Markets and Environmentalism - A Call for Better Incentives

Markets and Environmentalism – A Call for Better Incentives

Earlier I wrote that climate change and environmental concerns seemed to be too large of a problem to be left to nudges. Toward the end of Nudge, Cass Sunstein and Richard Thaler acknowledge the reality that nudges alone cannot tackle climate change, but they still encourage actions that follow the spirit of nudges, or at least learn from the psychology that makes nudges effective. Incentives play a huge role in behavior, and  need to be considered when governments approach businesses in an effort to redress the harms of climate change. Markets and environmentalism cannot be separated if we are to have a sustainable climate. Better incentives need to be implemented within markets to adjust for environmental needs.

 

The authors acknowledge market failures related to climate change by writing, “when the air or the water is too dirty, the standard analysis says that it is because polluters impose externalities (that is, harms) on those who breath or drink. Even libertarians tend to agree that when externalities are present, markets alone do not achieve the best outcome.” Pollutants are common externalities, as are traffic congestion and decimated wildlife populations. The cost of negative externalities is squarely on the shoulders of the individuals in the market, either the consumer or the producer. Governments are necessary to deal with these externalities and prevent them from harming innocent bystanders.

 

Additionally, regarding market failures and climate change, the authors continue, “When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene.” Most libertarians agree that labor contracts should be voluntary, with an employer reserving the right to hire anyone, and laborers reserving the right to walk away if their wages or working conditions are unfair. In reality, many people would starve if they walked away from a job, or at least face serious challenges, so voluntary agreements are not always possible. Within the climate change arena, many people cannot simply chose to travel to work by more fuel efficient methods, many people cannot afford the switch to solar power, and many other potential solutions are similarly unavailable, meaning people and businesses are often stuck, involuntarily, with polluting norms for travel, work, and heating or cooling their homes and offices. Markets alone don’t provide the impetus to change the status quo to reflect the reality of climate change.

 

The next post will dive deeper into the incentives and solutions to these problems, but it is clear that markets alone will not direct society toward a climate change solution. The danger of climate change is a long-term danger, where the costs are not experienced in the immediate moment but are instead experienced years and decades later. However, the costs of making adjustments to limit climate change are experienced up front. Upgrading infrastructure, investing in electric and solar technology, and living in more economically friendly ways present immediate costs that nudges cannot overcome. Nevertheless, we can consider the ways in which nudges work and build on those principles to begin to make changes. We can start to better align incentives to limit externalities, and we can preserve choice structures as we move forward with investments and innovation to help us meet the needs of the climate crisis. Government will play a big role and can learns a lot from the psychology of nudges to help address the challenges we face.

Carelessness

“The most disgraceful kind of loss, however, is that due to carelessness,” Seneca wrote in a letter to his friend Lucilius almost 2,000 years ago. Seneca’s Letters from a Stoic is a collection of short passages written from Seneca to Lucilius full of interesting reflections on life. His quick quote about carelessness seems to be as fitting as can be for our times today.

 

We live in a time where great possibilities are open to most of us. On a given weekend we can volunteer our time for a meaningful cause, go snowboarding, go to the beach, visit family, or work on an art project, or try to finally get the garage cleaned. Often, however, we might find ourselves in a position where our time slips past us, and our weekends are lost to Netflix and squandered on meaningless activities. I often look forward to the promises of the weekend on Friday with excitement, but end up looking around my place on Sunday night reflecting on everything I planned to do but never managed to get to. We don’t need to pack every minute of our free time with interesting, fun, and engaging activities, but what I feel on some Sunday nights, is the pain of a loss due to carelessness.

 

Much more seriously, our world faces very extreme consequences from global warming as we continue to put more carbon dioxide into the atmosphere. We face dangerous consequences from the  bioaccumulation of plastics in fish and wildlife species that eat our garbage. Millions of people in the deserts of the United States rely on water sources that are becoming depleted, yet water waste from leaks and unwise water usage persist. Our world faces various ecological crises that result more or less from our own carelessness. Just as I feel terrible some Sunday nights about the way I wasted my time during the weekend, we will look back at where we are today and feel extreme regret for the carelessness with which we wasted resources and allowed our planet to degrade.

 

Solving my problem on Sunday nights is not impossible. It just requires that I be more considerate about my time. It requires that I think about what I am doing and why I am doing it to ask myself if there are other things I should be doing and if I am going to look back and be glad that I spent my time engaging with any given activity. With some planning going into the weekend, I can be successful in engaging with the world in a meaningful way on my days away from the office. The same is true for our climate crisis. If we ask ourselves what we are doing and how our actions contribute to the overall sustainability of our planet, we can start to make small changes to live better on our planet. We won’t individually make much of a difference, but collectively we will start to make changes and we can all contribute to a consciousness about the importance of using our resources wisely. That mindset will eventually translate into smart decisions globally to help us mitigate our impact on the way things are going and prevent us from a disgraceful loss of a habitable planet due to our own carelessness.