Free market environmentalism

DEFINITION: Approach to environmental protection that relies on property rights and market forces rather than on government regulation

Free market environmentalism presents an incentive-based approach to environmental protection that can lower the costs of pollution control and habitat protection. By providing a new way of looking at environmental issues, free market environmentalism has helped regulatory agencies develop alternative strategies beyond command and control.

The Industrial Revolution brought a new level of material wealth to many people, but it also brought a new set of problems. One problem was the created as a of manufacturing. By the end of the nineteenth century, citizens began to look to government for protection from pollution. The first US regulation aimed at water pollution, the Rivers and Harbors Act, was enacted in 1899.

While Americans were becoming increasingly aware of the problems caused by pollution, the dominant force in the first half of the twentieth century was economic development. In 1962 Rachel Carson’s book Silent Spring brought the dangers of pollution to public attention, and in 1968 ecologist Garrett Hardin introduced the concept of the “tragedy of the commons” to describe how individuals pursuing their own self-interests tend to overuse open-access resources, such as common grazing areas or ocean fisheries. Hardin’s idea and Carson’s book helped spark a surge in environmental regulation in the United States. The Environmental Protection Agency (EPA) was created in 1970, followed by significant environmental legislation including the 1970 amendments to the Clean Air Act of 1963, the Clean Water Act (1972), and the Endangered Species Act (1973).

Armed with new legislation and administrative resources, the federal government began to address pollution problems using a general approach known as command and control. Standards were set for acceptable levels of various pollutants, and government told industries what antipollution technologies and methods they must use. While these efforts were supported by many citizens, critics argued that such regulation by government is inefficient and too costly and that it places unacceptable constraints on individual liberty. Early pollution regulations tended to include strict control standards that were costly for industries to meet, and as a result some factories were forced to shut down. During the 1980s, American opinion began to shift back toward a position favoring less government regulation, as evidenced by the landslide victory of Ronald Reagan in the 1980 presidential election. In addition, the limitations of any government attempts to protect natural resources were exposed as the environmental degradation in the Soviet Union and the Eastern Bloc nations came to light. Pollution levels were higher in the government-regulated areas of Poland, Hungary, and the Soviet Union than they were in the market-oriented United States and Western Europe.

Foundational Idea

With government’s ability to protect the in question, critics of regulation began to develop the notion that market processes might be more effective than regulation. The foundational idea in free market environmentalism is that defined property rights for natural resources will end overuse and environmental abuse. Individual property owners have a strong incentive to maintain the value of their property, so they will tend to protect their resources.

Free market environmentalism views humans through the classic economics perspective—that is, humans are guided by self-interest, not good intentions. If a forest is owned by an individual, family, or corporation, it is in the resource owner’s self-interest to protect the forest. When government (the public) owns the forest, some individuals will use the forest in ways that benefit them in the short run, even though the actions harm the forest in the long run. With no direct ownership, some people are willing to trade individual short-run benefits for collective long-run harm. Further, there is no guarantee that public ownership will actually protect the forest. The government agency created to protect the resource may make poor choices, may be captured by special interest groups, or may become overly bureaucratic.

The Coase Theorem

The intellectual roots of free market environmentalism can be traced back to a 1960 article written by Ronald H. Coase titled “The Problem of Social Cost.” The basic idea, known as the Coase theorem, is that under certain conditions defined property rights and the existing legal system will produce efficient levels of environmental protection without government regulation. For example, suppose that the residents of a small located on a pristine lake have defined property rights for clean lake water. If a firm pollutes the lake, it is responsible for compensating the community, just as a driver responsible for an automobile accident must compensate the innocent driver of the other car. Through negotiation, the community and firm would agree on an acceptable level of pollution and an acceptable compensation. If the firm produces more than the negotiated level of pollution, the community can sue for damages.

While the Coase theorem is valuable for presenting a new way of thinking about pollution, its actual application is limited. The theorem holds that efficient outcomes are possible when property rights are defined, when informed negotiation is possible, and when transaction costs are low. These conditions, present in the lake example, are never present in the real world. Suppose a property right for clean drinking water were given to the citizens of New York City. Could nine million people engage in informed negotiations with the thousands of firms discharging by-products anywhere in the entire watershed? The transaction costs—proving what damage was created by which individual act of pollution—would be an impossible barrier. The Coase theorem is also limited in dealing with pollution that crosses political borders. How would the millions of citizens living in the Southwest region of the United States negotiate with thousands of Mexican factories creating air pollution that drifts across the border?

Even though the usefulness of the Coase theorem is limited, defined property rights do effectively protect natural resources. In Europe, public access is limited for areas supporting recreational activities such as hunting and fishing. Anyone who wants to catch salmon in Scotland must pay a significant daily fishing fee to a landowner. On high-quality streams, such a fee may reach $500 per day during the peak season. People will pay the fee only if the likelihood of their actually catching a trophy salmon is high, so the landowner has a strong incentive to protect the river from degradation or overuse. In the United States, the public has access to at least part of any river with salmon runs. The tragedy of the commons then unfolds, with too many anglers overfishing the resource.

