Environmental problems often lead to calls for government intervention. However, misguided government action is often the cause of environmental problems. In fact, what is needed for better husbandry of ecological resources is more widespread and deeper establishment of property rights together with their enforcement.
The cause of environmentalism is often associated with the Left. This is despite the fact that some of the worst environmental outcomes in the history of our planet have been associated with Communist governments. Indeed, it is notable that Green parties nearly always partner with other Left-wing parties in coalition governments. The underlying assumption of the prevailing worldview is that government control of the people is necessary to restrain them from spoiling the environment.
Right-of-centre political parties and mainstream economists often view environmental problems as exceptional cases that demand government intervention, even if such people believe in general that markets ought to be free. The economist Nicholas Stern, for example, in presenting his report on climate change to the Blair government, described the problem as the “greatest market failure that the world has ever seen”. So, wherever you look, you seem to find that the cause of environmentalism is associated with the need for interventionist solutions.
We can identify at least three different categories of problem. The first is where property rights in environmental resources exist, but are not enforced.
This is strange, because a great deal of serious work has been produced by those who believe in market or community-based solutions to environmental problems, and a relatively small role for government. For example, Ronald Coase and Elinor Ostrom are two Nobel Prize winners in economics who have made profound contributions to our understanding of how markets and communities can promote environmental conservation. Indeed, the intellectual and moral high ground when it comes to environmentalism ought to be taken by those who believe in private property, strong community institutions and a free economy.
If things are owned, they will tend to be looked after. The owner of a lake will not fish it to near extinction (or even over-fish the lake to a small degree) because the breeding potential of the fish would be reduced. The owner values the lake’s future capacity to produce fish that will grow to breeding size in years to come. Indeed, the lake could be sold on the open market for a price that reflects the potential value of all the fish that can be taken from the lake in the indefinite future. If it is over-fished, the value of the lake reduces and, in effect, the owner shoots himself in the foot.
On the other hand, if the lake is not owned by anybody, or if it is owned by the government and fishing is unregulated, the lake will be fished to extinction because nobody has any benefit from holding back. Local businesses may well also pollute the lake if there are no well-defined ownership rights. The much-cited work here is Hardin’s Tragedy of the Commons (1968), though, in fact, Hardin was simply referring back to a pamphlet by William Forster Lloyd which was written in 1833. In that pamphlet, a situation was described whereby common land was open to grazing by all. The land would then be over-grazed because a person would get the benefit of putting additional cattle on the land without the cost that arises from over-grazing which would be shared by all users.
The second problem is where there is effectively no ownership of environmental resources or of land that contains environmental resources.
So, in this framework of thinking, in which we give priority to private ownership, why do environmental problems arise? We can identify at least three different categories of problem. The first is where property rights in environmental resources exist, but are not enforced. For example, it has been estimated that almost half of total tropical deforestation between 2000 and 2012 was due to illegal conversion for commercial agriculture. In principle, this is a relatively easy problem to solve. Countries with no effective rule of law and protection of property rights will tend to be blighted socially in many respects. Environmental problems will form one aspect of this problem. The solution is clearly not to give greater powers to governments, but, rather, for governments to undertake their proper functions competently. It may be that this is difficult to achieve in some countries, but there is no other obvious solution.
The second problem is where there is effectively no ownership of environmental resources or of land that contains environmental resources. This can arise for various reasons. It can arise because government does not provide a legal framework that allows property rights to be defined and enforced. Or it may be that governments have decided that particular resources should not be owned by anybody (the sea being one example). The solution here is to provide the legal framework in which private ownership is possible. This is not an uncommon problem in developed countries.
The third problem is where there is private ownership in general, but there are environmental consequences of actions that affect a wide range of parties that do not have ownership interests, and the costs of compensation or negotiating a more appropriate use of environmental resources is prohibitive. It is this last category of problem that provides the greatest challenge to property rights solutions to environmental problems. In the economists’ jargon the “transactions costs” are too high for the affected parties to reach a solution.
