Applying Market Principles to the Cause of Saving the Environment

Environmental problems threaten the future of the world economy in two ways. One is widely discussed. Abuse of the water, air and earth that are our common habitat can be enormously costly. The environmental damage done by and under communist governments should awaken even the most complacent to the size of the potential costs of abusing natural endowments.

The other potential danger is the enormous cost of protecting the environment if bureaucrats, Greens and many so-called environmentalists get their way.

At the Rio “Earth Summit” this June, the demands for payment were presented as a blank check to be signed by the developed countries made payable to the United Nations and the less-developed countries. Many countries signed. Fortunately, the United States did not.

What the U.N. bureaucrats and their allies demand is a free transfer of technology, plus up to $125 billion a year to help the Third World safeguard its environment, and much more. Our technology is to be given away at the discretion of the recipients along with a payment for using it.

The Rio program was developed by the U.N.’s Conference on Environment and Development (UNCED). This group is the intellectual and political heir to the U.N. Conference on Trade and Development (UNCTAD) that demanded a new international economic order based on large wealth transfers from the United States and other developed countries in the 1970s and early ‘80s.

UNCTAD went into eclipse after President Ronald Reagan told them, at a meeting in Cancun, Mexico, that the path to development lies through markets. He urged them to look to their own domestic policies, not increased transfers from the developed countries, to facilitate growth.

Those countries that took that advice--including much of East Asia, Chile, Mexico and most recently Argentina--prospered. The others mostly languished.

Similar demands reappeared a few years later as part of the Law of the Sea Treaty. This treaty would have transferred developed countries’ mining technologies to the United Nations as steward for the world’s poor.

The mineral resources under the sea were to become the property of the United Nations, to be sold by the world body. The revenue was to be used as U.N. bureaucrats chose to use them. Reagan, joined by British Prime Minister Margaret Thatcher, sank the treaty.

The same old demands have now reappeared, revised and updated by UNCED. President Bush, properly and courageously, stood alone among world leaders by refusing to sign the blank check.

Environmental demands pose a difficult problem. There are politically active environmental groups in all developed countries.

Many, but not all, of these groups are hostile to market solutions to environmental problems. Often they favor “command and control” methods--the kind that failed in Eastern Europe, China and the former Soviet Union. They want the government to order factories to close, forests to be preserved intact, wetlands to be left as swamps, and on and on. They reject the idea of using markets, science and engineering technology to find national low-cost solutions to environmental problems.

Environmental issues differ in one important respect from trade, economic development and mining the seabed, where private market solutions unaided are viable, successful and take account of competing interests.

Environmental problems differ because market prices do not incorporate fully the social costs of using resources such as water and air. A producer who pollutes the air or water uses a common resource without paying for it.

The economic solution to environmental problems of this kind subjects the use of common resources to a market test. Producers and consumers are forced to pay for the use of air and water, just as they pay for labor, capital and other materials that they use.

There are now some carefully thought-out programs of this kind. A few have been implemented; another was recently approved for detailed study by California’s South Coast Air Quality Management District. For example, a limit has been set on the amount of air pollution in many localities. Companies receive licenses that limit their right to pollute. If a producer can find a way to lower pollution enough, he can sell the rights to someone else. In this way, the marketplace reconciles the desired degree of environmental protection with productive efficiency.

The benefits of market-based solutions to environmental problems are not limited to the reassignment of costs and payments.

Market pricing encourages the development of technologies that reduce environmental damage and eliminates producers and products that are wasteful of resources by encouraging the development of substitutes. These substitutes lower the cost to society of achieving environmental goals.

Market principles can be used globally. Countries can sell permits that restrict pollution, charge consumers for refuse disposal, and use charges and fees to limit claims on common resources. Not all these techniques have been fully tested and applied, but most of them are close to the market principles that we use every day to assure a rational, efficient allocation of resources and better protection of the environment.

The problem is that the people who brought us UNCTAD, the Law of the Sea Treaty and the Earth Summit are not interested only in protecting the environment. They want it done their way, whatever it may cost in income and living standards.

They have been wrong many times. After the oil shock of the 1970s, environmental groups such as the Club of Rome warned that we would run out of oil and other resources by the end of the century.

In the 1980s, environmentalists proclaimed the dangers of nuclear winter and a coming Ice Age. People were frightened by the alar and cyanide scares into not eating apples and grapes.

Now the rabid environmentalists greatly overstate available evidence on global warming. In fact, many scientists continue to believe that there is a good prospect of lower temperatures in the 21st Century--global cooling. No one can be certain.

At Rio, President Bush and his team stood alone against the political pressure. Other governments took the politically expedient route of going along. For his courage and good sense, President Bush was pilloried by the press, the environmental lobby and those who would benefit from additional wealth transfers.

The U.S. position is not “do nothing.” The federal government now spends more than $4 billion a year on the environment, a 12-fold increase in 20 years after adjusting for inflation. Industry and local governments spend additional billions.

If we let them, science, technology and applied economics can reconcile economic growth, rising living standards and protection of the environment. If not, we will all overpay and be poorer.