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  • J. R. Clark (a1) and Dwight R. Lee (a2)

This paper considers prevailing environmental policy in the United States with the emphasis on liberty, markets, utilizing information, entrepreneurial discovery, and the economic analysis of political decisions (public choice). The general discussion is illustrated by the concern over global warming and policies for addressing this concern. The political incentives to confront environmental problems directly with mandates, restrictions, and subsidies ignore the power of liberty and market incentives to solve problems by fostering an impressive network of information transfer, increasing innovation, and expanding prosperity. Indeed, most environmental policies systematically suppress liberty, censor the communication of information, and retard innovation and prosperity, with the result that they provide less environmental quality at greater cost than is possible. While such flawed policies might be justified in cases where pollution problems pose clear, serious, and immediate threats, we argue this is not true of global warming, and the most effective response to concerns over carbon emissions may be limiting the discretionary power of government to take direct action and rely on the indirect effects of liberty and market incentives to move us beyond the petroleum age more quickly and efficiently than will result from the direct action of government.

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1 Hayek Friedrich A., “The Use of Knowledge in Society,” The American Economic Review 35, no. 4 (September 1945): 519–30.

2 Lee Dwight R., “The Internet, the Market, and Communication: Don't Ignore the Shoe while Admiring the Shine,” The Cato Journal 20, no. 3 (Winter 2001): 477–85.

3 Buchanan James M., “Order Defined in the Process of Its Emergence,” in The Logical Foundations of Constitutional Liberty: Volume 1 of the Collected Works of James M. Buchanan, ed. Brennan Geoffrey, Kliemt Hartmut, and Tollison Robert D. (Indianapolis, IN: Liberty Fund, 1999), 244–45; emphasis in the original.

4 The argument here does not depend on price information being perfect. The information communicated by markets, even without politically induced distortions from taxes, subsidies, and regulations, is often imperfect because of externalities. But externalities invariably result from the lack of market exchanges that would often be possible if political restrictions were removed or if transferable property rights were created. While government theoretically can correct such externalities with taxes, subsidies, and regulations, its decisions are always distorted by their own externalities, as organized groups see political opportunities to secure benefits paid for by others. These political externalities are often worse than the uncorrected market externalities.

For example, environmental regulation of coal-fired electricity plants has been used by eastern coal interests to reduce competition from western coal that was being used to reduce sulfur emissions. The result was worse air pollution and higher electricity costs. So information communicated by market prices does not have to be perfect to be more accurate than information communicated through the political process. See Navarro Peter, “The Politics of Air Pollution,” The Public Interest, no. 50 (Spring 1980): 3644.

5 “CAFE Overview,” (accessed July 30, 2008).

6 Hayek, “The Use of Knowledge in Society”; Smith Adam, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), vol. 1, in Campbell R. H. and Skinner A. S., eds., Glasgow Edition of the Works and Correspondence of Adam Smith, vol. 2 (Indianapolis, IN: Liberty Fund, 1981), 456.

7 Schumpeter Joseph, Capitalism, Socialism, and Democracy (New York: Harper, 1942), 83. Elaborating on the process of “creative destruction,” Schumpeter observed: “A system—any system, economic or other—that at every given point of time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter's failure to do so may be a condition for the level or speed of long-run performance” (emphasis in the original).

8 A broader discussion of public choice considerations appears in the next section.

9 See Higgs Robert, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987), for a history of the connection between crises (real, imagined, and engineered) and government growth. See also the Stephen Schneider quotation in note 19 below.

10 “An Inconvenient Truth,” (accessed July 8, 2008).

11 Moore Thomas G., “Why Global Warming Would Be Good for You,” The Public Interest, no. 118 (Winter 1995): 8399. This statement is from the 1991 book World on Fire: Saving an Endangered Earth by former Senate majority leader George Mitchell, and is quoted in Moore (83). Moore is skeptical that global warming is a problem.

