Tragedy of the Climate Commons

Nobel-Laureate economist, Paul Romer, provides one of the best encapsulations of the Tragedy of the Commons that I’ve ever heard:

“We know that the market system doesn’t guide people in the right direction when their actions impose costs on others.”

In other words, the free market is great, except when it isn’t.

The “free” use of air and water to dispose of waste is not actually free. Pollution – like any other use of a common resource – imposes costs. But those costs are rarely exclusively placed on the polluter. Instead the cost is divided up among many who rely on that resource for one reason or another, most of whom don’t reap a profit.

The polluter – not owning the air or water – has no incentive to steward it. But the polluter does have a massive incentive to a free-riding profit if they are permitted to take that free ride.

When governments allow free riding, they are not allowing the free market to work – even if they say that they believe in free markets – because permitting the imposition of costs on others by the polluter is a subsidy to the polluter.

There are four ways to deal with a Tragedy of the Commons when privatization is not possible:

  1. Ignore the problem: but eventually the Commons is destroyed.
  2. Regulate it: this can work, but this is highly susceptible to intentional rigging in favor of some against others.
  3. Impose a cost on use of the Commons, since the Commons cannot be privatized. In a climate context, put a price on carbon emissions.
  4. Some combination of the above three options.

Option 3 is not without it’s potential issues, but has been proven to work over and over again in a variety of Commons contexts. This is basic economics, and basic game theory.

But option 3 also takes political will to implement. Our politicians know all of this, but it seems that many of them would rather play games with our future for the sake of realizing their short-term goals of power.

But wait a minute,” some say, “all we need to do is wait for carbon-removing technology to become efficient and usable, then polluters can pollute all they want and the scrubbers can just remove that plus past atmospheric carbon inputs. So let’s just get working on those technologies.

Yes, indeed, let’s do that. But this does not change the economic argument because at some point someone is going to have to pay for the R&D to create the technology, the materials and expertise to build it, and the expertise and energy to run it.

Even in this (rather hopeful) scenario, someone still has to pay, and not insisting that polluters pay is a subsidy to polluters.

(And, in this scenario, there is one more question: who pays to clean up carbon already added to the atmosphere by past polluters?)