastes of American businesses. Horwitz, a professor of history at Harvard University and winner of the Bancroft Prize in American History for the first volume of that book, argues that the business community chafed under the burden of liability suits stemming from pollution nuisances and successfully convinced the courts and public officials to relieve them of direct liability for pollution and environmental harms. Regulations meant to balance the “public interest” were instituted at their behest, releasing corporate America from private liability for all but the most egregious violations of property.

Obviously, not all environmental problems are amenable to strict common‐​law remedies, but most are. Those that aren’t should be dealt with by some sort of performance‐​based regulation. While neither approach is perfect (and many elements of both approaches require qualifications and special considerations that time does not permit us to address this morning), we are not faced with a choice between perfect and imperfect public policies. The legal system may prove to be an expensive, inefficient, confusing, and costly means of addressing environmental concerns, but the political system shares all of those failings and has an added one: the raw politicization of the most basic questions of human protection and environmental health. Taking the politics out of environmental policy would undoubtedly lead to major improvements in environmental protection and would, according to a growing number of economists, lead to more efficient and effective environmental controls to boot.

While making “creative” use of markets to achieve environmental ends is better than the alternative, perhaps it’s time to allow individual Americans, not self‐​aggrandizing politicians, to determine what those environmental ends should be. Its hard to think of a greener platform for the environmental movement as it enters the 21st century.

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