Coase In Action

I first heard about Ronald Coase in college in an economics class. A few years later, the so-called Coase Theorem was put into action in the 1990 Clean Air Act. The law called for cap and trade "regulation" of sulfur emissions to address acid rain. In effect, anyone should be able to buy and sell sulfur dioxide emissions. If you are a manufacturer (probably an electric utility) who emits sulfur dioxide, you would then have to purchase emission credits if you wanted to emit SO2. It would be up to you to determine the cheapest way to comply with the law - you could purchase emissions credits, scrub your exhaust to remove the sulfur, switch to a cleaner fuel, or shut down.

Coase was seen as a better way to address pollution than the older methods. One of those was a Pigouvian (or Pigovian) tax, which is essentially what people are calling for when they say that we should tax fuel to address global warming. The Pigouvian tax "internalizes" the pollution externality, so the polluter is motivated reduce the pollution in order to reduce his costs. The problems with Pigou are that it is hard to figure out how much to tax and the victims of the pollution are (usually) not compensated. Another method for addressing pollution is command and control: decide how much pollution or what method of removing it is acceptable, then dictate that to the polluter. One problem with this is that it is subject to politics: politicians may pick the wrong technology, or they may pick a solution for the wrong reasons. For example, the 1977 Clean Air Act "grandfathered in" older boilers, and scrubbers were preferred to cleaner fuel because the scrubber solution favored dirtier, brown, Eastern coal over western coal. Eastern coal mines were more unionized than western mines, and the unions had a definite preference. Thus, to mollify regulated utilities and unions, a less efficient, dirtier, more expensive solution was preferred to a cleaner solution (and you can bet that the companies that made scrubbers weren't too sad about it).

The best (most readable) explanation I have ever read of the Coase theorem is in David Friedman's Law's Order, Chapter 4. I'm not even going to attempt it here, go read the link (the entire book is online). The bottom line, though, is that application of Coase's ideas (calling it a "theorem" was not his idea, nor did he suggest these applications in the original paper, "The Problem of Social Cost") internalizes pollution by assigning property rights and allowing the actors to trade their way to an efficient outcome (caveats, yadda, yadda - see Friedman link above). The 1990 Clean Air Act also allowed the rights to be traded in open auction, which means that people who aren't necessarily polluters or victims can buy and sell emissions permits. One of the parties buying tradeable permits in the last few auctions has been the Acid Rain Retirement Fund, a non-profit group that buys emissions permits and then refuses to exercise them. Since the number of permits is capped by law, that means that the total amount of pollution is reduced below what the law allows.

That is just one example of free market environmentalism; other similar examples would be outright land purchases, conservation easement purchases, or unused grazing or water right purchases by conservationists. Groups such as Trout Unlimited, Ducks Unlimited, and The Nature Conservancy have used these methods to protect and even to recover land, rivers, and wetlands. It doesn't involve endless and divisive litigation, it doesn't involve command and control regulation, and it relies on rather than undermines property rights. This is just the kind of thing you might have hoped for when Terry Anderson showed up in the 2000 campaign as a Bush advisor. So why, oh why, does the Bush Administration oppose free market environmentalism?

Because of the divisive tactics they use, groups like the Sierra Club drive wedges between environmentalists and landowners. Ranchers who might otherwise be in favor of conservation (such as the Quivira Coalition) suddenly find themselves fighting for control of their land and therefore against environmentalists and bureaucrats run amuck. Consider the Malpais Borderlands Group, ranchers along the New Mexico/Arizona border who arranged a grassbank (essentially a grazing coop that allows some areas to recover without putting the rancher out of business). One of the conservation methods they decided to use was to let wild fires run their course ("controlled burns" were pioneered by TNC, not the BLM). Unfortunately, the BLM decided that they would oppose them and put fires out even on private property. Or consider the case of Dayton Hyde in his attempt to build a refuge for sandhill cranes. Suddenly, he lost control of his property as it fell under federal control because it was a wetland, even though it was his action that created the habitat! But some environmental groups are finally realizing that blanket opposition to ranching is a bad idea because the alternative for the ranchers is to subdivide for development.

Yes, according to this John Tierney article (The Sagebrush Solution ($$) in the New York Times (via The Agitator), free version here), the Bush Administration has demonstrated once again that they oppose such classical liberal principles as free markets and small government. The Grand Canyon Trust is a nonprofit group that buys land just like The Nature Conservancy; it is headed by Bill Hedden and concentrates on conserving land in northern Arizona. Dell LeFevre is a 5th generation rancher who fought the Clinton Administration's Grand Staircase-Escalante National Monument land grab. LeFevre and Hedden made a deal to sell rights to the grazing permits LeFevre leases from the BLM. It was a win-win-win situation in which some areas will be preserved, the ranchers will be able to move their cattle to less valuable (and safer) land, and taxpayers get more conservation at no extra cost. Makes sense, right? Apparently not to Bush appointees at the Interior Department, who have decided to stop the deal from going through. They apparently base their reasoning on local politicians' claims that this will destroy their "ranching way of life" (but it helps a rancher!?) and on a reading of the law that allows them to determine for what the land is "chiefly valuable" (but the rancher and the conservationist have done that through trade?!).

So apparently, the Bush Administration may trust you with your own money, but they don't trust you to figure out the best use of your own land. And the difference is ... ?

Oh well, no time to waste. I've got a permit to emit several hundred pounds of sulfur (that's the certificate at the top), and I figure I better get busy emitting it before some bureaucrat decides that I don't know what the best use is.