Liberty, markets, and environmental values: a Hayekian defense of free-market environmentalism.

• Author: Pennington, Mark

In recent years, the development of free-market environmentalism has marked a major advance in the relationship between the classical-liberal tradition and the challenge to individualist institutions presented by the modern environmental movement. Building on the work of Ronald Coase and the New Institutional Economics, free-market environmentalism has demonstrated that environmental problems, far from being the inevitable result of market institutions, are best explained by the absence of these very institutions. Notwithstanding these advances, however, free-market environmentalism has failed to have a significant impact on the environmental movement. Indeed, insofar as there has been any reaction to proposals for the extension of private-property rights, it has tended to be hostile.

One of the reasons for this lack of progress stems from the differing social ontologies adopted by the proponents of environmental markets, on the one hand, and by the green political theorists and activists who tend to favour command-and-control models of environmental regulation, on the other. The former have a tendency to emphasize notions of rational self-interest, utility maximization, and efficiency, whereas the latter focus on communitarian conceptions that emphasize a nonreductionist account of social interaction and a "moralistic" approach to environmental issues that seeks to institutionalize a search for the "common good."

Although I recognize the contribution of rational-choice analysis, I argue in this article that free-market environmentalism is unlikely to make political progress unless its arguments are recast in a mode that speaks to the communitarian greens on their own terms. One way of achieving this goal is to restate the case for free-market environmentalism from a Hayekian perspective. I attempt to move the debate in this direction by showing that the conclusions of Hayekian liberalism are more consistent with the nonreductionist foundations of green communitarianism than are the conclusions of the communitarians themselves. The argument is structured in three parts. In the first section, I set out the communitarian critique of free-market environmentalism. In the second section, I outline the essentials of Hayekian liberalism and its similarities to and differences from communitarian ontology. Finally, in the third section, I offer a Hayekian defense of free-market environmentalism against the central claims of green communitarian thought.

Free-Market Environmentalism versus Green Communitarianism

Environmental problems for much of the postwar period were treated as classic examples of "market failure," a treatment inspired by developments in neoclassical welfare economics. In this perspective, market processes result in socially suboptimal environmental decisions because private decision makers are not held properly to account for the consequences of their actions owing to the prevalence of collective goods and externality problems. Seen in this light, the task of environmental policy is to devise ways of correcting imbalances in the market system via the judicious use of taxes, subsidies, and regulatory controls in order to ensure the appropriate provision of environmental goods.

The emergence of free-market environmentalism represents a significant advance in how environmental problems are conceived. Building on the work of Ronald Coase (1960), Harold Demsetz (1969), and developments in public-choice theory, free-market environmentalism suggests that the mere identification of market failures is not a sufficient justification for widespread government intervention. Insofar as markets are prone to 'Tail" in the environmental sphere, they do so mainly because of the high costs of establishing private-property rights. These obstacles to market exchange prevent the successful internalization of spillover effects. Transaction costs are not the sole preserve of the market system, however, and we commit the "nirvana fallacy" if we suggest that the alternative to an imperfect market is a government immune from the same sort of problems. Public-choice theory, in particular, suggests that the interaction of voters, interest groups, politicians, and bureaucrats is characterized by a distinctive set of transaction costs that may result in chronic examples of government failure. What we need, therefore, is a comparative framework for examining the extent to which institutional provisions in the private and public sectors encourage or inhibit the internalization of all costs.

In this framework, free-market environmentalism has made a strong case for much greater use of private-property rights and "imperfect" market processes as an alternative to the regulatory state. Authors such as Terry Anderson and Donald Leal (2001) have documented numerous examples of environmental goods that can be and are supplied successfully in private markets, and empirical researchers examining state-centered models of environmental management have highlighted numerous cases of government failure. For land-based environmental assets such as forests and minerals, for example, evidence suggests that private-property solutions are highly successful in generating the necessary incentives that encourage resource conservation and help to overcome the problems of "free riding" associated with open-access conditions (De Alessi 2003). Thus, the record of forest management in Sweden under a predominantly private regime has been noticeably more impressive than the record of forest management under government ownership in the United States, Canada, and Great Britain. Similarly, the private ownership of wildlife in countries such as Botswana has had markedly more success in protecting stocks than government-sponsored trade bans on ivory products that have been put in place over much of Africa (Sugg and Kreuter 1994).

Although proponents of free-market environmentalism recognize that environmental markets have limits owing to the prevalence of transaction costs, they contend that these problems are more likely to be overcome within an institutional framework supportive of private contractual arrangements. In this perspective, all environmental externalities represent potential profit opportunities for entrepreneurs who can devise ways of defining private-property rights and arranging contracts (via technological innovations, for example) so that those currently free riding on collective goods or imposing negative external effects (for example, water pollution) on their neighbors are required to bear the full costs of their actions. A land owner, for example, may introduce fences and install entrance points to the grounds of a park in order to exclude nonpayers from the park's aesthetic benefits. Likewise, if technologies develop in the future that enable the "fencing" of the atmosphere, then entrepreneurs will have incentives to define property rights to the air and to charge those who are currently polluting without compensating those injured by their action. In the market economy, therefore, if people are imposing costs on others or are benefiting from the provision of certain goods without payment, entrepreneurs have incentives to find ways of eliminating such involuntary transfers over time.

The political process, by contrast, tends in its very nature to externalize costs through the coercive mechanisms of collective decision. The all-or-nothing nature of political decision making means that once a majority coalition has been assembled, costs can be imposed on those outside the ruling group. As a consequence, politicians always have an incentive to find ways of externalizing costs--providing benefits to some groups at the direct expense of others. In light of these incentives, advocates of free-market environmentalism suggest that we should rely on government action only in those situations where it is inconceivable that a market solution might be forthcoming. At present, for example, transboundary air-quality management seems to fall in this category. As yet, technological developments have not allowed the effective "fencing" of atmospheric resources, so government action may be warranted as a last resort.

Recognizing the limits of property-rights solutions in this regard, free-market environmentalists argue nonetheless that "marketlike" incentives, such as those established by tradable-permit schemes, be built into whatever policy interventions are required, eschewing the adoption of a command-and-control approach. In this perspective, command-and-control policies, such as fixed-emission quotas, do not provide sufficient incentives to deliver improvements in environmental quality beyond those specified by government mandates. Marketlike approaches, such as tradable permits, by contrast, give externalities a price tag that producers can reduce in a process of substitution. Thus, in the case of tradable pollution permits, if a firm reduces its emissions below its allocated quota, it can sell the unneeded share of its quota to other firms that are less efficient in producing emissions reductions. In turn, because firms, whatever their efficiency, have a positive incentive to continue reducing pollution, the state has less need to employ armies of inspectors to ensure compliance with the law.

Despite the substantial body of evidence to support the case for free-market environmentalism, the approach has made little headway either in policymaking or with regard to developments in green political theory. Although some green theorists are now willing to concede that certain environmental goods can be supplied in private markets, they reject the view that these goods should be provided in that way.

Similarly, although many greens are willing to concede the "efficiency" case for tradable permits and other marketlike instruments, they continue to favor reliance on command-and-control policy tools. Their objections rest on the contention that...