Study their behaviors. Observe their territorial boundaries. Leave their habitat as you found it. Report any signs of intelligence.

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Tuesday, March 25, 2008

Environmental Kuznets Curves and Pigovian Taxes

There's just no question in the economic literature whether environmnental quality is what is called a "normal good" -- i.e., one that is demanded more as incomes grow. See e.g. Environmental Quality Is A Normal Good (2003) by a couple of Canadian economists. In fact, if you search on the phrase "environmental quality is a normal good", you find lots of papers by economists asserting this. The underlying phenomenon is called the Environmental Kuznets Curve, which is described in Wikipedia thus:
Another situation where Kuznets type curves appear is the environment. It is claimed that many environmental health indicators, such as water and air pollution, show the inverted U-shape: in the beginning of economic development, little weight is given to environmental concerns, raising pollution along with industrialization. After a threshold, when basic physical needs are met, interest in a clean environment rises, reversing the trend. Now society has the funds, as well as willingness to spend to reduce pollution. This relation holds most clearly true for a many pollutants, such as sulfur dioxide, nitrogen oxide, lead, DDT, chlorofluorocarbons, sewage, and many other chemicals previously released directly into the air or bodies of water.
PERC (a leading market-oriented environmental think tank) writes in The Environmental Kuznets Curve: A Primer:

Since 1991, when economists first reported a systematic relationship between income changes and environmental quality, this relationship, known as the Environmental Kuznets Curve (EKC), has become standard fare in technical conversations about environmental policy (Grossman and Krueger 1991). When first unveiled, EKCs revealed a surprising outcome: Some important indicators of environmental quality such as the levels of sulfur dioxide and particulates in the air actually improved as incomes and levels of consumption went up.

Prior to the advent of EKCs, many well-informed people believed that richer economies damaged and even destroyed their natural resource endowments at a faster pace than poorer ones. They thought that environmental quality could only be achieved by escaping the clutches of industrialization and the desire for higher incomes. The EKC's paradoxical relationship cast doubt on this assumption.

We now know far more about the linkages between an economy and its environment than we did before 1991. This primer shares this knowledge. [...]

However, income growth without institutional reform is not likely to be enough. Improvement of the environment with income growth is not automatic but depends on policies and institutions. GDP growth creates the conditions for environmental improvement by raising the demand for improved environmental quality and makes the resources available for supplying it. Whether environmental quality improvements materialize or not, when, and how, depend critically on government policies, social institutions, and the completeness and functioning of markets.

Better policies, such as the removal of distorting subsidies, the introduction of more secure property rights over resources, and the imposition of pollution taxes to connect actions taken to prices paid will flatten the underlying EKC and perhaps achieve an earlier turning point. The effects of market-based policies on environmental quality are expected to be unambiguously positive.

All the mechanisms on Guy's list (posted on the private PlatCom forum) are just ways that higher-income societies seek to satisfy that demand for a cleaner environment. The only item on the list that argues against the validity of the basic point is the claim that higher-income societies can in effect export their pollution. This is called the Pollution Haven Hypothesis, and is discussed on pp. 14-17 of the full PDF of the PERC primer. The empirical data suggests that any such haven effect is swamped by the EKC effect of the rising income in the "haven" country.
Note that the EKC effect needs smart policy like pollution taxes in order to work. Pollution taxes (aka Pigovian taxes) are almost universally regarded as a no-brainer in the literature of market-oriented environmentalism, and there is even a "Pigou Club" of famous economists who are petitioning for this policy. Such anti-aggression taxes are supported by several of us on PlatCom, but the LP's radical thought police make such policies verboten in the LP Platform. So what we have here is 1) a top-of-mind voter issue, combined with 2) a consensus market-oriented solution for the issue that is accepted by economists of all ideologies, and that 3) is not embraced by any of the LP's competing parties. So is the LP jumping all over this policy position? Of course not! What do you think we are? A party that advocates the leading market-based solutions? Nope.
I'll close by applauding Rob Power's recent comments about Mary Ruwart on the Outright forum:
her only arguments on pollution are regarding the point source type, e.g., a factory dumping mercury into the river, to which her answer is that the people downstream sue the factory into oblivion. This well-reasoned argument was fine for 30 years ago when urban rivers were flammable, but it simply doesn't work for modern non-point-source pollution that every living thing contributes to. This has been a concern of mine for a long time. She has a few topics on which she offers nothing more than hand-waving arguments, which only works in a room full of friendly libertarians -- it easily gets torn apart by non-libertarians.
I'd like to ask people who dismiss Platform reformers as "Republican lite": can one advocate taxing environmental aggression and still be considered a real libertarian?


Scott Semans said...

Mainstream U.S. libertarians seem unaware of geolibertarianism, or Georgism. I'd say WE are the real libertarians, not the Royalists in the LP who want the government out of everything EXCEPT enforcing "rights" of those who draw arbitrary boxes on the ground and claim what's inside is theirs to do with as they please, just like their toothbrushes. Now how does THAT make sense? I'm a libertarian, not a propertarian.

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