The Gulf Oil Spill and Eco-nomics

 
 

Are market economies friends or foes of the environment?

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The Gulf oil spill is a terrible ecological disaster. But its legacy will be even worse if it results in the enactment of misguided policies that hurt the environment while trying to help it. It seems that almost everyone’s knee-jerk reaction to the spill is to forget (assuming they ever knew in the first place) the environmental lessons learned over the past several decades, and thus to bash cheap energy, market economies, and private property. But successful environmental protection results from harnessing, not subverting, the benefits of each of these.

New York Times columnist Paul Krugman blamed the oil spill in part on “futuristic technology” without which “BP couldn’t have drilled the Deepwater Horizon well in the first place.” He went on to blame the “anti-environmentalists” who have rolled back environmental protection policies, and concluded that “the environment won’t take care of itself, that unless carefully watched and regulated, modern technology and industry can all too easily inflict horrific damage on the planet.” The implication, of course, is that big government is to do the watching and the regulating—even more than it already does. And in his column the following week Krugman triumphantly proclaimed that “what really needs to change is our whole attitude toward government.”

E. J. Dionne in the Washington Post declared the problem to be that “BP was trusted to know what it was doing with complicated equipment that, it would appear, it either didn't understand very well or was willing to use recklessly.” And he quickly posited a statist solution as well:

Everyone is a capitalist until a private company blunders. Then everyone starts talking like a socialist, presuming that the government can put things right because they see it as being just as big and powerful as its Tea Party critics claim it is. But the truth is that we have disempowered government and handed vast responsibilities over to a private sector that will never see protecting the public interest as its primary task. The sludge in the gulf is, finally, the product of our own contradictions.

Eliminating the contradictions, therefore, entails empowering government which, supposedly, will protect the public interest.

Religious leaders got in on the act, too. The managing editor of Christianity Today engaged in a jeremiad directed at more or less everyone:

Woe to you, O consumers, who drive when you could walk, who lust for goods that must be flown and shipped from far away in oil-consuming ships of land and sea and air, whose way of life must be preserved no matter the cost to my planet or to those whose lives depend on its health. Woe to you, O producers, who pile greed upon greed, who drill and pump and ship and refine black gold with little thought of tomorrow, and sometimes not even today.

Meanwhile, the Dean of the Southern Baptist Theological Seminary directed his fire more directly at the free market, arguing that just as Roe sparked Evangelical concern about abortion, so too the oil spill should cause them to care about the environment. And apparently caring about the environment must entail a governmental solution:

Because we believe in free markets, we’ve acted as though this means we should trust corporations to protect the natural resources and habitats. But a laissez-faire view of government regulation of corporations is akin to the youth minister who lets the teenage girl and boy sleep in the same sleeping bag at church camp because he ‘believes in young people.’

Where to begin? What we’re seeing is an animus directed toward modern technology and industry, an unmodulated suspicion of the private sector’s motives, an unexamined belief that markets have failed, all coupled with an uncritical (and nearly unthinking) faith that, in the final analysis, only government and extensive regulation will save us from ourselves and protect Mother Nature.

But the history of environmental progress tells a different story. And the lessons of this story ought not to be obscured by this tragic event. First, governmental attempts to protect the environment often have been inefficient, ineffective, and even counterproductive. Second, economic growth—and the affordable energy and market economies that allows for such growth—is largely responsible for the environmental gains we have witnessed over the past decades. And third, property rights and the market itself—not the supposedly angelic intentions and intelligence of government officials—best protect the environment.

The road to hell is paved with good intentions, and perhaps the best-known governmental misstep—still in full force—when it comes to environmental policy is the Endangered Species Act. Signed into law in 1973, the act was meant to protect species on the verge of extinction as “a consequence of economic growth and development untempered by adequate concern and conservation.” The law has had some good effects, but in certain respects the remedy was worse than the disease. Instead of bringing economic growth and development into harmony with concern for and conservation of endangered species, the act gave some an economic incentive to kill and destroy the habitats of the very animals it sought to protect.

“Shoot, shovel, and shut-up” best captures the attitude of some ranchers, farmers, harvesters, and other land-owners who stand to lose all access to their land should an endangered animal be discovered on it. If an endangered species is discovered on private property, governmental officials can tell the owners what they may and may not do with the land—imposing criminal sanctions if they fail to comply. This can greatly decrease the value of the land, but the government does not offer any economic recompense.

As a result, land-owners know that if they spot an endangered animal they should get rid of their problem by getting rid of the animal before the government finds out—“shoot, shovel, and shut-up.” This same logic also provides the incentive for land-owners to manage their properties in such a way (by clearing undergrowth, limiting the size of forests, etc.) so as to prevent them from providing habitat for endangered species.

Imagine how many more endangered species would be discovered and protected if there were an economic incentive to doing so. What if conservation groups paid land-owners to purchase the properties where these species were discovered? Barring that, what if the government compensated land-owners, thus implementing a policy that makes sense by providing the proper economic incentives. No one suggests getting rid of the Endangered Species Act, only reforming it to make use of market-based solutions.

Among governmental attempts to protect the environment, the Endangered Species Act is not unique in failing to grapple with the problem of scarcity and thus ignoring economic incentives. Nor is it alone in assuming greater knowledge on the part of bureaucrats than human beings can possibly have. The simple fact of the matter is that scarcity—in this example, land—drives our economic activity. And when the environmental good to be protected comes at no cost to the regulator, then no price extracted from the land-owner will be deemed too high. Determining, then, which goals to set (what level of emission, how many species to protect, how many acres of land to freeze, etc.) and by which dates becomes rather arbitrary—and certainly not optimally efficient. Allowing the price mechanism of the market to work even for environmental benefits provides a better solution.

