Environmental Markets: the Good, Bad and Ugly, an Astor Lecture

By Sayan Roy, WSPM student 2019-20

On the 30th of October 2019, the School of Geography and the Environment played host to the Astor Lecture organized by the Smith School of Enterprise and the Environment. Professor Michael Hanemann delivered this Lecture on the topic of environmental markets, their applications and limitations. Professor Hanemann is currently the Julie-Ann Wrigley Chair in Sustainability at the School of Sustainability at Arizona State University in addition to being the Chancellor’s Professor (Emeritus) at the University of California, Berkley in the Department of Agriculture and Resource Economics. When faced with intractable issues in sustainability, such as the prudent allocation of water resources, economists often provide valuable insights into what markets can offer towards addressing these challenges; Prof. Hanemann’s delineation of what environmental markets are ‘good for’ and ‘bad for’ were instructive.

Fundamental to environmental economics is the notion of the externality and its economic regulation through taxation. This is exemplified by Pigouvian taxes (an instrument of economic regulation) that help arrive at a socially derived optimum for pollution of some kind (an externality). A key takeaway from this lecture was that attempts to address an externality on the basis of a supposedly ‘objective’ scientific determination without paying attention to concerns of distribution stands a great risk of trampling over the real identities and concerns of people. In other words, economic markets treating everyone as equally affected by a given environmental problem is problematic. Prof. Hanemann therefore argued that it was the prerogative of economics to “identify the circumstances that effect equity” in order for governments to effectively deploy the right choice of instruments in economic regulation such as taxes in service of social good. His call-to-arms was for a “meta-theory of which externalities (emphasis author’s) merit an intervention” – ultimately governments have limited financial resources to tackle environmental problems and therefore a sound basis for allocation is absolutely critical.

The lecture also looked at specific examples of water rights and water markets. Prof. Hanemann illustrated that in spite of a robust legal setting in the Colorado river basin in the United States, where any amount of disruption in return flow to the river can be a basis for challenge in water courts, tradable water rights resulted in short-run flexibility (e.g. transfer of water rights from a farmer to a city for domestic water use), but long-term lack of overall use reallocation. In contrast, Professor Hanemann offered the reason for the success of reduction of Sulphur Dioxide globally as being that the overall caps or limits played a much larger role than the actual trading.

The Astor Lecture left the audience to grapple with some complex questions – how do you draft a regulatory agreement on behalf of unborn generations that essentially takes into account inter-temporal considerations? Prof. Hanemann certainly did not shy away from giving definitive statements on complex issues. What do you do if there is a river, forest or mountain that is sacred to a group of indigenous people but has extractive economic value for the rest of society? In his words, it comes down to veto power. If the group that values the resource as sacred can use their veto to block others’ rights to use it in an extractive manner, then it is settled. But in an absence of a veto, society does not value one group’s rights to a (sacred) resource as much as another’s rights to use it for a different (extractive) purpose.

 

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