The current discussion on ways to tackle industrial emissions demonstrates the right’s hot and cold relationship with the market. The Harper government is looking to a series of environmental regulations that will place a cap on air pollutants and greenhouse gasses, and will introduce motor vehicle, fuel and energy efficiency standards. I’m not interested in criticizing the regulations themselves, except to say that they are weak and won’t achieve the level of industrial emission reductions necessary. What is far more interesting is the Conservative decision to go the regulatory route rather than adopting a market based approach.
Under the neo-classical framework, environmental problems like climate change and smog are viewed as market failures. Simply put, no market exists for pollution because property rights are not assigned to the air we breath. I couldn’t sell my allocation of clean air to the car driving neighbour next door, because there would be no reason for her to buy it – polluting is effectively free. The policy solution leading from this framework, of course, is to create a market where one doesn’t exist. Under this solution, the cost of pollution on all “economic agents” is estimated, and a tax is set such that the marginal benefit of pollution (i.e., industrial production) equals the marginal cost of production plus the marginal costs of pollution (i.e., environmental impact of smog). In plain language, demand equals (adjusted) supply.
For all intents and purposes, Kyoto does exactly this, but uses a slightly different market instrument (tradeable permits). In other words, the Harper government has dismissed the market policy approach in favour of what the Conservative Party would normally describe as “heavy handed regulation”. But it’s clear that market friendly environmental policies aren’t market friendly — this isn’t a case of Harper forgetting everything he learned in econ grad school — he’s concerned about the impact on his friends in Alberta’s oil patch. So, I guess the market is wonderful… when it’s profitable. This point isn’t exactly a stunning revelation – more like an amusing observation.