To illustrate how more widespread property interests could help resolve environmental problems, take the situation where a company decides to build a noisy railway line next to a housing estate (HS2, for example). The noise can be thought of as damaging the local environment. In principle, this is easy to deal with. If the owners of the houses have a property right to a quiet neighbourhood, then the train company must come to an agreement with the owners of the houses if they are to infringe their quiet environment. There would have to be some form of mutually agreed compensation or abatement or the railway line would not be built.
On the other hand, if the train company has an established right to make a noise and the owners of the houses wish to prevent or reduce the noise, the owners of the houses must pay for noise abatement or compensate the train company for not making a noise. One way or another, the environmental costs of the railway line would be factored into decision-making.
As long as property rights – and this includes rights not just to land, but also to environmental features that come with ownership – are well defined, in principle, these problems can be solved.
When it comes to climate change, greater practical difficulties arise. The emission of carbon dioxide and methane in one part of the world could have widely spread costs in other parts of the world. In theory, those who are affected could demand compensation from the polluter for the harm they cause. However, the practicalities of this would be enormously difficult.
The third problem is where there is private ownership in general, but there are environmental consequences of actions that affect a wide range of parties that do not have ownership interests, and the costs of compensation or negotiating a more appropriate use of environmental resources is prohibitive.
Billions of people would somehow have to negotiate an appropriate level of compensation with hundreds of millions of carbon emitters. Stern argued that the market has failed. He is wrong (though he is using the rather perverse jargon from the economics textbooks correctly). It is not that the market has failed; it is that transactions costs prevent the market from developing. There is no market to fail.
Here, economists – including Stern – would recommend that people be encouraged to reduce carbon outputs to the level that might arise if a market could exist, either by using carbon taxes or by using cap and trade systems so that the cost of emitting carbon reflects the problems that it causes to people in other parts of the world. These systems have proven difficult to implement in an effective way because of the problems that arise in obtaining worldwide agreement between governments and then enforcing the agreements.
Nevertheless, this is the best way to reduce carbon emissions at least cost. Such systems of carbon taxes or carbon trading allow people to choose how to reduce their own emissions at least cost. Some people might choose to heat their houses less; others might choose to use the car less; still others might choose to use renewable energy; and so on. People can make their own decisions about how to reduce carbon emissions, faced with the costs and benefits of their actions through the quasi-market mechanisms of taxes and carbon trading.
Unfortunately, both the EU and the UK government have introduced a plethora of interventions in energy markets that have effectively renationalised the supply of energy, following the extremely successful privatisations of the 1980s and 1990s. The UK government is trying to pick winners by promoting particular types of energy generation, regulating how homes should be built, and so on. For example, the UK government has an absurd contract with the Chinese government for the delivery of nuclear power as part of a general policy that involves the government deciding how much should be produced by renewables and to what degree each source will be subsidised.
Anthropogenic climate change is probably the most difficult problem to solve using market mechanisms as it involves billions of people (both affected by the phenomenon and as producers of carbon). Nevertheless, despite the fact that there are mechanisms available that could use the dispersed information within markets, the government has chosen central planning and detailed intervention, the result of which will be that a given reduction in carbon emissions will come at a much greater welfare loss.
In many ways, carbon emissions are the difficult case. Nearly any other environmental problem imaginable can be resolved using market mechanisms and extending the institution of private property. By way of a final case study, consider the case of deep-sea fisheries. This is now an urgent policy issue, given Britain’s impending exit from the EU.
The problem with sea fisheries is that there are often no well-defined property rights in the sea. Although governments seem to be comfortable with the idea of privately owned land, they wish to keep regulation and ownership of the sea to themselves – with disastrous ecological consequences. Of course, for much of human history, the management of sea fishing grounds did not generally matter. The demand for fish was small relative to the resources available and limitations in technology made overfishing difficult, at least in open waters. Private ownership is only necessary when resources are scarce. However, most fisheries are now either fully fished or over-fished.
