Today is Blog Action Day, and in honor of this concerted effort of thousands of bloggers worldwide, I am dedicating my post today to the environment. Like (almost) every post on Money and Such, I will be talking about the environment in the context of personal finance and the economy.
Regular readers of money and such know that I am a fervent supporter of free markets. Free markets have a lot to do with the environment. In fact, it can be argued that most of the environmental problems that we are facing today are actually economic problems. How so? If people had to pay for the full and true costs of their actions, they would make different economic decisions. Let me give you an example:
If a company is thinking about building a new coal power plant, they are taking into consideration the cost of building it, the cost of shipping coal to the plant, the cost of operating the plant, the cost financing the construction, and many other such costs. However, they are not taking into account the cost of the acid rain that they may be causing; they are not taking into account the impact their carbon emissions may be having on temperature, rainfall and weather patterns in other parts of the world, and so forth. Why not? Simply because they do not bear these costs.
It's not that these costs are not real. These costs are very real and have been repeatedly demonstrated to exist. The reason the company is not considering such important environmental implications is a trivial but critical one: someone else is paying for these specific costs. While the company will be earning the return from generating and selling the electricity from the polluting power plant, others will be paying for much of the harmful side effects. Costs paid by third parties are known as externalities, and should be eliminated.
If we want people to make the correct economic decisions, they must have complete and correct information on which to base their decisions, and in economics there is only one kind of information that counts: the price.
To get back to our example: the company that is planning a new coal power plant is not doing so because they have a particular sentimental attachment to coal. No siree. They are building a coal power plant because they sincerely believe that this is the best way for them to make money. That's a good thing. This is the way that the capitalist system works. If you want them to take a different approach, all you have to do is give them the right information about the true cost of their activities, and fortunately, this is very easy to do: charge them a fee which is equal to the costs that other people will bear as a result of the company's electric production operations.
If said company now has to pay an extra 10 cents per kilowatt to offset the cost of the harmful carbon emissions, the acid rain and the pollution to local streams and destruction of habitat, they may find that building a coal fired power plant is no longer economically justified. It may now makes more economic sense to invest in cleaner, less impactful forms of power generation, such as solar, wind and, yes, possibly even nuclear.
Don't get me wrong here. I am not talking about imposing penalties or excessive fees to give people an incentive to switch. All I am talking about is assessing a fee equal to the actual cost needed to offset any harmful effects from one's activities. I am talking about paying for the damage you actually do.
Taxing carbon emissions can be the first step towards ensuring that polluters pay for the true cost that their pollution imposes upon society. This a socially progressive and just tax that will impact pretty much everyone in society. If you drive a car, you will have to pay such a tax. If you use electricity from the grid (unless you are purchasing renewable power), you will have to pay this tax. If you purchase a gallon of milk at the store, you will have to pay this tax. This tax will be all around you, it will become a part of life. Guess what, pretty much everything we do in the modern economy generates carbon emissions. Once we all start paying for those emissions, and for the harmful effects that they cause, we will have a big, monetary incentive to reduce our carbon use.
Finally, I am not suggesting that we must immediately pay for the full cost of our carbon emissions. Such a sudden change will no doubt impose an unacceptably high cost on the world economy. However, we can start with this tax today and gradually phase it up to its full level over a 20 year period. This will allow people to adjust and phase out their use of harmful carbon and will allow industry plenty of time to adjust.
The market is a very powerful tool for innovation and societal good. If all true costs are reflected in the market prices we pay everyday, the magnitude of our environmental problems will decline dramatically. Environmental problems are not a failure of free markets, they are a symptom of markets that are operating without adequate information about the true price of commodities. Free markets, armed with complete information, are a powerful tool for solving the critical enviromental problems that humanity faces today. Hopefully someone in Washington is listening.