When the customer/loan portfolio of any bank is weighted heavily toward one industry, its fortunes will be more closely tied to the fortunes of that industry. The failure of such an institution will have painful consequences within the sector it serves, but is...
Environmental Economics: A Missing Discipline
Everyone wants the cleanest possible environment. But there are competing problems to solve and scientific issues to resolve. Climate Change Reconsidered II: Fossil Fuels (CCRII-Fossil Fuels), a 780-page report issued last year by the Nongovernmental International Panel on Climate Change (NIPCC), looked at the variables that should be considered in the development of effective environmental protection programs. In this article, with permission of the editors and the publisher of CCRII-Fossil Fuels, The Heartland Institute, we demonstrate how complex a seemingly simple problem can be.
As a family, a town, a state or a nation, all decisions to spend economic resources (money) must be considered in conjunction with all reasonable alternatives to where the money could be used more beneficially. CCRII-Fossil Fuels explains:
“The most valuable concept economists bring is opportunity cost, the value of something that must be given up to acquire or achieve something else. Every choice has a corresponding opportunity cost. By revealing those costs, economics can help policymakers discover cost-effective responses to environmental problems, including climate change (Block, 1990; Markandya and Richardson, 1992; Libecap and Steckel, 2011).”
Those who are convinced global warming will destroy life as we know it are willing to spend anything to stop it, while those who believe it to be a non-problem do not want to spend any money on it at all. With over $1 billion spent every day on ‘climate finance’ across the world, it is clear that the alarmists have been winning so far.
The market plays a huge role in determining the actual costs of what either side wishes to be done. In the case of countering man-caused global warming, were it to exist, carbon dioxide (CO2) sequestration (i.e., capture and storage) is a major activity alarmists want governments and industry to commit to. But the public only hear it referred to as ‘carbon sequestration,’ which encourages people to think we are eliminating coal dust, lamp black, and the like, while in fact it is getting rid of life-supporting CO2.
The sequestration of CO2 carries exorbitant costs that has never been affordable, though you may hear Exxon Mobile touting it daily in radio and TV ads to show they are a ‘green company.’ That is apparently a form of ‘virtue signaling,’ which Dictionary.com defines as “the sharing of one’s point of view on a social or political issue, often on social media, in order to garner praise or acknowledgment of one’s righteousness from others who share that point of view, or to passively rebuke those who do not.” In Exxon’s case, it seems to be a cover for the fact that their primary business is the production of fossil fuels. And make no mistake about it, enforced ‘carbon sequestration’ would increase the cost of all fossil fuels, especially inexpensive coal-fired electricity. Indeed, ‘carbon sequestration’ is really a synonym for ‘no coal at all.’
The single most overlooked aspect of environmental economics is the unintended consequences of the actions we take. In our homes, there are likely few such consequences, but in towns, states, and countries operating through regulations there are always unintended consequences, most of which are not positive. Predicting how people and markets will react to new environmental laws is as difficult as forecasting the stock market for the very same reasons—there are too many variables and no one can accurately predict the response of the human mind to changes in circumstances.
Regardless, regulations often fail to achieve their objectives due to conflicting incentives of individuals and government and the lack of reliable local knowledge. Outlawing both plastic straws in California and the sale of sugared beverages larger than 16 oz. in New York City are cases in point. Government bureaucracies predictably fall victim to what is called ‘regulatory capture’ by special interests benefitting from a regulation, much of which is referred to as ‘rent seeking’ by economists.
Government’s ability to promote the goals of some citizens at the expense of others leads to resources being diverted from asset production into political action. Many argue that the real goal of today’s environmentalism is actually worldwide socialism.
Another huge worry regarding excessive government environmental regulations are policies that erode the protection of property rights, thereby reducing the incentive and sometimes the ability of owners to protect and conserve their own resources. Paradoxically, this results in a reduction in the ability to protect resources economically.
Mistakes made when the free market controls the protection of the environment on a cost basis tend to be small and quickly self-correcting. Mistakes made by governments tend to be immense and frequently have long term deleterious impacts.
The government protection of property rights always wins the day for environmental protection. It is a fact that enables the United States to be superior in environmental protection to other nations, as our property rights are ingrained in our Constitution. We are one of the few nations in which the ownership of land grants ownership to the minerals beneath that land. This is quite different to countries such as Australia and most EU and Latin American countries where mineral rights are exclusively state-owned.
Unfortunately, the public rarely studies the details involved in what they may generally see as “anything to protect the environment must be good.” They have little incentive, therefore, to become knowledgeable about the details of public policy issues. Economists call this Rational Ignorance. It has resulted in governments enabling a great deal of legislation that has done little for the environment while impeding economic progress for the nation. It is these unproductive regulations which President Donald Trump and EPA Administrator Andrew Wheeler are attempting to undue for the public benefit without endangering the environment.
This is far more important that most people realize. CCR-II-Fossil Fuels shows “how prosperity makes environmental protection a higher public goal and provides the resources needed to achieve it.” The report explains:
“Once basic demands for food, clothing, and shelter are met, people demand cleaner air, cleaner streams, more outdoor recreation, and the protection of wild lands. With higher incomes, citizens place higher priorities on environmental objectives.”
CCR-II-Fossil Fuels details Environmental Kuznets Curves (EKCs), which demonstrate how environmental degradation rises with national per-capita income until a certain critical point is reached, after which the environment starts to improve.
CCR-II-Fossil Fuels cites Grossman and Krueger (1995) who:
“conducted an extensive literature review of air quality over time and around the world and found ambient air quality tended to deteriorate until average per-capita income reached about $6,000 to $8,000 per year (in 1985 dollars) and then began to sharply improve. Later research confirmed similar relationships for a wide range of countries and air quality, water quality, and other measures of environmental protection.”
Before EKCs were created, many informed people believed that wealthier countries damaged their environment more than poorer ones. The solution was to de-industrialization and reduce incomes, they maintained. But we now know that, while factors such as levels of educational achievement, income equality, and the strength of democratic institutions play a role, environmental protection is strongly linked with prosperity.
Indeed, the record shows throughout the world that environmental protection increases and thrives in the strongest economies. Anything that damages prosperity will concurrently damage the environment. Trump was completely correct when he said in his official 2019 Earth Day statement:
“Environmental protection and economic prosperity go hand in hand. A strong market economy is essential to protecting our critical natural resources and fostering a legacy of conservation.“
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