Sketching a Free-Market Response to Climate Change

As Florida faces Hurricane Irma and Houston continues its recovery efforts from the intense flooding there, a lot of people are turning more of their attention to the matter of climate change, and with good reason.

Summarized briefly, my position on human-caused climate change has evolved over the years roughly from “it isn’t happening” to “it’s happening but it isn’t that big of a deal” to “it’s happening and it’s probably a big deal.” These notes represent my quick attempt to help bridge the communication gap between scientists and activists who think that climate change represents an existential threat to people on the planet and free-market advocates typically less inclined to take the problem seriously. (And yes, I realize that no given weather event can be attributed to climate change, but that doesn’t undercut the case that climate change makes certain types of damaging events more likely.)

In particular I want to reply to some of the remarks of Joseph Romm and Sam Harris in Harris’s recent podcast on the subject.

The basic reason that free-market advocates often are skeptical of claims of dangerous climate change is that such claims seem to be the latest in a long line of anticapitalist fearmongering. In his recent article, Lawrence J. McQuillan discusses the ridiculous predictions of catastrophe by the likes of Paul Ehrlich, who decades ago predicted widespread famine due to population growth. His claims were not just wrong but laughable.

But just because the boy keeps falsely crying wolf doesn’t mean there is no such thing as wolves. My belief now is that climate change actually has teeth. Ignoring the threat of wolves just because someone keeps seeing phantom wolves is just as counterproductive as falsely crying wolf.

I want to suggest that, even if people concerned about climate change have reason to distrust free-market advocates, and vice versa, each group should try to pay attention to what the other is saying.

I was struck by something Romm said to Harris:

The problem is that we’ve been unable to get a carbon price passed in this country. . . . If we had the right carbon price, if the price of carbon reflected the actual damage that carbon does to the world, then we wouldn’t need a bunch of other policies. . . . The market would just figure out what is the cheapest thing to deploy, and it would deploy it.

Harris followed up:

This is a classically libertarian description of what to do. It’s really an amazing irony that the people who seem to be against doing anything about climate change— . . . a very high percentage of these people consider themselves libertarians—but the core philosophy of libertarianism is that you have to price in all the benefits and harms of any given economic behavior.

Minor quibbles aside, I agree with what Romm and Harris are saying. An aspect of free markets is that people who pollute must stop polluting or pay compensation to those they harm.

My disagreement is over the particular policies that Romm advocates to get carbon pricing that captures the real costs of pollution. Romm discusses cap-and-trade, and I get the sense he’d accept a carbon tax as an alternative.

But a real free-market approach would involve something like a Carbon Compensation Fund. The basic idea is that energy producers would have to pay into the fund according to how much carbon their products emit and what damages are expected to be. So this would act similarly to a tax in some respects, but it would not create a slush fund for politicians; the money would actually go directly to compensate those harmed by climate change (if the program functioned correctly).

A Carbon Compensation Fund would be superior to cap-and-trade for several reasons. It would not create artificial “rights” in pollution that would arbitrarily make existing players rich at the expense of newcomers. Also, it would not try to guess what the “right” amount of carbon emissions is in a given year; it builds the damages into the costs, and, as Romm says, lets the market function.

If Romm is right that people really would be better off switching entirely from fossil fuels to solar and wind and the like, then a compensation fund would best incentivize people to make the switch in the most economic way. But the approach does not rule out in advance other potential paths involving a mix of fuel substitutions and adaptations to a changing climate.

A huge benefit of the fund, relative to other approaches, is that contributions could be regularly adjusted based on expected harms, and refunds could even be issued if the damage is less that expected. So, as a hypothetical, if producers of fossil fuels figured out a way to suck carbon dioxide back out of the atmosphere to offset emissions, they would no longer need to pay for damages from emissions. (As an side, the fund theoretically could be expanded to include other sorts of relevant emissions. Obviously a fund like this would be very hard to set up and properly manage.)

Romm is a big fan of government subsidies, but the problem is that subsidies often support politically correct research rather than the best research. If people want to subsidize renewables with their own money, great. But there’s no reason to think that government will accomplish anything other than to waste resources on net. Generally politicians and their bureaucratic appointees pick winners and losers based largely on politics, not based only (or even) on the best science and economics.