If governmental regulation—which varies from country to country—does not fully explain recent improvements in environmental conditions, then what does explain the marked environmental gains that much of the industrialized world has experienced over the past decades? It’s the economy, stupid. And economic growth in particular. One of the most important discoveries in environmental economics was the Environmental Kuznets Curve. Many environmentalists once claimed that economic growth hurts the environment and produces a race to the bottom as countries compete against one another to bring out the maximum bang for the buck at the expense of Mother Nature. But in 1991 the economists Gene Grossman and Alan Krueger discovered that the relationship was not linear, but arced. Picture the relationship between environmental harms and per-capita income as an upside-down U. Initially, as incomes increase so too do environmental problems as society makes greater use of natural resources and emits more pollutants. But after incomes reach a certain critical inflexion point, critical environmental indicators begin to improve as society finds more efficient and effective ways to produce goods. Rather than a race to the bottom, economic growth produces a race to the top.

Economists have found this general pattern to hold for a host of environmental indicators across time and national borders. In fact, they can pinpoint the exact dollar amount where an increase in wealth will start to lead to better environmental conditions. It should be no wonder, then, that developed countries today enjoy better environmental conditions than they did a century ago, or that developed countries have better environmental health than developing countries. The key for developing countries is to find a way to shift the Environmental Kuznets Curves down and to the left. In other words, to reach that inflexion point sooner and with lower environmental costs. Likewise, the key for all countries is to find a way to keep pushing them along the curve in the direction of progress—for there is no guarantee that things will move along the curve in the right direction. But doing these things will require “futuristic technologies” and the fuels and market economies that generate economic growth. Rather than spurning innovation, inexpensive energy, or the free markets that incentivize these developments, those truly concerned with the environment should embrace these factors as the keys to future environmental wellbeing.

Though it may seem counter-intuitive to some, property rights and the market itself can be harnessed in the cause of environmental protection. The economists Bruce Yandle, Madhusudan Bhattarai, and Maya Vijayaraghavan have found that countries where property rights and the rule of law are secured produce the desired shift in and movement along their Environmental Kuznets Curve:

When scarce aspects of the environment are defined as property . . . the community moves rapidly in the race to improve environmental life. The pace of this progress is determined partly by the extent to which environmental assets are protected by private property rights. Thus, the Environmental Kuznets Curve is a proxy for a property rights model that begins with a commons and ends with private property rights.

It should come as no surprise, then, that some of the worst polluters in the world have been state-run economies, such as those of the Communist world.

But property rights can also be used to create markets in environmental protection. Consider three examples. A factory releases polluted water into a local stream. In an ideal world, industry wouldn’t pollute. But in the actual world, industry generates some pollution as an externality to production. The question, then, is how best to control this externality. Typical governmental solutions decree a certain standard over a particular time table—command and control. But what if the town-members owned the local stream and thus could exert their property rights against the factory? They could then charge the factory for every part per billion of whatever pollutant it releases to yield a concentration they find acceptable and thus provide the factory with continued incentives to further reduce their negative externalities. This requires no omniscient or omnibenevolent regulator. As Yandle, Madhusudan, and Bhattarai explain:

As ‘propertyness’ expands—and private property is the most incentive-enriched form—individuals have a greater incentive to manage, to conserve, and to accumulate wealth that can be traded or passed on to future generations. Under such circumstances, what might be viewed as a waste stream affecting the commons, or no-man’s-land, is seen as an invasion of property. Those who impose uninvited costs are held accountable.

Beyond regulating pollutants, however, property rights and markets can be used to protect fragile ecosystems and endangered species. The problem of overfishing is a well-documented tragedy of the commons. But if our rivers and oceans weren’t commons, but were owned, their owners would have economic incentives to ensure that the fish-stock remains healthy—for what economic value is there in an ocean with no fish? Rather than a state licenser trying to set daily catch limits, an owner will seek to maximize the long-term value of his property. Lastly, conservationists concerned with protecting the environment can bear the economic costs of doing so directly by purchasing fragile ecosystems.

What does any of this have to do with the Gulf oil spill? Partly it should serve as a reminder that the spill isn’t the final word on markets and the environment. Beyond that, however, it should restrain the knee-jerk impulses to castigate markets and oil, and to call for potentially harmful governmental regulation. Affordable energy and market economies drive environmental wellbeing, while much governmental regulation can be counter-productive. The critical consideration, then, is what sort of governmental response is appropriate. If anything, these lessons should prompt policy makers to seek market-based solutions to prevent future disasters. The Obama administration announced a temporary ban on all future off-shore oil drilling, a ban some members of his party want to make permanent. But America needs oil no matter what, and as Steve Hayward pointed out, shipping oil across the oceans has proven to be ecologically much more dangerous than off-shore drilling.

Undoubtedly BP would have had better safety mechanisms in place—known how to use their equipment and not been reckless, in the words of Dionne—if they were economically liable not only for the full costs of the cleanup but for the property rights they would be violating if the Gulf were not a giant commons. As it stands, however, a 1990 law passed by Congress limits the economic damages that can be collected after an oil spill to $75 million. Democrats in Congress now are trying to raise this to $10 billion. BP has a net worth of around $250 billion, and if all of that was on the line one can imagine how much more careful they would have been. Not relying on the good intentions of business or the wisdom and benevolence of government, but instead relying on economic incentives is the key. It’s not that market economies failed us in the Gulf, but that they were never put to work in the first place.

Ryan T. Anderson is Editor of Public Discourse: Ethics, Law, and the Common Good.

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