Evolutionary Ecology

A new environmental vision

Lynn Scarlett from the May 1996 issue

(Page 3 of 5)

The common-law framework offers a means of further clarifying rights and refining just what "enjoyment and use" of one's property means. It is thus both a mechanism for conflict resolution and a means of discovering the scope and limit of rights.

Consider an apartment building with a noisy air-conditioning unit that disturbs a neighbor. Asked for injunctive relief, one tool of common law, the court may emphasize the neighbor's rights, requiring the apartment owner to eliminate the air conditioner noise--unless the neighbor agrees to some other arrangement. Or it may assign the owner the rights, declaring that the neighbor must put up with the noise unless he can make a deal with the owner. In actual conflicts, injunctive relief usually balances the two interests. "The law of nuisance," says Chicago economist Coursey, "actually would tend to use a rule that looked like a combination...: the apartment owner may make noise with impunity up to some critical level, and, if the apartment owner makes more than the critical level of noise, the single family may obtain an order of the court directing the apartment owner to reduce the noise down to the critical level."

In his famous "Coase theorem," Nobel laureate Ronald Coase developed the theoretical underpinnings of this sort of institution. In a friction-free world, where there are no "transaction costs," he argued, it doesn't matter which side is given the rights, because the two parties can always make a deal. (This calculation covers only the question of whether activities will occur, not issues of fairness, where distribution of rights does matter.) If your air conditioner is making noise you have every right to make, I can pay you to stop; if, on the other hand, you have no right to a noisy air conditioner without my permission, you can pay me to grant that permission. Problems arise in the real world, however, because transactions aren't free and the way rights are defined affects the cost of reaching agreement. So social institutions, such as courts, step in and assign rights to minimize conflict and maximize wealth, at least in theory.

Common-law tradition embodies a discovery process that clarifies and refines rights boundaries and obligations in those blurry realms where different sets of rights intersect. Common law tends to follow precedent, and precedent can only be disturbed by private parties bringing new cases with slightly different circumstances or new arguments. As the law gets better and better at maximizing the welfare of the parties in a particular kind of case, fewer and fewer such cases will be brought. As a result, the common law tends to settle on fairly efficient rules--those that make the value pie larger. Private parties then bargain "in the shadow" of settled law, dividing a larger pie than they would under rules not tested over time.

Common law, write economists Bruce Yandle and Roger Meiners, "continues to evolve. Changing preferences and improved understanding of pollution problems continuously enter the arena of law." And, unlike statutes, common law takes into account the particular circumstances of specific situations.

The common law can work to mediate disputes between discrete, identifiable parties. But, concede Yandle and Meiners, "It is hard to imagine how common law could address urban auto emission control, ozone layer problems, and global warming, to the extent that the science of those problems becomes more settled." In such cases, it is much too difficult to identify a clear-cut "polluter" and a clear-cut "plaintiff." Either most people fall simultaneously into both categories or the cost of dividing the environmental good--clean air, an undisturbed ozone layer, etc.--is much too high (sometimes approaching infinity).

Yet the problems of knowledge and values remain, and so does the demand for environmental goods. The trick for environmental reformers is to develop a vision of evolving institutions that permits different sorts of institutions to address different kinds of issues, and to do so at the appropriate decision-making level. It helps to think of this challenge as a sequence of interrelated questions, a decision tree based on the characteristics of the particular environmental goods involved.

In some cases, what is needed is not political rule making but business institutions, analogous to standard sizes and outdoor-equipment trade shows. In these cases, environmental goods are divisible, rights are assignable, and we are in the ordinary realm of markets, where entrepreneurs are rewarded for finding ways to address the knowledge and value problems effectively. Here the only issue is allowing time for institutions to evolve on their own.

Markets for some recyclables, for instance, are hampered because buyers and sellers sometimes lack information about available supplies and demand, and uniform quality is not guaranteed. These problems resemble those of many farm commodities in the 1800s. One remedy is to mimic the experience of corn farmers a century ago: Establish a coordinated process for trading in recyclables. The recent creation of electronic listing of some recyclables with the Chicago Board of Trade is a first step in this direction.

This approach differs markedly from political activists' calls to mandate recycled content in products. Those proposed mandates simply override the specific knowledge of circumstances so critical to efficient resource use. For example, mandating high levels of recycled content in certain paperboard products can require adding extra virgin (nonwaste) fiber to maintain adequate strength of the paperboard. The result is a heavier product that uses more total fiber.

Often, however, environmental goods are indivisible and present challenges to ordinary markets. Faced with these "market failures," the traditional response from the green movement has been to substitute government coercion for individual choice. Yet absolutist regulation that suppresses knowledge and imposes a single value hierarchy is not the only way to achieve such goals as clean air. It is possible to create evolvable institutions that, while they are not as simple or politically neutral as traditional markets, capture much relevant information about knowledge and values.

Traditional regulations, such as technology prescriptions and resource-use mandates, ignore the location-specific and ever-changing information critical to all production and consumption decisions. Performance standards, by contrast, allow individuals and firms to figure out how best to achieve the stated standards: to lower overall air pollution to a certain level, for instance. This is the central insight of economists who have articulated the case for market-oriented regulations like the tradeable permits scheme set forth in the 1990 Clean Air Act Amendments. (See "Selling Air Pollution," page 32.)

Tradeable permit schemes and pollution charges provide flexibility to producers (and consumers, in the case of vehicle emission charges) that should, in the long run, result in more efficient responses to air pollution problems. These approaches still require top-down goal-setting, and they are still therefore subject to political pressures that don't affect the market for jackets. In setting such standards, general scientific knowledge is critical, and often a matter of dispute.

But the problem of indivisibility--especially in the case of air pollution--makes some sort of collective goal-setting inevitable. The number of affected parties makes common-law approaches or voluntary bargaining cumbersome, given today's technologies. What is attractive about tradeable permit schemes is their potential to prepare the groundwork for creating enforceable "clean air rights" over time. For this to happen, however, legislators need to eliminate all the current language that insists these pollution credits are not rights--language that renders investment in such credits uncertain.

Tradeable permits and pollution charges are promising mechanisms. But even if we decide they are the right mechanisms to address a certain environmental problem, we still must ask who the affected parties are--who is breathing the air in question--and where, then, the goal-setting ought to be done. For three decades, we've taken for granted the idea that there should be one single environmental standard for the whole nation. But understanding the roles of knowledge and values in defining and pricing environmental goods suggests that that may not be the case. For some problems, impacts are strictly local and narrowly circumscribed. Other environmental problems may impose regional, or even global, impacts. The locus of impact should help determine where decision-making authority resides.