Free Market Environmentalism and Climate Change

by H. Spencer Banzhaf

This year is PERC's 30th anniversary, and looking back it has many intellectual successes to celebrate, as it has met the challenge of showing how free-market solutions can solve many environmental problems. Looking forward, it will surely have many more successes as it continues to wrestle with new challenges. One of those challenges may be global climate change. If climate change is happening, and if it proves to be harmful to human welfare, then free-market environmentalists should face the challenge by turning the lessons they have learned from smaller problems to that bigger one.

While much maligned from the right, a "true" cap-and-trade approach actually has much to recommend itself to free-market environmentalists wrestling with climate change. At its core, the cap-and-trade approach is simply a market in property rights to the atmosphere. This trade-based approach limits the government to defining and enforcing property rights to the atmosphere, while leaving markets to determine the best way to reduce pollution. In this respect, it has the same advantages as markets in other environmental resources, including water and in-stream flows, fisheries, and open space.

Much of PERC's research has centered on proving those advantages time and again. Markets provide people with incentives to conserve and for entrepreneurs to find new, innovative ways to reduce pollution. Of course, PERC's research has also shown that defining property rights can have pitfalls as well, if interested parties waste resources trying to grab those rights from one another. Navigating those factors will be the challenge for a successful climate policy. Given that this has been its specialty for 30 years, PERC is bound to have another productive (and busy!) 30 years ahead.

H. Spencer Banzhaf is a senior research fellow at PERC and an associate professor of economics at Georgia State University.