Property Rights Approaches to Global Warming: Scope and Limits

Private approaches are not a cure-all for global warming, but they are better than authoritarian schemes
Global warming has once again taken center stage in our political theater: The Supreme Court has agreed to hear a lawsuit by Attorney Generals of 12 states demanding that the Environmental Protection Agency regulate carbon dioxide like an air pollutant. California Governor Arnold Schwarzenegger - in a pointed snub to the do-nothing strategy of the Bush administration - recently fulfilled his promise to British Prime Minister Tony Blair to aggressively counter climate change and has agreed to cap carbon dioxide emissions in his state. And, of course, former Vice President Al Gore has made his celluloid debut with a movie about global warming.

All this movement - combined with greater scientific certitude that human beings are contributing to global warming - has fossil-fuel-dependent industries in the United States worried that it is only a matter of time before the government imposes some version of Kyoto-style emission-reduction mandates on them. Indeed, many companies such as Ford and Shell are trying to capitalize on the inevitable by publicly demanding government action on global warming in the hope, no doubt, of acquiring environmental clout to influence future policies in their direction.

The industry's "join them, if you can't beat them" strategy makes it hard to discuss the still outstanding lacunae in the science of global warming without being branded a head-in-the-sand ideological ostrich by the broader environmental movement. Nevertheless, the possibility of an overheating planet raises exceedingly knotty issues for those who favor free-market or property-rights-based approaches to environmental problems.

Global warming represents a classic tragedy of the commons. Earth's atmosphere is a vast un-owned frontier that everyone has an incentive to exploit � and no one has an incentive to protect. It is widely recognized that the best way to address this type of tragedy is by extending property rights — as opposed to restricting or regulating the activities of the people who use them. For instance, fish populations in oceans are thriving in countries and communities that have given fishermen harvesting rights. By contrast, the United States, that until recently relied predominantly on a regulatory approach limiting or banning fishing, continues to confront massive overfishing.

But the global atmospheric commons are not an obvious candidate for privatization. Some years ago, Terry Anderson and Bishop Grewell, explained why in a seminal paper, "Property Rights Solutions for the Global Commons: Bottom-Up or Top-Down?"

They noted that property rights can spontaneously emerge to resolve conflicts over resource use when the benefits of these rights outweigh the costs involved in defining, defending and divesting them — or what economists call transaction costs. So in a primitive society where there are enough pastures for everyone's cattle, for instance, there would be no need to divide the land into privately owned parcels that restrict common access because the cost of enforcing property rights would be too high relative to the benefits. This calculus might change if the land became scarce because people either discovered other uses for the pasture (e.g. agriculture) or the population of cattlemen increased.

But property rights can become viable even in instances that don't involve scarcity when social conditions serve to hold down transaction costs. A shared language or shared norms of what constitutes an actionable wrong in culturally homogeneous societies can lower the costs of defining rights, identifying violations and adjudicating disputes. In these conditions, property rights might emerge spontaneously from the bottom-up and become codified in the common law traditions of societies.

In less homogeneous situations, a rule of law enforced by a sovereign from top-down can lower the cost of dispute resolution and make property rights more viable.

The absence of scarcity or a common understanding of what constitutes harm to the global commons precludes a bottom-up property rights approach to stabilize global climate. "The transaction costs to identify each and every party harmed and causing harm would be prohibitive," noted Anderson and Grewell.

While transaction costs could be lowered by a top-down property rights approach that imposes a common understanding of what constitutes harm, these approaches have other problems, Anderson and Grewell acknowledge. Among them is what economists call rent-seeking, or the process by which market participants seek to gain wealth and market share — not by producing something of value — but influencing government largesse or policies in their direction.

Rent seeking has been a major problem in the carbon credit trading program — a top-down property rights scheme — that the European Union implemented last year to curtail greenhouse gas emissions. Each company covered by the program has tried to obtain as many carbon credits as possible since it can sell its spare credits. Indeed, the scheme has proved a huge windfall for the more effective rent seekers who have managed to capture a bigger share of carbon credits. Among them are large multinational oil companies such as British Petroleum and Esso. By contrast, less effective rent-seekers such as Greece's main electric company have lost out. The company ran out of credits mid-year, and had to buy more credits on the open market, making electricity much more expensive for Greek consumers.

Rent-seeking does not simply create minor inequities in an industry that have to be tolerated for some more important goal. Rather, over time it destroys industries by diluting their incentive for greater productivity and efficiency.

Don Boudreaux, an economist at George Mason University, in his Reason Roundtable essay, however, identifies an even deeper problem with top-down, cap-and-trade approaches than rent-seeking. In a normal market, how much of a commodity is to be traded is not determined artificially by some central planning authority outside of the market, it is determined by the market participants themselves. But in the case of carbon trading programs, the level of allowable emissions is set by political authorities who simply "don't have enough information about the particular circumstances and needs of individuals to know where to set emission levels so as to optimize their costs and benefits," he writes. In such instances, "government failure" — or government action that on balance reduces rather than enhances human welfare — becomes a very real possibility.

While it is difficult to use property rights to protect the global commons and avert climate change, it does not follow that government regulations are therefore the answer. Property rights still have a valuable role to play in helping humanity cope with the adverse effects of global warming, notes Julian Morris, Executive Director of International Policy Network and Visiting Professor at the University of Buckingham, in his Reason Roundtable essay. The threats that people often associate with global warming — cities or countries pushed below sea-level, vector-borne diseases, loss of bio-diversity — he points out, are all extensions of existing problems. And the societies that have the best track record of dealing with these problems are wealthy societies with well developed property rights and accountable rulers, in other words, liberal democracies. To the extent government regulations to reduce emissions of greenhouse gases thwart these free-market institutions and hands bureaucrats more power over individuals' economic life, he cautions, the "cure" may well be worse than the disease.

Shikha Dalmia is a senior policy analyst at Reason Foundation and editor of Reason Roundtable, which can be found here. An archive of Dalmia's work is here.

Related Reason Roundtable Columns:

» The Missing Elements in the "Science" of Global Warming
Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University

» The Role of Market Institutions in Enabling Adaptation to Climate, Change
Julian Morris, Director of International Policy Network

Shikha Dalmia is Senior Analyst