On June 18, 1963, an economist named Allen V. Kneese took his seat before the House Government Operations Subcommittee on Natural Resources and Power. He was there to talk about America's water-quality problems, and his advice was, by the standards of the time, most unconventional. "Regulation has its limitations," he told Congress, just at the moment when environmental regulation was coming into its own. The setting of detailed, centrally administered water-quality standards would "require extremely large amounts of information—perhaps more than an administrative organization could be expected to secure and handle effectively." Thus, Kneese said, "we must look beyond direct regulatory practices to new, and what some may consider revolutionary, approaches. A most promising possibility in this regard is a tax or levy on waste discharge."
A sludge tax! While everyone else talked about affluent taxes, Kneese was talking about effluent taxes. Putting a price on the right to foul rivers, he said, could reduce pollution more cheaply and "with much less information than would be needed to achieve the same end by means of direct regulation of individual waste discharges."
Washington was unready to listen. Pricing sludge? Wasn't that just a way of giving permission to pollute? But Kneese kept at it. In 1969, before a different congressional committee, he touted the power of market-based incentives; and in 1970, in yet another hearing, he said that dirty water was a problem to be managed rather than solved, and that pricing pollution rather than banning it had to be part of the answer.
In those days, hardly anyone talked that way. "As recently as 10 years ago, environmentalists looked on market mechanisms with abject horror," says Gregg Easterbrook, a prominent writer on environmental issues. "They would say, 'This is industry's latest plot to distract us,' or their eyes would glaze over and they wouldn't understand it."
In 1990, however, Congress decided to try an emissions-trading program for sulfur dioxide, a pollutant that causes acid rain. Instead of telling every company to reduce its SO2 to the same level using the same technology, the government set an overall cap and let companies buy and sell pollution allowances. The concept is closely related to Kneese's pollution tax, and it worked for the reasons he outlined: By letting the market rather than the federal bureaucracy allocate reductions in SO2, the trading scheme has cut the cost of cleanup by more than half. Impressed, many mainstream environmentalists have come to look on market mechanisms as tools rather than traps.
"It's one of those rare cases when history vindicated a maverick idea in the lifetimes of the people who advocated the maverick idea," Easterbrook says. "In the long run, it will be RFF that will get most of the credit for this historic achievement. Many economists had toyed with these ideas. But RFF laid the hard groundwork as far back as the 1950s and '60s, when environmentalism itself was considered a quirky cause."
RFF? No demerits if the initials don't ring a bell. They stand for Resources for the Future, a Washington think tank whose research staff included, until 1974, Allen Kneese. On October 15, RFF will celebrate its 50th anniversary, perhaps prompting a brief respite from its unchallenged status as the most important think tank you've never heard of.
I discovered RFF in the 1980s, when I wrote on economic policy. Deluged by hysterical press releases from environmental groups forecasting the end of the world, and by equally hysterical press releases from industry groups claiming that every new environmental rule would eliminate 86,553 jobs, I needed to find analysts who could see both shades of green—the tree shade and the money shade. RFF was, and is, packed with them; three-fourths of its 40 or more researchers are economists, and all worry about the environment for a living. As many other people have done upon seeing the quality of the work that emanates from RFF, I wondered: Why isn't this place famous?
Part of the answer is that the way to become famous in the world of ideas is to be ahead of the curve, whereas RFF has tended to be ahead of ahead of the curve. For example, the think tank was first to refute the notion, highly influential in the 1970s and also dead wrong, that the world faced impending shortages of oil, minerals, and other key resources. RFF authoritatively debunked this idea—but that was in 1963, nine years before the Club of Rome's Limits to Growth set off the big scarcity scare. In a landmark volume—almost literally a landmark, with 1,000 dense pages and 18 technical appendices—three RFF analysts concluded that, even though "vastly greater quantities" of natural resources would be needed to maintain economic growth, "neither a long view of the past, nor current trends, nor our most careful estimates of future possibilities, suggest any general running out of resources in this country during the remainder of this century (or, if a broad impression may serve in the absence of detailed analysis, for a long time thereafter)." RFF got it right years before most people even realized it mattered.
Modern environmental activism was founded on a pessimistic outlook (catastrophe is just around the corner) and an anti-market ideology (capitalism is the problem, not the solution). Those attitudes have begun to change only recently, and even then only slowly. It is intriguing to imagine how environmentalism might have looked had it instead taken RFF's hopeful, market-friendly approach as its template. For five decades, RFF's work on a wide range of subjects has been distinguished by an attitude that is optimistic but also reformist, results-oriented rather than process-bound, and above all, both pro-market and pro-government—years before Third Wayers and New Democrats imagined any such reconciliation. Pollution and the overuse and misallocation of resources are serious problems, RFF says. The answer, however, is not to upend markets but to extend them.
Thus it was that in 1971 RFF funded and published a book calling for the government to create a market for radio-spectrum licenses, rather than just giving them away. After all, said the author, Harvey J. Levin, the airwaves are a scarce resource, and they are no less susceptible than rivers or roads to overuse or congestion. Because the Federal Communications Commission was allocating spectrum space bureaucratically, incumbent broadcasters had no reason to economize or innovate, while newcomers were often locked out. Levin, an economist, proposed "a regulated market-type system with prices." And the government took Levin's advice—in the mid-1990s, when the FCC finally began auctioning off broadcast frequencies. Well, it only took a generation.
More recently, RFF's analysts have studied marketable quotas to reduce overfishing. They have proposed "space transportation vouchers" to use outer space more efficiently and ingeniously. They have suggested ways to harness markets to reduce global warming, an approach that will be essential, Easterbrook argues, if the problem is to be addressed affordably. ("If anything serious is going to happen on global warming," he says, "trading is how it's going to happen.") And, true to form, RFF continues to expand the very concept of a marketable resource.
A few years ago, a young Indian doctoral student named Ramanan Laxminarayan made a connection. He had a master's degree in public health and was getting his Ph.D. in resource economics. Joining the two, he realized that the efficacy of antibiotics, like the sea or the air, is a limited but common resource, and thus is susceptible to what economists call the "tragedy of the commons." Doctors and their patients—and, for that matter, poultry farmers (almost half of antibiotics in the United States are fed to farm animals)—have every incentive to use antibiotics liberally. But no one looks after the drugs' overall efficacy, which diminishes as their heavy use stimulates germs' resistance.
The evolution of antibiotic-resistant "superbugs" poses one of the most ominous problems in public health. "I don't think people realize how much we rely on antibiotics," the slender, 31-year-old Laxminarayan told me recently. "We need these drugs for the next 200 years, and we're approaching this in such unimaginative ways that it's scary." With universities less than eager to push the envelope, Laxminarayan found support at RFF, where he is developing patent reforms and other market-based approaches.
It is typical of RFF to be beavering away on this resource problem before the rest of the world has realized it is a resource problem. Allen Kneese died last year, but somewhere, one suspects, he is smiling. Washington is a crass, cynical place, but good ideas still matter.