Free Market Environmentalism

Citation metadata

Editors: J. Baird Callicott and Robert Frodeman
Date: 2009
Publisher: Macmillan Reference USA
Document Type: Topic overview
Length: 1,380 words
Content Level: (Level 5)
Lexile Measure: 1360L

Document controls

Main content

Full Text: 
Page 442

Free Market Environmentalism

Free market environmentalism (FME) begins with the belief that market institutions can and do promote environmental quality effectively. Proponents of FME see private property rights as holding individuals and firms accountable for their environmental impacts and rely on markets to provide crucial information about environmental conditions to society. FME stresses principles of individual liberty, voluntary exchange, and common law liability. FME typically stands in contraposition to command-and-control regulatory approaches to environmental policy, arguing against the inefficiencies of bureaucracy, centralization, and regulation.

Full Text: 

THEORY

In place of regulation or taxation, proponents of FME recommend altering incentives to conserve environmental resources by extending property rights and markets into domains that have been external to market processes. The FME vision rejects assertions that markets are to blame for environmental problems. Instead, environmental problems are viewed as opportunities to institute property rights, internalize externalities, and let markets improve environmental quality and welfare. Free market environmentalists emphasize the institutional context of decision making and argue that market institutions provide the best incentives and information about ecological conditions and scarcity. Market arrangements tend to reward good decisions and ecological stewardship and penalize waste and degradation.

Central to FME are well-defined, enforced, and sellable or transferable private property rights. Secure private property rights encourage stewardship, as degradation and poor management undermine market value. They also reward ecoentrepreneurs who reduce consumption and waste, find better uses or substitutes, improve productivity, or conserve for times of scarcity. Limitations on property rights such as use-it-or-lose-it rules governing permits for grazing, timber, or water rights and limited liability arrangements are seen as distorting conservation incentives.

This approach draws heavily on the Coase theorem, which holds that an optimal level of pollution is achieved through bargaining regardless of who owns the right to pollute as long as certain conditions are met (Coase 1960). With well-defined property rights and low transaction costs, individuals internalize their environmental costs by bargaining in a market. This amounts to a strict polluter pays policy. In a Coasian system the amount of pollution is not set by regulators or by firms with disregard for victims but through negotiations and a voluntary exchange of rights between interested parties. The rights to pollute are owned and exchanged voluntarily, falling into the hands of polluters, victims, or other parties, depending on who bids the highest. The level of pollution traded in this market may be more or less than what a regulator would allow.

Page 443  |  Top of Article

APPLICATIONS

As an alternative to the command-and-control environmental policies that dominated the 1970s and 1980s, market-based approaches exist around the world and many more are emerging. Several nations employ individually transferable quotas that are set by government regulators to enable the trading of commercial fishing rights. Also, the United States has implemented a trading scheme for rights to emit sulfur dioxide. Large-scale successes have inspired ongoing efforts to use market-based approaches in other areas, such as a capand-trade policy for dealing with carbon emissions.

It can be argued that these markets for harvesting or emissions are only partial markets because they ultimately rely on technocrats or nonmarket mechanisms to establish the overall cap, or target quantity. A pure FME approach would task the market with setting the cap. Akin to shoemakers being compensated for their efforts by those wanting shoes, the owners of the rights to a clean stream could exchange some of those rights to polluters, in principle leading to a market clearing in which as much pollution is generated as its victims will tolerate. Such markets govern Scottish rivers and streams and are used in the western part of the United States for maintaining instream flows.

Other market institutions, both new and old, have been marshaled to promote environmental quality. Land trusts and organizations such as the Nature Conservancy are considered exemplars of private efforts to protect the environment through the use of private property rights and voluntary exchange. Those interested in protecting natural resources can do so simply by purchasing them or purchasing and not using the development rights—known as conservation easements—and holding them in perpetuity. Conservation trusts that advance environmental goals through the marketplace are proliferating in the United States. These green payments (akin to polluter pays) favored by FME are seen in various forms, such as user fees for recreationists, bottle bills, payments by the Defenders of Wildlife to ranchers who suffer losses from endangered wolf populations, and water markets in the western United States.

Free market environmentalists often criticize central planning and regulatory institutions for mismanaging environmental resources. FME advocates call for green scissors, referring to the cutting of environmentally and economically wasteful subsidies and regulations. They call attention to the poor environmental performance of regulatory agencies and managers of public lands. They see the failure of centralized regulation and public management as arising from institutions with incentives misaligned with conservation.

DEBATES AND CRITICISMS

Pragmatic concerns about FME usually start with transaction costs. The Coasian bargaining central to the efficacy of the market-based approach hinges on minimal costs in reaching and enforcing voluntary agreements in the market. In practice this may be unrealistic, although high costs also may plague the alternatives. Multiple polluters contracting with thousands of private parties may create overwhelming transaction costs. Similarly, the rule of law and functioning markets depend on costly government, especially a highly responsive judiciary. The polluter pays principle of FME requires clear and defensible property rights, low-cost application of tort law principles, and monitoring of environmental trespasses. These conditions often are lacking in environmental contexts.

The practical limitations of applying common law liability may be most serious when the source of environmental harms or the effects of pollution are difficult to identify. FME advocates see the costs and complexities of enforcing property rights regimes as being outweighed by the social and environmental gains arising from voluntary trading, especially compared with the alternative of governments dictating pollution levels without conferring private tradable rights.

Critics have found shortcomings in FME on ethical grounds. Markets for pollution often are seen as immoral or as tacitly endorsing pollution. Moreover, market processes provide only for anthropocentric values. Markets also may be blind to important social inequities such as marginalization of the poor. FME proponents often acknowledge this and favor the use of poverty policy, not environmental policy, to address poverty.

The FME paradigm offers no guarantees that certain outcomes will be achieved. Holding people accountable and fostering voluntary exchange may produce results that some find objectionable. Markets, for instance, provide no special protection against irreversible changes such as extinctions, although regulatory or other institutions also may not provide such guarantees. Critics of FME also contend that placing control of natural resources in private hands creates a reliance on individuals who may not be sufficiently enlightened, knowledgeable, farsighted, patient, or altruistic. FME advocates often counter that regulators and technocrats are often worse in terms of those qualities and that market incentives discipline individuals in ways bureaucracies do not.

Ultimately, markets are easier to establish and property rights are easier to define for some resources and activities than for others. Implementing idealized markets for resources such as global climate and biodiversity presents enormous practical and political challenges. Advocates of FME contend that although markets are not a panacea, they should be used to promote environmental goals when possible.

Page 444  |  Top of Article

BIBLIOGRAPHY

Adler, Johnathan H. 2000. Ecology, Liberty & Property: A Free Market Environmental Reader. Washington, DC: Competitive Enterprise Institute.

Anderson, Terry L, and Donald R. Leal. 2001. Free Market Environmentalism. New York: Palgrave.

Baden, John, and Richard L. Stroup, eds. 1981. Bureaucracy vs. Environment: The Environmental Costs of Bureaucratic Government. Ann Arbor: University of Michigan Press.

Coase, R. H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3: 1–44.

Smith, Fred L., Jr. 1995. “Markets and the Environment: A Critical Reappraisal.” Contemporary Economic Policy 13(1): 62–73.

Douglas S. Noonan

Source Citation

Source Citation   

Gale Document Number: GALE|CX3234100139