October 12, 2009

Are There Free Market Solutions to Climate Change?

Kevin Drum and Matt Yglesias both recently asked whether conservatives' professed belief in free markets hobbles their ability to take climate change seriously. Yglesias points out that there are plenty of free market climate change policies (e.g., eliminating fossil fuels subsidies, green tax shifts, etc.), but conservatives often denounce even these as socialist:
Now of course in the real world it’s going to be impossible to legislate a pure free market “tax shift” policy... But if people started from the premise that emissions need to be reduced, and then debated the extent to which this needs to be done in a free market way versus some other kind of way, then compromise would be easy to reach.... But that’s not what we have. Not because market-oriented approaches are inadequate to the challenge but because too many of the key institutions that espouse market-oriented approaches are run by people who are too corrupt, incompetent, immoral, stupid, or cowardly to get their side to take the problem seriously.
Drum agrees, but argues that even free market policies aren't equal to the scale of the problem:
Conservatives know that if they actually fess up to the full scope of the global warming problem, they're eventually going to have to accept some pretty serious government intervention to halt it. Things like fuel economy standards, green research and development programs, moratoriums on coal-fired plants, tax incentives for conservation, new building efficiency standards, and much, much more. There's nothing wrong with any of this stuff, but there's no question that it's a considerable amount of interference in the market.
I think the question that needs to be asked here is, "Compared to what?" To take one item from Drum's list, for example, building efficiency standards are a subset of land use regulations, which are going to exist whether there's a public interest in environmental protection or not. That is, I don't see much of a difference between a regulation that says that a building's insulation have must an R-value of X and a regulation that says only single-family detached homes can be built in such-and-such parts of town. One can argue about the wisdom of land use being regulated in certain ways (witness the recent liberal-libertarian exchange on urban planning -- see here and here for highlights), but once it's granted that governments can regulate how buildings are constructed in a given community (and I think most people would agree with that), it's not a big leap -- still less a leap into socialism -- to include energy consumption in those regulations as well.

That being said, it's not necessarily the case that more regulation is better when it comes to climate change, or any other issue, for that matter. Yglesias, for one, has argued repeatedly that the greatest infringement of economic liberty today is not marginal income tax rates or product safety regulations, but local restrictions on land use that prohibit dense, mixed-use development. And all things being equal, I want regulations that maximize individual choice and minimize transaction costs or perverse incentives -- in other words, a green tax shift is preferable to, say, an alternative fuel tax credit. Not that I necessarily oppose such programs, but policymakers should be cognizant not to let the regulations they do enact become more trouble than they're worth.

So perhaps we can say that there are no laissez-faire solutions to climate change -- no one expects private industry to, on its own, care about the effects of their fossil fuel consumption on future generations; moreover, a large portion of our carbon footprint is bound up in our infrastructure (e.g., transportation and electricity), which was never in the private sector's hands to begin with. But we can definitely say that policies that take what is best about free markets (in not dictating every little action, for example) have a major role to play in our response to climate change.

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