Tuesday, October 17, 2006

The Coase Theorem Can Guard Against Any Adverse Effects of Global Warming

Stuart K. Hayashi

This originally appeared in Tali Satele's Critique of American Samoa's Government on Tuesday, October 17, 2006.

Shikha Dalmia has written many brilliant essays on subjects like illegal immigration, India's economic liberalization, and private financing of education in India.

Recently, I came across an intriguing piece she wrote about whether private property rights and market forces could alleviate any harm that global warming may impose in the next one hundred years.

I believe Coase theorem, devised by University of Chicago economist Ronald Coase, has important implications for addressing the extent to which carbon dioxide emissions from heavy industry may contribute to the harmful effects of global warming. That is to say that market economics and private property could be the most important tools to correct adverse effects of global climate change, if only so many government regulations did not stand in their way.

Three of the biggest problems that anthropogenic global warming will supposedly exacerbate are:

1. The spread of tropical diseases like malaria

2. Lands that were once arable no longer will be

3. Rising sea levels

Let us assume, for argument's sake, that the fossil-fuel emissions from the coal and oil industry really do worsen theese problems.

What should be done if an increase in average global temperature, which the coal and oil industries supposedly helped cause, causes malaria vectors to advance?

First, if malaria finds its way into the United States, then limited DDT use should be legalized. Fighting malarial mosquitoes in the U.S. would not lead to Americans spraying large clouds of malaria all over as was done in the 1950s. Malarial mosquitoes will stay away from a house if its walls are sprayed with DDT once every six months.

But the federal government has banned it in America.

Furthermore, if dangerous epidemics spread themselves throughout the U.S., then private communities should be able to find their own safeguards over whom is allowed to set foot on its grounds. Just as the state government of Hawaii has methods of inspecting visitor luggage to prevent "invasive species" from entering the Hawaiian ecosystem, private communities should be able to inspect newcomers or visitors for disease before entry.

If an infectious disease made its way into a private community, then its property values would drastically decrease. If an epidemic spread throughout America, then the owners of private communities may see fit to perform check-ups upon people before they move into the new community.

Also, a purely consistent laissez-faire night watchman state would hold individuals liable for spreading dangerous diseases. If someone gives me a terrible disease, then the infector has damaged the private property that is my body, and I should be able to sue for compensatory damages. This would mean that, if Person X carried syphilis and had sex with Person Y without informing Person Y, Person Y should be able to sue Person X to make up for the costs that this imposed on Person Y.

If such a legal system were implemented, people would take more precautions to ensure that they do not infect others.

Now we can move on to the agriculture argument.

Global warming alarmists say that the changing climate will harm agriculture because lands that are currently arable will lose their arability over decades, while other lands will become arable when they previously weren't.

If that is the case, then the "creative destruction" of the market should be allowed to commence. Owners of farmland that is no longer arable will liquidate their holdings in that real estate, selling it off to investors who can find a more profitable use for it. Meanwhile, investments will be made into the newly-arable lands in other parts of the globe.

What is the impediment to this? Federal farm subsidies and price supports. If the federal government finds that an agribusiness's productivity is dropping as a result of global warming depriving the agribusiness's land of its arability, then it would not be surprising if the federal government used taxes to bail out the agribusiness. his will erase the investors' incentives to liquidate their holdings in farmlands that are no longer productive.

Finally, it is said that global warming will cause sea ld destroy the homes of people in coastal regions. Some scream that beachfront properties will be further devastated by an increasing frequency of Category 4 and 5 hurricanes.

If it is true that beachfront property is under such assault, then private insurance companies should be free to raise their rates so high that people will be discouraged from building homes so close to the shore. Furthermore, the fact that beachfront properties may be submerged within a 30 year period will cause beachfront real estate to decline in marketability, thus discouraging developers from continuing to erect properties that are too dangerously close to shore.