12 See note 10.

13 Conceivably, even if global warming is entirely the result of natural phenomena, it might be possible to enact policies that increase human welfare by countering the warming. However, most of those claiming that urgent action is needed to halt global warming are talking about changing the human behavior that they believe is causing the problem.

14 Or if there is a scientific consensus, it has changed rather dramatically in recent decades. See note 20 below.

15 See Moore, “Why Global Warming Would Be Good for You.”

16 Deschenes Olivier and Moretti Enrico, “Extreme Weather Events, Mortality, and Migration,” NBER Working Paper 13227 (Cambridge, MA: National Bureau of Economic Research, July 2007), (accessed July 23, 2008).

17 See “Copenhagen Consensus,” Wikipedia, (accessed July 8, 2008). The global warming initiatives ranked behind policies to combat AIDS, reduce malnutrition, liberalize trade and immigration, control and treat malaria, research new agricultural technologies, and reduce the prevalence of low birth weight. See the Web site for more details, including dissent from experts not included among the eight judges.

18 U.S. ethanol policy is a case in point. Even if we ignore the problems with that policy discussed in Section II, we shall see in Section V that substituting ethanol for gasoline does little, if anything, to reduce the emission of greenhouse gases.

19 Bandow Doug, “Global Politics, Political Warming,” The Freeman 48, no. 1 (January 1998): 3436. Speaking of being honest, consider the statement that Stephen Schneider, an activist in the fight against global warming (who in the 1970s was warning of global cooling), made to the Boston Globe in the early 1990s: “It is journalistically irresponsible to present both sides [of the global warming issue] as though it were a question of balance…. I don't set very much store by looking at the direct evidence…. To avert the risk we need to get some broad-based support, to capture the public imagination. That, of course, means getting loads of media coverage. So we have to offer up some scary scenarios, make some simplified dramatic statements and little mention of any doubts one might have…. Each of us has to decide what the right balance is between being effective and being honest” (quoted in ibid., 35).

20 Sullivan Walter, “Scientists Ask Why World's Climate Is Changing: Major Cooling May Be Ahead,” New York Times (May 21, 1975): 45; Gwynne Peter, “The Cooling World,” Newsweek (April 28, 1975): 64. In the New York Times, Sullivan wrote: “Sooner or later a major cooling of the climate is widely considered inevitable. Hints that it may already have begun are evident.” We were informed in Newsweek by Gwynne that “there are ominous signs that the Earth's weather patterns have begun to change dramatically and that these changes may portend a drastic decline in food production—with serious political implications for just about every nation on Earth…. The evidence in support of these predictions has now begun to accumulate so massively that meteorologists are hard-pressed to keep up with it…. The central fact is that after three quarters of a century of extraordinarily mild conditions, the Earth's climate seems to be cooling down…. The longer the planners delay, the more difficult will they find it to cope with the climatic change once the results become grim reality.” The article went on to mention that meteorologists “are almost unanimous in the view that the trend will reduce agricultural production for the rest of the century.” And bold actions were being recommended, “such as melting the Arctic ice cap by covering it with black soot.”

21 Nordhaus William D., “Reflections on the Economics of Climate Change,” Journal of Economic Perspectives 7, no. 4 (Fall 1993): 1125. The point here is consistent with Nordhaus's argument that “perhaps we should conclude that the major concern lies in the uncertainties and imponderable impacts of climate change rather than in the smooth changes foreseen by the global models” (23). This does not mean that Nordhaus would agree with our argument, since he is emphasizing the value of flexible government approaches rather than recommending more reliance on markets as the best way to combat global warming.

22 We ignore the value that private firms can realize from a reputation for being environmentally responsible. We do so both for the sake of argument and because, as will become clear, we believe that the most important way relying on markets can reduce carbon dioxide has little to do with the incentive that firms have to be environmentally responsible, even though that is a useful incentive.