Shifts in Thinking

Environmental groups such as the Nature Conservancy and the National Audubon Society have recognized the problem of common access and have begun to buy or lease environmentally sensitive areas so that they can directly control how the land is used. With recognition of the importance of defined property rights to environmental protection, increasing numbers of books and articles favoring free market environmentalism have been published. Conservative think tanks, including the Political Economy Research Center, the American Enterprise Institute, and the CATO Institute, support conferences, workshops, and publications on the topic.

As new ideas emerged, the EPA rethought its pollution-control tactics and began to experiment with incentive-based strategies that relied on markets to achieve environmental improvements. For example, the Clean Air Act amendments of 1990 created a marketable permit program to reduce the sulfur dioxide emissions that were contributing to the acid-rain problem in the northeast United States. Coal-fired power plants in the Midwest and Northeast were given allocations of permits, with each permit allowing a plant to emit one ton of sulfur dioxide. Unlike under the old command-and-control approach, individual plants were given considerable latitude in deciding how best to reduce their pollution. Plants that reduced their emissions below their permit limits were allowed to sell their unused permits to other plants; thus the plants had a powerful economic incentive to reduce pollution as much as possible. The emissions permit trading approach was successful, with plants decreasing sulfur dioxide levels by 50 percent at an annual cost savings estimated at $1 billion relative to compliance under the former command-and-control strategy.

Although the sulfur dioxide trading program is viewed as a success, most mainstream environmentalists remain skeptical of free market environmentalism as the central approach to environmental protection. The chief criticism is that many environmental problems involve circumstances that do not allow defined property rights. How would one create individual property rights for the deep ocean, the total atmosphere, or rivers that cross national boundaries? In the absence of defined property rights, the legal remedy is not available to those hurt by pollution or overuse. Critics also question whether the free market approach would adequately protect or ecosystems that have limited economic value. A clear incentive exists for a landowner to protect salmon fishing habitat, but what is the market incentive to protect the habitat of the American burying beetle or the Key Largo woodrat?

The issue has remained contentious despite the many arguments in favor of for Free Market Environmentalism. Not only are environmental issues at play, but also economic ones. In 2021, The American Prairie Reserve, a private organization that purchases privately-owed land with the aim of redirecting the property for conservation efforts, ran afoul of the Montana Livestock Association. At issue was American Prairie Reserve’s plan to purchase 3.5 million acres of land and allow free-roaming bison to be reintroduced. Local ranchers feared that bacterial diseases borne by bison could infect cattle. To arrive at a resolution required compromise from all parties, including a plan by American Prairie Reserve to enact disease testing and monitoring of bison herds.

In 2022, authors William Wang, Victor Espinosa, and Jesús Huerta de Soto, argued for a free market solution to the issue of electrical power generation in Spain. The authors assert that governmental interventionalist policies result in higher electricity prices, taxes, and intrusions of individual property rights. Instead, the three argue that market-based solutions are possible. These could have positive results for areas such as producing electricity through renewable sources.

By providing a new way of looking at environmental issues, free market environmentalism helped regulatory agencies develop alternative strategies beyond command and control. Academics and policy makers are interested in developing more incentive-based strategies that use the power of markets to protect the environment in a cost-effective manner. Free market environmentalism will continue to shape public policy as governments around the world seek solutions to environmental problems.

Bibliography

Anderson, Terry L., and Donald R. Leal. Free Market Environmentalism. Rev. ed. New York: Palgrave, 2001.

Bliese, John R. E. “’Free Market Environmentalism’: Environmentalism for Conservatives?” In The Greening of Conservative America. Boulder, Colo.: Westview Press, 2002.

Coase, Ronald H. “The Problem of Social Cost.” Journal of Law and Economics 3 (October, 1960): 1-44.

Dryzek, John S. The Politics of the Earth: Environmental Discourses. 2d ed. New York: Oxford University Press, 2005.

Ehrlick, Darrell. "American Prairie Reserve Resolves Long-Running Dispute with Phillips County."Missoula Current, 29 Jan. 2021, missoulacurrent.com/american-prairie-reserve/. Accessed 17 July 2024.

Mahoney, Dan. "Free-Market Environmentalism’ Is Working in Montana." American Institute for Economic Research, 1 Oct. 2022, www.aier.org/article/free-market-environmentalism-is-working-in-montana. Accessed 17 July 2024.

Stroup, Richard. "Free-Market Environmentalism." The Library of Economics and Liberty, 2023, www.econlib.org/library/Enc/FreeMarketEnvironmentalism.html. Accessed 17 July 2024.

Wang, William Hongsong, Victor I. Espinosa, and Jesús Huerta de Soto. "A Free-Market Environmentalist Enquiry on Spain’s Energy Transition along with Its Recent Increasing Electricity Prices." International Journal of Environmental Research and Public Health, 7 Apr. 2023, doi.org/10.3390/ijerph19159493. Accessed 17 July 2024.

Vig, Norman J., and Michael E. Kraft, eds. Environmental Policy: New Directions for the Twenty-first Century. 7th ed. Washington, D.C.: CQ Press, 2010.