The Free Market Chronicles: Global Warming
Like most mainstream political issues, the global warming debate has been reduced to partisan sparring and political sloganeering. On one branch of the crazy tree, rabid environmentalists predict doomsday if the world fails to alter its course and propose relentless regulations and impossible fuel efficiency standards. On the other branch, delusional Republicans pout and whine about the “liberal” media and sophomorically ignore the problem like a disgruntled toddler. Amid the prophesizing and the denying, a legitimate policy issue is forgotten.
Over the last decade, environmentalists have proposed an assortment of government-based programs to combat global warming. In 1997, the Framework Convention on Climate Change signed the Kyoto Protocol, with the intent of curtailing greenhouse gas emissions. Since its inception, roughly 175 countries have ratified the protocol, with the notable exception being the United States. Demanding reductions of greenhouse gases to specified levels by specified deadlines, the protocol set the precedent for government intervention to mitigate the effects of global warming.
Since then, environmentalists have tried, usually unsuccessfully, to implement a variety of Kyoto-inspired policies. Most recently, Senators Hillary Clinton, John McCain and Barack Obama have proposed a cap-and-trade system to curb emissions. Under the proposed Lieberman-McCain Climate Stewardship Act, companies are granted “credits” that represent the amount of emissions they are allowed to emit. In order to increase their emission outputs, companies must purchase more credits from other companies. This trade system encourages climate stewardship by rewarding companies who pollute less (the credit sellers) and exacting a price on companies who pollute more (the credit purchasers).
If passed, this policy would prove economically disastrous. Although it may accomplish its stated goal of reducing emissions, Lieberman-McCain places an undue burden on industries that are already struggling to turn a profit, imposes stringent fines on companies who exceed their emissions limit, and offers only a slim grace period for companies to analyze their business practices and adapt to the government’s demands. In essence, Lieberman-McCain hopes to solve global warming by “compulsory encouragement.” Hardly an oxymoron.
This may come as a surprise, but global warming can be addressed without compulsory encouragement. In fact, global warming should be addressed without government involvement. The longer we wait for a gridlocked Congress to take the initiative, the less time we have to develop market-based solutions to global warming that actually have a chance of succeeding without destroying the economy.
It is a fundamental economic principle, but it is worth reinforcing: investors want to make money. While it seems stupidly obvious, this principle is seldom applied to global warming. Like any other market, if an opportunity exists to make a profit, investors will do what they do best: invest. Governed by the laws of risk and reward, market economies compensate risk-takers who pioneer new technologies. In a healthy economy, relatively stable market conditions and restrained government policies that recognize the limitations of regulators (who are incapable of creating wealth, only redistributing it) foster a business environment that encourages calculated investment. Conversely, unstable market conditions, exacerbated by excessive taxation and high-minded regulators, foster a business environment that discourages investment. When investor confidence disintegrates because of an inconducive business environment, investment diminishes and stagnation manifests.
Unequivocally, stable market conditions and restrained regulators are necessary conditions for investor confidence. Clearly, though, they are not sufficient conditions: there must be consumer demand. If the public yearns for a particular product or technology, so long stability exists in the respective market, investors will undertake the risk necessary to satiate the consumer’s desire. Stability combined with demand manifests confidence, which leads to innovation, which results in societal progress. Applying the aforementioned principles to global warming causes one to realize that so long as markets are left to their own devices, and so long as the government does not impose regulations that discourage investment, investors will shift capital into products and technologies that the public endorses.
In the last decade, the percentage of Americans who believe that global warming will “pose a serious threat” in their lifetimes has nearly doubled, according to an April, 2008 Gallup poll. Clearly, the public endorses global warming. While the poll does not specify the extent to which Americans demand “greener” products and technologies, it can be reasonably inferred that those Americans who believe that global warming is a serious risk will also be inclined to support market efforts to combat global warming. Thus, one necessary condition for investor confidence has been met.
Unlike measuring consumer demand, which can be ascertained objectively through polling, quantifying stability in the marketplace is a far more subjective task. In order to gain an clarity, financial institutions, legal frameworks, and recent market trends must be codified into a coherent and analytical evaluation. Lacking the time and equipment to embark on such rigorous analysis, an examination of applicable economic theory and historical precedent must suffice.
Recent business developments lead to the conclusion that while efforts to “green” the economy are presently insufficient, they are steadily improving. For example, Waste Management, a company that provides residential, commercial, industrial and municipal waste storage and removal services in North America, has enjoyed consistent profit growth and relatively stable stock prices since 1999. Waste Management’s successful experiment in environmental protection can be attributed partly to consumer demand, but also to the foresight of savvy investors—alongside conglomerates like Exxon Mobil, Tyco International and British Petroleum (BP), Waste Management tops the list of companies that Bill Gates is most highly invested in—whose gumption provides corporations like Waste Management with the support and capital necessary to survive the rigors of the marketplace.
While recent market trends suggest that stability in the US economy adequately satisfies the apprehensions of investors, economic philosophy teaches us that the present business environment can be improved. When government imposes excessive taxation on private enterprise—the sorts of impositions that Mr. Obama and Mrs. Clinton propose—the market typically reacts adversely. Naturally, the severity and length of this adverse reaction depends largely upon the government’s degree of imposition. In some cases, the reaction is fleeting; in other cases, the reaction deteriorates investor confidence, increases bankruptcy and unemployment and precedes a prolonged period of economic stagnation. Consequently, presidential candidates who rally against “corporate greed,” promise to increase the capital gains tax and windfall profits tax, and guarantee that the government will take a more active role in “monitoring” and “overseeing” the market in order to ensure “equality,” contribute to market instability and thus investor uncertainty.
Solving the global warming problem necessitates the depoliticizing of the dialogue that sparks consumer demand and the deregulation of the markets that manifest investor confidence. Instead of politicians framing the debate, proposing unnecessary, irrational regulations that transform this serious topic into a wedge issue, investors and consumers need to control the discourse. Remember the old Milton Friedman saying, “Governments never learn. Only people learn.”
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