23 See note 7.

24 Hayek Friedrich A., introduction to Frederic Bastiat, Selected Essays on Political Economy, ed. de Huszar George B. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 1995), ixxii. As Hayek pointed out, “Freedom is important in order that all the different individuals can make full use of the particular circumstances of which only they know. We therefore never know what beneficial actions we prevent if we restrict their freedom to serve their fellows in whatever manner they wish. All acts of interference, however, amount to such restrictions. They are, of course, always taken to achieve some definite objective. Against the foreseen direct results of such actions of government we shall in each individual case be able to balance only the mere probability that some unknown but beneficial actions by some individuals will be prevented. In consequence, if such decisions are made from case to case and not governed by an attachment to freedom as a general principle, freedom is bound to lose in almost every case” (p. x).

25 Hayek Friedrich A., Law, Legislation, and Liberty, Volume 3, The Political Order of a Free People (Chicago: The University of Chicago Press, 1979), 28; emphasis added. See also “Economics Focus: Poverty and the Ballot Box,” The Economist (May 14–20, 2005): 80. The Economist also addressed the case of reducing poverty with the statement: “[D]emocracies have a bias towards ‘direct’ methods of tackling poverty, such as subsidies and hand-outs, which, in the long run, are less effective than ‘indirect’ methods—i.e., those that generate faster economic growth.”

26 For a summary of the results from these studies, see Tietenberg Tom, Environmental and Natural Resource Economics, 7th ed. (Boston: Pearson Education, 2006), 380.

27 See H. Sterling Burnett, “Understanding the Precautionary Principle and Its Threat to Human Welfare,” elsewhere in this volume.

28 We ignore here the possibility that a warmer planet might, on balance, improve human well-being.

29 Keeney Ralph L., “Mortality Risks Induced by Economic Expenditures,” in Viscusi W. K. and Gayer T., eds., Classics in Risk Management, vol. 2 (Northampton, MA: Edward Elgar Publishing, 2004); Chapman Kenneth S. and Hariharan Govind, “Do Poor People Have a Stronger Relationship between Income and Mortality Than the Rich?Journal of Risk and Uncertainty 12, no. 1 (January 1996): 5163. More than money, or material wealth, is at stake here. A reduction in disposable incomes due to government regulation is often more of a risk to life than the problem being regulated against. For example, Keeney estimated that a statistical life is lost for every $7 million (in 1980 dollars) spent on regulation. In other words, if a regulation to reduce a risk costs more than $7 million (again in 1980 dollars) per life it saves, it is likely killing more people than it is saving. Chapman and Hariharan found that this regulatory risk to life is about twice as large for people in the bottom 20 percent of the income distribution as for those in the top 20 percent.

30 Buchanan James and Tullock Gordon, The Calculus of Consent (Ann Arbor, MI: University of Michigan Press, 1962).

31 “TIME Poll: Global Warming,” TIME (March 26, 2006),,9171,1176975,00.html (accessed July 8, 2008); Kluger Jeffrey, “Global Warming Heats Up,” TIME (March 23, 2006),,9171,1176081-2,00.html (accessed July 9, 2008). According to a 2006 TIME/ABC News/Stanford poll, 85 percent of Americans believe that the world's temperature has been going up slowly over the past 100 years, and 80 percent believe that the cause is either mostly human activity or about an even split between human activity and natural causes. In another 2006 TIME/ABC News/Stanford poll, 87 percent believed that government should take action to reduce global warming.

32 Broder John M., “Panel Passes Bill to Limit Greenhouse Gas Emissions,” New York Times (December 6, 2007): A29. For example, Senators Joseph Lieberman (born in 1942) and John Warner (born in 1927) sponsored legislation that calls for carbon dioxide and other greenhouse gas emissions to be reduced by roughly 70 percent below 2005 levels by 2050. This bill was approved by the Environment and Public Works Committee in the Senate before being tabled in committee.

33 See “Green Protectionists,” The Economist (November 17–23, 2007): 14, for a discussion of special interests masquerading behind global-warming concerns to push private agendas. If the political desire to take real action against the threat of global warming were as strong as the desire to cater to organized interests, we would expect to see the U.S. Congress eliminate subsidized insurance for homes (often second homes of the wealthy) along the East Coast and on the barrier islands.

