Climate change is a textbook example of the economic case for government intervention. In the language of an economics textbook, it involves a pretty clear market failure created by the fact that my actions (emitting carbon dioxide) spill over onto nonconsenting third parties.
Consider: I burn fossil fuels, to my own benefit. The climate changes. You might also benefit if you own land in northern Canada, but you might be worse off if you live in Miami or Bangladesh. How can you be compensated for the harm I cause to benefit myself? On the face of it, theres a plausible case for government involvement.
But in light of political responses to natural disasters and political outcomes more generally, Im inclined to think that political solutions are not solutions at all. Consider how governments respond to natural disasters like Hurricane Sandy. They openly defy the laws of the marketplace and impose laws against price gouging. These laws in turn create shortages, which in turn create unnecessary suffering.
Consider also the China-bashing that was on display in the recent presidential election and the more general foreigner-bashing that is part and parcel of the political scene. Such rhetoric and the policies based on it are at odds with what economists left, right and center have known about trade for centuries: Trade creates wealth, and free trade among nations is a rising tide that lifts all boats. In spite of this, few things are as unpopular as free trade (on the Left) and open immigration (on the Right).
The rhetorical, cultural and political environment in which climate change policy is made will never be one characterized by wise and benevolent leaders seeking only the good of a populace consisting of recently enlightened New Environmentalist Men and Women. People have all sorts of biases that warp their political judgment, as Bryan Caplan has discussed in his book The Myth of the Rational Voter.
With systematically biased voters, tangled webs of interest groups and politicians who are all to eager to cater to these biases and these interest groups, the policies we get in the real world are likely to differ from the optimal policies that get discussed in the externalities and public goods lectures in introductory economics classes by a pretty wide margin.
The lesson for climate change policy is dismal. Even if we agree that climate change is a problem, and even if we agree that climate change could have very, very bad effects, ongoing research in robust political economy is showing us that passing seemingly plausible ideas through the filters of political bias will give us something very different from the solutions we would like to see.
How, then, should we address climate change? Adaptation is probably a better strategy than prevention. Large-scale, top-down solutions are unlikely to work, so the best way to proceed might be to recognize some of the key insights of 2009 Nobel laureate Elinor Ostrom. Her work focused on how bottom-up solutions to resource management problems evolve. To translate it into the language of a bumper sticker you might have seen, Think globally, act locally. Lets look for ways to devolve authority and to develop markets for goods and for risks that are not currently priced. Lets trust the initiative of innovative economic, social and cultural entrepreneurs rather than politicians.
Art Carden is a Research Fellow at the Independent Institute in Oakland, California, and Assistant Professor of Economics at Samford University.
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