The nature of capital investment is that an upfront expenditure is made with the hope of producing a stream of benefits over time that more than pay for the initial expenditure. Capital investments are thus risky, because that stream of benefits may not materialize. The economic environment may deteriorate, induced by new patterns of trade or a technological advancement creating fresh competition. Or the legal environment may darken, if it is later discovered that the production process is harmful, or if product is harmful in a way that was unknown at the time of investment. When those economic or legal threats present themselves, owners of capital rally to preserve the value of their capital. The bigger the capital, the stronger the rally. When capital owners attempt, through legal, political, or extra-legal means to protect their capital from these changes, they are said to engage in rent-preserving activities. The result is a costly policy conflict.

While it would be impractical to try and regulate capital investment, it is still surprising that there is so little to deter risky investments. It is still easy to invest in capital equipment that produces harmful effects or products. The reasoning would seem to be the notion that capital investments are purely private decisions. We leave it to the private investor to consider the private benefits. As to the potential for public harm, a dual system of ex post and ex ante disincentives are supposed to send a signal to prospective investors. Ex post, liability could be costly, and could serve as a deterrent for engaging in potentially harmful behavior, by investing in harmful capital. Ex ante, a regulatory state is supposed to intercept the most dangerous industrial practices, and should disincentivize the capital investments that enable them. These dual disincentives have been insufficient in stemming the investment in harmful capital.

Capitalism is not the reason that humankind has so badly mistreated its environment. It is true that capitalism has taken a very wrong turn, and having gone down this route, it is difficult to change it. But there is nothing about capitalism preordaining it to produce environmental destruction. Capitalism has taken on a malignant form, but it has been steered by mistaken political choices, born of political failures, greed, tribalism, and that toxic cocktail of human arrogance mixed with abject ignorance.

In May 2020, during the COVID-19 crisis, which pummeled markets and industries of almost all types, fourteen Republican senators and two Republican congressmen wrote to the President, urging him to “use every administrative and regulatory tool at your disposal to prevent America’s financial institutions from discriminating against America’s energy sector … .”

Just a little more than 150 years after the publication of Das Kapital, by the eponymous Karl Marx, capitalism finds itself under scrutiny again. For a time the failures of Marxism, as a political ideology, and the failures of socialism, as a means of economic organization, were so globally apparent that there seemed no longer to be anything to argue about. Inequality has now rekindled the old debate over capitalism versus alternative forms of government or economic organization.

Differences in degree are masked by a simple capitalism-versus-socialism dichotomy. Nevertheless, this book takes up this debate on these simplified terms, and with respect to only one question, but one of existential importance to humankind: How will human civilization right its horribly, tragically errant relationship with the planet it inhabits?

While Adam Smith did not name it, he identified capitalism as something profoundly different, something that would break feudalism, and something that would generate wealth previously unimaginable. To argue that something so transformative could happen without royal edict or conscious purpose, driven only by self-interest, was heretical. But it is a big and consequential mistake to leap to the conclusion that capitalism is “natural” and self-executing. It became a canard that all capitalism needed was “free” markets, unspoiled by government interference. Markets depend upon rules and institutions for governance. Capitalism is more than markets alone, and requires more by way of governance. Even in Smith’s eighteenth-century England, there still had to be “tolerable administration of justice.” Capitalism was then, is now, and will always be dependent up the selective coercion of legal rules and institutions. For example, the enforcement of promises requires the coercion of courts, or at least norms broad enough to be institutional in nature.

There is much work to be done. This chapter sets out a list of five proposed environmental taxes. This is by no means a comprehensive list of worthwhile environmental taxes. What else don’t we know? These are five of the most important externalities to price. Some of these taxes have multiple effects. In fact, some of the effects overlap across different taxes. Some account can be made for overlap, so as not to double tax the same harmful activity, except of course for multiple harms. Each tax is described briefly, along with some discussion of the harms and the implementation and enforcement issues. Each proposed tax is worthy of a book-length discussion, but my purpose here is to introduce the need for the tax, and to lay out a roadmap for implementation, hoping the reader will forgive the omissions necessitated by considerations of space.

The cornerstone of this book’s proposal is a system of environmental taxes, which will serve as price signals for polluting activities. This part of the proposal is so central because prices are the cornerstone of a healthy market economy; without prices, there is no market. With inaccurate prices, markets will function, but they will misallocate resources. That describes how the entire world, including even Sweden, functions: the value of the global environment is almost never accurately priced into day-to-day activities. An environmental tax, if set at the correct level, would reflect the cost of some harm inflicted upon the environment, and therefore act as an appropriate price for that harm. An environmental tax would typically be levied upon some small but measurable unit of pollution: a ton of carbon dioxide, a ton of sulfur dioxide, or a pound of nitrogen oxides.