34 According to “Cheap No More,” The Economist (December 8–14, 2007): 81–83, “America's ethanol programme is a product of government subsidies. There are more than 200 different kinds, as well as a 54 cents-a-gallon tariff on imported ethanol…. Federal subsidies alone cost $7 billion a year (equal to around $1.90 a gallon)” (ibid., 82).

35 Eaves James and Eaves Stephen, “Neither Renewable Nor Reliable,” Regulation 30, no. 3 (Fall 2007): 2427.

36 Naik Gautam, “Biofuels May Hinder Antiglobal-Warming Efforts,” Wall Street Journal (February 8, 2008): A4. Let's not be completely negative, however. By driving up the price of corn, and food in general, ethanol could reduce gasoline consumption by encouraging people to lose weight. A 2006 study concluded that obesity in America alone required an additional 938 million gallons of gas annually to haul excessive body weight around in cars and light trucks, and that does not account for the extra fuel required by airplanes. This is not a large percentage of total fossil fuel consumption, but it is not much less than Eaves and Eaves estimate would be saved by using the entire 2005 American corn crop for ethanol.

37 Krauss Clifford, “U.S. Growers Want Ethanol Deal to Offset Mexican Sugar Cane Imports,” International Herald Tribune (October 18, 2007), (accessed July 8, 2008).

38 Baram Marcus, “Buy a Hummer, Get a $25,000 Tax Break,” ABC News (June 28, 2007), (accessed July 9, 2008).

39 Wald Matthew L., “Calculating Energy Bill's Real Figures,” New York Times (December 4, 2007): C1, C5.

40 Harris. Lyle V., “An Oil Junkie Sees the Light,” Atlanta Journal-Constitution (December 2, 2007): B6.

41 Williams Jonathan, “Local, State, and Federal Gas Taxes Consume 45.9 Cents Per Gallon on Average,” Tax Foundation (September 13, 2005), (accessed July 8, 2008).

42 Antonelli Angela and Wilson D. Mark, “Why Congress Should Cut the Gas Tax,” Executive Memorandum No. 664, Heritage Foundation (March 21, 2000), 1; Strom David, “Eliminate the Federal Gas Tax,” Town Hall (December 4, 2007), (accessed July 8, 2008). According to Antonelli and Wilson, “During the past ten years, Congress and the President increased the gas tax by more than 50 percent—not to build roads, but to boost tax revenues to pay for general government spending. In 1990, Congress and the President increased the federal gas tax by 5 cents per gallon (2.5 cents went to general revenue rather than for transportation spending), and just three years later, they hiked the gas tax by 4.3 cents for general revenue and more spending.”

43 This offset market might allow government to issue fewer carbon permits than it otherwise would, if carbon emitters who buy more offsets may then buy correspondingly fewer government-issued permits.

44 See Story Louise, “F.T.C. Asks If Carbon-Offsets Money Is Winding Up True Green,” New York Times (January 9, 2008): C1, C4. Story reports: “As more companies use [carbon] offset programs to create an environmental halo over their products, the [Federal Trade] Commission said it is growing increasingly concerned that some green marketing assertions were not substantiated. Environmentalists have a word for such misleading advertising: ‘Greenwashing’ ” (C1).

45 The government could distribute the carbon permits in response to rent-seeking as the Federal Communications Commission (FCC) used to do with the electromagnetic spectrum before 1994. But since 1994 the FCC has auctioned off the spectrum, and the government would probably do the same thing with carbon permits.

46 See Harris, “An Oil Junkie Sees the Light.” These and other suggestions were justified by Harris in part because of “the potentially dire consequences of man-made global warming.”

47 Rubin Paul H., “Folk Economics,” Southern Economic Journal 70, no. 1 (July 2003): 157–71.

48 Marshall Alfred, Principles of Economics (1890), 8th ed. (London: Macmillan and Co., 1966), 163n. 1.

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