What would stop that from happening? The fact that the federal government implements a National Flood Insurance program that compensates people who imprudently build structures so close to shore that they are destroyed almost every single year. When these structures are destroyed, the National Flood Insurance program provides the property owners with the funds they need to re-build the structures . . . that will be destroyed once again. Without the government's financial crutch, these people would see that they only lose money from continually building too close to shore, and finally more further inland.

And, finally, there is the issue of liability for all of the property damage for which anthropogenic global warming is blamed.

Suppose that a group of attorneys call upon experts who scientifically prove that fossil fuel emissions from the coal industry and petroleum rock-oil industry contributed to global warming. And suppose that they could scientifically prove that it was these industries' carbon dioxide (CO2) emissions that caused the average temperature, since 2000, to increase by a margin that othewise would not have existed had only non-human natural factors been involved.

If it can be proved that it was this margin that caused so many people to be infected with tropical diseases, or to have depreciation in agricultural real estate and coastal real estate -- that, without all of these CO2 emissions, these tragedies otherwise would not have happened -- then all of the aggrieved parties can file a civil action lawsuit against the industries that have contributed to the Warming.

The more expensive the lawsuits are for these industries, the more these industries will have an incentive to find methods of providing energy without contributing so much to adverse global warming.

For example, there is something called "the gasification of coal." To "gasify coal" is to burn the coal so hot that it converts into a gas that can be transported through pipelines.

Gasified coal provides just as much energy as regular solid coal, but it emits much smaller quantities of carbon dioxide.

Yet the reason why businesses refrain from gasifying coal is that gasification is much costlier than emitting higher quantities of CO2.

However, if civil action lawsuits kept driving up the coal industry's costs, making the industry lose billions of dollars, then we may reach a point where it becomes cheaper for the coal industry to gasify its product -- thus reducing the number of big lawsuits -- than to continue harming people and paying out so much money in damages.

Here, a leftwing critic may respond that the big coal and oil industries would win every single lawsuit that middle-class victims filed against them, since Big Oil and Big Coal have so much more money at their disposal.

A solution to that would be to legalize champterty -- the practice of allowing individuals to invest their money into lawsuits. If venture capitalists believe that some farmers and beachfront home owners have a strong scientific case against Big Coal -- but that these aggrieved parties are woefully outmatched by Big Coal in terms of capital -- then the venture capitalist can finance the plaintiffs' case under the agreement that he receive a percentage of the damages if they win.

Now, I am well aware that, as attorney Walter Olson frequently points out, a ridiculously litigious society can easily penalize businesses that have not done harm. This is because, even if the business defendant wins a tort case that was filed against it, that business still loses money by having to pay for the cost of its defense. Thus, I would recommend that the United States adopts the "loser pays" system of England and many other industrialized countries -- the loser of the lawsuit should pay the legal fees of the other side.

With such reforms in place, businesses can be secure from frivolous lawsuits even as tort law can be used to "internalize" the "externalities" of industry-contributed greenhouse warming.

As Julian Morris writes,

I have argued elsewhere (Morris, J., 2003: 'Climbing out of the Hole: Sunsets, Subjective Value, the Environment and English Common Law' [read the PDF of that here --S.H.] Fordham Environmental Law Journal, Vol XIV, No. 2, 343) that much more could be done to enable private parties to resolve environmental problems through the legal system. Most legal systems in principle enable the owners of private property to recover damages when that property (or the beneficial use of that property) is damaged by the actions of another, whether intentionally or unintentionally.

Morris observes that it would be difficult to compensate the victims of such problems in Third World countries for such harm, as what makes these nations poor is almost always their lack of rule of law. The long-term solution, of course, is for these countries to finally develop a system of rule of law in which the courts bother to enforce individual rights to life and private property rather than to ignore them or abrogate them.

In the meanwhile, if only the First World more consistently adopted the principles of a "night watchman state," it would more effectively utilize the institutions of private property and liability to ameliorate the level to which industry may add to the global warming problem.

Copyright © 2006 Stuart K. Hayashi. This piece may not be reproduced by any means without the author's expressed written permission.