If we want sustainable environmental outcomes, the answer almost never lies with government control, but with the establishment and enforcement of property rights over environmental resources. This provides the incentive to nurture and conserve.
The EU’s response has been the Common Fisheries Policy (CFP). While it is now the case that fish stocks have stabilised and are even rising within the EU, the CFP has been a very inefficient way to achieve that objective. It is poor at resolving conflicts and has not created a sustainable, long-term approach to managing fisheries. There are much better ways to manage fish stocks sustainably.
Now that fishing policy has been repatriated, the UK should establish property rights in sea fisheries. Few would seriously question private property when it comes to the land. For example, it is rare these days to find people who would suggest that farms should be nationalised or collectivised or returned to an unregulated commons where anybody can graze their animals without restriction. It would be understood that this would lead to chaos, inefficiency and environmental catastrophe.
One reason why it is difficult for people to envisage property rights solutions to unsustainability in the fishing industry is because of the obvious practical problems. Apple orchards and grain fields remain stationary and cattle can be fenced in, but fish are more difficult to pin down. So the development of property rights is not quite as simple as on land. It is not a case of selling off 60 square miles of the North Sea to one trawler owner and 50 square miles to another.
One system that tends to work quite well is that which has been used in Iceland. In such systems, a given percentage of the total allowable catch in a particular fishing ground is allocated to the different trawler owners as a quota when the system is first developed. This right needs to be a right in perpetuity, though in Iceland the legal position is slightly vague (and regrettably so). An important aspect of the system is that the quota can then be traded. Each year, a total allowable catch is then set. In practice, the total allowable catch is set by the government in Iceland. However, it need not be set by the government and, indeed, it would be better if it were not.
Because each trawler owner’s right stretches into perpetuity, trawler owners have an incentive to agree to set the catch in a given year in such a way that sustainability is maximised. Fewer fish caught this year (up to a point), means more fish available to breed and more fish in the future and so the value of the quota increases. If the quotas were tradeable, the increase in the value of the quota would be observable. Because each of the trawler owners has a right to a percentage of the total allowable catch stretching out forever, they would wish to ensure a sustainable fishery, thus maximising (as economists put it) the net present value of the fish that they can catch over an indefinite period. It is the net present value of all future catches that will largely determine the value of the tradable quota.
In the EU, there is a continual battle between the Commission, scientists and trawler owners, all of whom have different interests. In Iceland, there tends to be broad harmony between all parties thus producing cooperation as well as a sustainable fishery. Hannes Hólmsteinn Gissurarson, on the Icelandic system of fishing quotas, writes: “In Iceland, owners of fishing vessels now fully support a cautious setting of TACs [total allowable catch] in different species. They have become ardent conservationists…[T]he private interests of individual fishermen coincide with the public interest.”
When it comes to the UK, there are practical questions to be considered such as how fishing grounds are defined; how to allocate the initial rights; how the quotas for different types of fish interact with each other; whether the behaviour of particular types of fish mean that a different approach should be taken in some circumstances; how catches should be monitored; how to deal with fishing grounds where the movement of fish runs across the territorial waters of different countries (or the UK and the EU); and how to manage inshore fisheries (which in principle are easier than the management of deep sea fisheries, but should probably be separate). Whatever the practical difficulties, however, the policy framework should be clear – long-term sustainability is best achieved through a system of property rights granted over fishing grounds.
If we want sustainable environmental outcomes, the answer almost never lies with government control, but with the establishment and enforcement of property rights over environmental resources. This provides the incentive to nurture and conserve. Where the government does intervene it should try to mimic markets. When it comes to the environment, misguided government intervention can lead to conflict and poor environmental outcomes. The best thing the government can do is put its own house in order and ensure that property rights are enforced through proper policing and courts systems. That is certainly the experience of forested areas in South America.