How to Solve the Other Environmental Problems

Although climate change gets the headlines, we still have the old environmental challenges, such as preserving wildlife and reducing water pollution—the kind of concerns that kicked off Earth Day 1970. Unfortunately, the nation chose to use government interference—often counterproductively—to address those problems.

Regulation still holds back energy projects; government allocation of water dries up rivers; the penalties of the Endangered Species Act still spur “shoot, shovel and shut up”; national parks are still overcrowded and undermaintained; and the Forest Service, created to showcase sustainable commercial forestry, produces 3 billion board feet of lumber per year, compared with private production of 45 billion.

It doesn’t have to be that way.

A new environmental textbook, An Economist’s Guide to Environmentalism by Jordan K. Lofthouse, offers renewed hope that our overreliance on government might change. “When people can bargain and trade their properties with one another, [they] can flow to higher-valued uses, which are often environmental ones,” he writes.

Lofthouse, a senior fellow at the George Mason University’s Mercatus Center, is bringing free market environmentalism to new audiences. 

What is free market environmentalism (FME)? It starts with applying standard (neoclassical) economics to environmental and resource problems. Most economists agree that the absence of property rights leads people to pollute the air (since no one owns it) or to destroy endangered species (because no one owns them), among many other calamities. 

What makes FME different is that it applies economic insights that are often ignored. Such insights are found in Austrian economics, institutional economics, property rights literature, and public choice. 

For example, traditional economics tends to ignore entrepreneurs—people who see opportunities that others don’t and achieve them, often through mutual exchange. Also neglected is F. A. Hayek’s insight that the knowledge needed to solve environmental problems is dispersed so widely that top-down solutions from the government rarely work as they were intended to. “Pragmatic environmentalists must be aware that government failure is a real and pressing problem,” says Lofthouse.

And Lofthouse brings new emphasis to local cooperation. Nobel Prize-winning Elinor Ostrom showed that, around the world, small groups have overcome the “tragedy of the commons”—overuse of an open-access resource—with locally chosen rules and customs. 

Lofthouse’s approach goes back to the 1970s. It began as “the new resource economics,” then became “free market environmentalism.” Its start may have been a controversial 1973 article by Richard L. Stroup and John Baden in The Journal of Political Economy. They described the decisions by the U.S. Forest Service as highly political and argued that economist Milton Friedman’s proposal to sell off the Forest Service’s assets to private owners was worth considering because it would foster better timber management and more diversified recreation. 

Along with Terry Anderson and P. J. Hill, they founded PERC, the Property and Environment Research Center, in Bozeman, Montana, in 1980. As Anderson wrote in 1982, the old ways of dealing with environmental and resource issues “focused on market failure due to open access, public goods, and externalities,” while the new approach recognizes “the potential for private contracting to correct market failure.” He and Donald Leal subsequently wrote the book Free Market Environmentalism.

These ideas had an impact, but all too often a subordinate impact—they led to “market mechanisms,” trades under government control, rather than more creative uses of market exchange.

To illustrate “market mechanisms,” let’s look at the problem of “acid rain” (which ultimately turned out to be almost a non-problem).

In 1977, amendments to the Clean Air Act required electric utilities to install “scrubbers” to capture sulfur dioxide (a cause of acid rain) before it left the smokestacks. This was expensive—and unjust as well, because it prevented utilities from lowering emissions by buying low-sulfur coal. 

But in 1990, Congress changed tack. Instead of specifying the technology, the government set a limit (or “allowance”) on the amount of sulfur dioxide each utility could emit. Then it allowed trades among the utilities. If a company could reduce its emissions below the limit, it could sell its extra “allowances” to utilities whose reductions were more costly. 

This is an aspect of FME, an important part, but a shadow of the market’s potential. Such policies have lowered costs, but the government remains in charge and the limits it sets are arbitrary. 

Even a market-oriented textbook like Markets and the Environment by Nathaniel Keohane and Sheila Olmstead sees markets as government tools. Yes, the authors pay attention to Ronald Coase, who showed how property right trades have the potential for solving environmental and other problems. But they argue that Coase’s recognition of the cost of making such trades (“transaction costs”) provides “a strong justification for government regulation.” Reducing the transaction costs doesn’t enter their picture. Although it makes fleeting references to government failure, Markets and the Environment is about how the government can correct environmental problems, just more efficiently. 

This approach leaves gaping holes. Perhaps Lofthouse’s An Economist’s Guide to Environmentalism will begin to fill them.