If people like Romm want to be more successful, they will pay more attention to the reasons that many people get nervous when “climate activists” start calling for yet more taxes, more regulation, and more centralized bureaucratic control of the economy. A Carbon Compensation Fund would follow the model not of bureaucratic controls but of torts. Such a fund, theoretically, could even be the product of an actual class-action lawsuit or a series of lawsuits. But if, due to the complexity of the international legal order, treating the problem literally as a tort cannot work, then a political intervention to reach comparable results probably would work as well as anything might while potentially appealing to a broader political marketplace.

And if national and international politics fail, then, I predict, we’ll still slowly phase out most carbon-based energy, simply because people will become ever more willing to spend more of their own money on carbon-free alternatives. If Romm is right, then we should be able to see more signs of trouble as the years progress. But building the costs of harm into the price of carbon-based energy certainly would help get the incentives right and help achieve more-just outcomes.

As far as I’m concerned, the debate over whether humans cause potentially harmful global warming by emitting carbon dioxide and other gases is over. We do. Now the interesting debate is what to do about it. Those who act as though the automatic answer is to tax, regulate, and subsidize energy production are not only failing to think fully scientifically, they are failing to craft an approach with a realistic chance of succeeding politically.

A personal note: As I write this, Irma is bearing down on Florida, and it’s unclear what the damage from that will be. Those of us not in the danger zone are thinking of the the people affected.

What If Global Warming Is “Mild and Manageable”?

September 10 Update: What if, as some people on Facebook have suggested, global warming is “mild and manageable,” as Alex Epstein thinks?

How severe the harms of global warming will be is an empirical question. Some people still think the harms will be zero, but most people concede that there will be at least some damages. The severity of global warming depends largely on whether “feedback loops”—prominently, the reduction of light-reflecting ice and the increase of water vapor—increase warming beyond what carbon dioxide by itself would accomplish.

My basic response is that, if people think global warming will be “mild and manageable,” then they should embrace my approach. Even if the harms of global warming are “mild,” then those harmed should be compensated. Normally we do not let people freely harm others if they do so in a “mild” way. If the effects of global warming turn out to be mild, then my approach would result in modest compensation paid by producers of carbon-based energy to those harmed.

The adjustability of my approach is a huge advantage over other approaches. If the harms of global warming turn out to be quite severe, then we’ll increasingly see its effects, and my approach would call for higher compensation to those harmed. If the harms are less severe, then the compensation would be scaled back accordingly. So my proposal should appeal to people with a very wide range of views.

Image: Naval Research Laboratory


Other Works Bear on the Issue

Thank you for addressing this issue. Have you seen the articles on this topic by Edwin Dolan (Cato Journal) and Jonathan Adler (Social Policy & Philosophy)? (Both of those articles are mentioned by Jerry Taylor in “Libertarian Principles & Climate Change.”)

Also, regarding the remark, “if producers of fossil fuels figured out a way to suck carbon dioxide back out of the atmosphere to offset emissions,” this is not a hypothetical, as you might know. It’s called carbon sequestration. I expect people have proposed, in lieu of a carbon tax, that producers pay to sequester their own carbon.

—Brian S.

Ari Armstrong replies: Thanks for the tips, Brian. I did read Adler’s article years ago, and its ideas stuck with me—although I had lost track of the citation. I think Adler gets a lot right, but I disagree with his emphasis on developed versus developing nations. We should be concerned with specific individuals harmed by global warming, regardless of where they live, not with national aggregates.

A Property Rights Approach

First, I agree that there are anthropogenic effects to climate. I may lean toward the wolf having smaller teeth, however. I am glad that others like you realize that it should be addressed in the context of rights violations. It’s really frustrating that this issue for the most part, has two schools of thought—“do nothing” or “more statism.”

Assuming that the United States would address it and implement something from a property rights approach (I’m skeptical of that happening, but it would be nice), the world is likely to still have major polluters who will likely do nothing. I suppose that we could lead by example.

—Ben F.

Ari Armstrong replies: I don’t know enough about international law or about tort law to comment on the possibility of international tort actions under existing law. It is theoretically possible for nations via treaty to in effect create an international tort system to deal with global warming.

Rethinking a 2012 Article

I read with interest my 2012 article for the Objective Standard, “Does Reason Support a Carbon Tax?” The main difference between my views then and my views now is that I take the potential harms of global warming much more seriously. My argument was that a carbon tax does not treat global warming as a tort, but I did not then see a need to do so or a way to do so.

—Ari Armstrong

An Exchange on Climate Change

John Clinch sent in some replies about the above article; due to the length of his remarks and of my reply, I have posted the exchange elsewhere.

—Ari Armstrong