Climate Policy as Wealth Creation, Part 2

James K. Boyce

This is the second installment of a five-part series on climate policy adapted from regular Triple Crisis contributor James K. Boyce’s March 31 lecture, part of the Climate Change Series at the Honors College of the University of Pittsburgh. The lecture explores how to turn the atmosphere (heretofore treated as an “open access” resource, into which greenhouse gases can be dumped at no cost to the emitter) into a common-property resource. The first installment of the series is available here.

The full lecture and subsequent discussion are available, as streaming video, through the University of Pittsburgh website. Click here or on the image below.

The Tragedy of Open Access

The kind of problem that carbon emissions epitomize is what’s called in economics the “tragedy of open access.” It’s also sometimes called the “tragedy of the commons,” although since that phrase was coined back in 1968 by Garret Hardin, it’s become clearer to folks that there’s a difference between commons and open access. Very often, commons are, in effect, regulated through systems of common-property resource management. Open access is really the heart of the problem. The problem is that, currently, we’re able to put carbon dioxide in the atmosphere as if there’s no scarcity of the biosphere’s capacity to absorb emissions. There’s no price associated with doing so—it’s free. There are no property rights associated with this—no one owns the carbon absorptive capacity of the atmosphere. And the problem is that when you have resources that are treated as open access resources but in fact are in limited supply, you can get overuse of the resource—you can get abuse of the resource to the point where you’re damaging the resource and the economy.

The examples of the tragedy of open access range from grazing lands at a more local level to fisheries to, in this case, the global carbon balance of the biosphere. Congestion problems are something we all know about, and we all know about how those problems are addressed in practice, often not perfectly, but nevertheless, addressed in a satisfactory way. For example, parking automobiles raises a set of congestion problems. If parking space were totally free, you’d have a lot of cars piling up and it would be very difficult to get in and out of those parking spaces. In fact, if there weren’t any rules to govern them, there wouldn’t even be parking spaces, there would just be a big lot and people would park behind each other, making it impossible for the first person who parked to get his or her car out, etc. So we have regulation, we have those little lines that show you where to park. And we often have price as part of the solution—we have parking meters or parking fees, we pay those fees as a way to limit demand for the limited parking space—and if the price is set about right, you end up with a situation in which you don’t have excess demand for the parking spaces. You’ve got a price that limits the number of people who want to park there to what the parking space can contain.

Now, when we charge money to park on a city street, it doesn’t mean we’ve put the city street up for sale. In the same way, if we charge money to park carbon in the global atmosphere, it doesn’t mean we’re putting the atmosphere up for sale. Sometimes, you’ll hear people say, “Oh, the atmosphere shouldn’t be for sale.” I’m not talking about making the environment something for sale that can be used and abused by anyone without constraints and is open to the highest bidder. What I’m talking about is charging for use of the limited space that’s up there. Having a price of zero is still having a price, but it’s having the wrong price—and it’s better to be approximately right than precisely wrong. Therefore, having a positive price, even if we don’t get it exactly right, is a good thing to do. Using a cap, I think we can come pretty close to getting it exactly right.

When we put a price on carbon, what we’re doing is we’re moving from an open-access regime, which is a situation where there are no property rights, to create a set of property rights. We already do that when we have regulatory standards, which are sometimes called “command and control regulations” in a kind of unflattering allusion to the old Soviet economy. But regulations already assert a certain type of property right, the right of the public acting through the government to make rules about how the resource is used. Putting those little lines between the parking sports and saying you have to park between the lines is a type of regulation. Renewable portfolio standards, low-carbon fuel standards, etc., those are regulations, and by putting those regulations in place, we already are moving away from pure open access towards a certain type of property right, public rights to regulate the use of the resource.

Putting a price on emissions takes that process one step further. It not only says there are rules about where you can park, etc., there are also prices charged for using that resource. So it’s moving along that spectrum from a complete absence of property rights towards a more full specification of property rights.

In terms of the “polluter pays” philosophy, the first set of regulatory standards-based property rights involves the polluter paying something. The polluter has to pay the cost of complying with the regulations, what economists call the “cost of abatement.” In the second case, the polluters not only pay the cost of abatement—the cost of reducing emissions by switching to alternative fuels, investing in efficiency, etc.—they also pay for the pollution they don’t abate. They pay for the pollution they continue to emit. So in terms of the distinct “sticks” in the “bundle” of property rights, a phrase often used by legal scholars, what we’re doing by adding carbon pricing is we’re adding another stick into the bundle of property rights around the use of the atmosphere as a sink for carbon emissions. We’re adding a stick that requires polluters paying for the emissions that they don’t reduce. We’re moving beyond simply the property right to set access rules to add the property right to charge prices, and therefore a right to receive income, an income that sometimes is called a “resource rent.”

Where does that income come from? If you price carbon emissions, those become part of the cost of fossil fuels, and in the end, it’s consumers who pay those higher prices. How much do they pay? They pay in proportion to their carbon footprint. Those who consume more fossil fuels pay more. Those who consume less fossil fuels pay less. But the fact that they pay raises an interesting and important question, which has not received as much attention in the realm of climate policy as I believe it should: If consumers are paying higher prices, who is it that’s going to get that money? Who’s going to receive the money that people pay in higher prices?

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