Environmentalists are well intentioned. In protecting the environment, environmentalists pursue interventions aimed at altering behaviour and market outcomes. To their delight, economists neatly rationalise these efforts through the concept of ‘negative externalities’, the case where two parties to a transaction externalise part of the cost onto a third party—e.g. pollution. This market failure justifies an intervention (e.g. Pigouvian taxes) to internalise the social cost and in turn reduce the market quantity.
Unfortunately, when misguided, interventions tend to fall victim to the phenomenon known as the ‘the law of unintended consequences’ or ‘the cobra effect’, a term popularised by German economist Horst Siebert. The ‘cobra effect’ dates back to colonial India, when in the wake of a cobra epidemic, the government, eager to decimate the serpentine population, decreed a cash bounty on cobras. The result was an increase, not decrease, in the number of cobras. Why? Quite simply, the government had indirectly propped up a market for the breeding of cobras. People began to breed cobras in private and then traded with locals, who would subsequently cash in with the government. Needless to say, the concept wasn’t well thought out, particularly since it ignored the powerful force of economic incentives.
Similarly, environmentalist-led initiatives may not be as well thought out as first thought. As discussed by Edward Glaeser in his paper The Supply of Environmentalism,[1] in the process of the fragmented environmental sales pitch, rules of thumb endorsed by environmentalists have often led to sub-optimal and even adverse outcomes. Glaeser identifies three common green initiatives that fall into this category:
1. Resource conservation[2]
One of the most ubiquitous conventional wisdoms in our time has been that using less paper will save trees and the environment. The idea’s simplicity is a double-edged sword: an easily sold pitch that induces an unsound outcome. This is because the view wrongly presupposes that trees are in fixed supply in a common pool and are non-renewable resources. As we know, trees are a renewable resource produced by commercial forests. As a result, low demand for products derived from commercial forests (e.g. paper) will reduce the incentives of these private forests to plant trees. In the long-term, this cycle will decrease the quantity of the very resource that activists sought to protect.
2. Switch to hybrid cars[3]
Another interesting case discussed by Glaeser is the idea that the increased use of hybrid cars benefits the environment. The logic of the idea is again appealing: as the average car becomes more fuel-efficient, total carbon emissions decline. However, the ‘Jevons Paradox’, named after the economist William Jevons, compels a reassessment of this thought-process. In 1865, Jevons observed that, despite the fact that the steam engine’s rapidly increasing efficiency reduced the reliance on coal, overall coal consumption in England had actually increased eight-fold from 1801 to 1861. The reason for this was as the steam engine’s efficiency improved, more and more people built their lives around the steam engine, reflecting a strong behavioural response. Therefore, the eco-friendliness of the hybrid car comes into question if the behavioural response of driving with lower per mile costs outweighs the environmental benefits per mile of travel, known as the ‘rebound effect.’ In other words, will the lower cost of driving hybrid cars encourage more total driving by an amount large enough to offset the reduced carbon emissions expected from more fuel-efficient cars?
Typically, a more fuel-efficient gas or petroleum-powered car lowers total carbon emissions because the behavioural response or ‘rebound effect’ is weak, as evidenced by an elasticity of miles travelled with respect to miles per gallon being less than one. In this case, with carbon emissions per mile declining at the same rate as marginal costs (fuel costs) per mile, the rate of driving must change at a slower rate than fuel-efficiency for the environment to be better off, reflected by inelasticity.
In contrast, the hybrid car’s reliance on electricity instead of gas or petroleum has the implication that although reducing both carbon emissions and marginal costs per mile, the hybrid car’s reduction in marginal costs per mile is substantially greater than the reduction in carbon emissions. In this case, with the price impact triumphing the carbon impact, the elasticity of miles travelled with respect to miles per gallon must be far less than one if the total emissions are to fall. See detailed formula.[4] In a nutshell, it’s not ridiculous to conjecture that this much cheaper mode of transport (in marginal cost terms) could incite a behavioural blowout in proportions that undo the environmental gains initially expected.
3. Local land use policies[5]
The third tenuous act of environmentalism relates to construction restrictions. The problem with policies that prevent housing construction to take place in one area ‘to protect the environment’ is that they unintentionally sign off to construction in another region, which tends to be more carbon-intensive. While the supply of housing locally can be monitored, the same is unachievable nationwide. A clear example is the city of San Francisco, where the average household emits 19.4 tons of carbon per year (8 tons less than the US average) due to its intrinsically green climate (warm winters, cool summers), but it has counter-intuitively committed itself to these regulations. This well-meaning pursuit of local environmentalism is at the expense of the environment globally.
Why mingle with an economist?
Though these rules of thumb gain traction in the public domain because of their marketability, the more complicated nuances that underpin their efficacy are left behind. Admittedly, the environmentalism movement hasn’t been in vain, through its ability both to raise awareness and alter behaviour. And of course what is also true is that the plethora of forestry regulations would surely safeguard against the gradual extinction of forests and the underlying force behind conservation, hybrid cars and local environmentalism is to inculcate sustainable behaviour. All of this is taken on board.
However, the power of economics lies in its ability to bring into focus all of these initiatives and explain why they won’t work because economics focuses on the decisions of autonomous agents who primarily respond to incentives. So what can be done? Regarding trees, in light of all the protection given to forests and with the increasing use of technology confining the role of paper, the market for paper seems to offer a sensible outcome, without any added restraint on demand necessary. Hybrid cars could benefit the environment if people don’t over-use them, but we must concede that greater reliance on public transport is the optimal solution. As for local environmentalism, perhaps in an ideal world construction should be subsidised in green regions and taxed in less eco-friendly areas. Returning to reality though, encouraging residence in and closely around the city would more closely align with an environmentalist’s nirvana.
In summary, by appreciating that most, if not all, people are guided by self-interest and that people will breed snakes against their government’s wishes to secure a profit, environmentalism can look to broaden its horizons.
References:
[1] Glaeser, E, ‘The Supply of Environmentalism,’ National Bureau of Economic Research, Working Paper 19359 (2013).
[2] Ibid, 22-23.
[3] Ibid, 18-19.
[4] Ibid, 19.
[5] Ibid, 27.
