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  • Writer's pictureRohan Bhatia

The Free Market Approach to Climate Change

Whether we want to admit it or not - the climate is changing. The evidence for this is so relentless, that even the staunchest ‘climate sceptics’ have slowly started to accept the fact that our planet is warming. What is not clear, however, is that extreme economic restrictions are the way forward. There is certainly a vocal group, often masquerading under labels such as “Extinction Rebellion” who have morphed their fight against climate change with a fundamental fight against capitalism. According to these people, it is capitalism and the supposed over-production that comes with it - that is the driving force behind climate change. Their fight is not just against a warming planet - but against the entire economic foundations of our capitalist societies. Yet, as you would learn in any Econ101 class at college, capitalism has many methods and incentives that can be put in place to correct for environmental degradation. The truth could not be further from what the “Extinction Rebellion” types argue; if we are to find a sustainable way out of climate change, capitalism is our best shot at it.

So before I get into what the free-market, laissez-faire approach is - and why it’s so obviously the way out of this climate crisis - let’s look at the more extreme alternatives that get thrown around. As a result of a very vocal, conspicuous group of protestors on the far left of politics - you’d be forgiven for thinking of climate change as a regular partisan political issue. The impression that is often created is that the economic left - favouring government intervention - care about climate change, and the economic right - a side often carrying climate sceptics - couldn’t care less. The economic right instead simply cares about greedy profits and considers environmental degradation as a necessary byproduct of production. Hence, for this contingent, the only reasonable solution to reduce the harm of climate change is obtrusive government intervention to severely limit emissions. This involves heavy limits and bans on production of some of the world’s largest companies. Take popular congresswoman Alexandra Ocasio-Cortez’s much publicised, “Green New Deal” - which explicitly focuses on the need for the mobilisation of the federal government to drastically reduce emissions. The deal outlines plans to completely move toward electricity-fuelled energy by 2050 - but fails to offer a reasonable, effective path to such a result. Instead, Ocasio-Cortez’s proposal focuses on the need to limit production and force businesses to abide by regulation and new rules, exacerbated by the likely red-tape and inefficiencies that will emerge. As a result of this, Ocasio-Cortez and her supporters seem to consider the economy as a wider sacrifice that is needed. The Green New Deal posits that we can’t reach target emissions without crushing production, and as a result, hurting businesses and leaving individuals unemployed in key industries all across the world.

Therein lies the strength of a free-market approach to resolving the climate crisis. It argues that really, there is no need to sacrifice substantial GDP growth and national income levels to achieve reasonable emission levels. The free-market approach does not disagree with the need to get to carbon neutral levels as soon as feasible - but the methods of getting there are substantially different. To start with, alongside labour, enterprise and capital - land (or natural resources) are considered one of the four major economic resources. When it comes to the production of many goods and services, we rely on agricultural and mining resources (all of which come from the environment) to a great extent. Should we start seeing these resources massively depleted, as can be expected in the long-term under a climate crisis, the entire economy would crumble. Suppose for example, due to climate changes, that our ability to mine resources such as steel and iron ore massively reduces. How then should we allocate resources for huge infrastructure projects that not only reduce bottlenecks, but also create jobs and raise the livelihood of billions around the world? The free-market approach recognises this risk and therefore places great importance on the long-term sustainability of the environment.

So clearly dispelling the strawman argument of the government interventionists, we’ve outlined why bastions of the free market care about climate change. But the claim that I initially put forward is that not only do free marketeers care about the environment, but more so that their solutions are the best at getting to our targets of net-zero emissions. Through the incentive effect that comes about in a free-market, firms will gradually start seeing the profitability of cleaner production. We know consumer preferences are shifting toward cleaner energy, and the beauty of the free-market system is that the best firms are those which can align their supply and production with the wants and needs of the consumer. In this way, consumer demand for clean energy and environmental conservation will drive firms to act in a sensible way.

Another solution to the climate crisis that can come out of laissez-faire economics is the allocation of more obvious property rights to the environment. When we have goods that have no clear private property rights - like roads and public parks - the result is often over consumption and depletion. This of course arises because in such a scenario we have no incentive or reason to conserve or care for the good. What reason would I have to pay particular attention to the maintenance of my local park? I don’t own it. My own personal interest is almost always going to trump any little care I have for the shared park. It’s the government’s responsibility, right? But on the other hand, if we compare this to my backyard in my house - all of a sudden I care a lot more.

The problem we have with the environment is an extension of this problem of property rights. At the moment, we consider the environment a shared good that none of us truly own. Why should we inherently care about its conservation and sustainability then? A way out of this problem is to privatise elements of the climatisation process in order to generate inherent incentives that will fuel much more sustainable behaviour. We need to give mass emitters a reason to care about the environment. Corporate posturing and virtue signalling will only get us so far. Assigning property rights would be one key way in which the free market can resolve the climate crisis. Necessarily, such an approach would not require restrictive government intervention and should therefore be able to sustain economic growth levels. Economic growth and environmental sustainability. Who said we can’t have both?

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