Incentives for Environmentally Responsible Markets

Incentives for Environmentally Responsible Markets

When it comes to environmental issues, no single actor is completely to blame, and that means no single actor can make the necessary changes to prevent catastrophic climate change. This means we can’t put all the weight on governments to take actions to change the course of our climate future, and we can’t blame individual actors either. We have to think about economies, polities, and incentive structures.


In their book Nudge, economists Cass Sunstein and Richard Thaler look at what this means for markets and regulation as we try to find sustainable paths. They write, “markets are a big part of this system, and for all their virtues, they face two problems that contribute to environmental problems. First, incentives are not properly aligned. If you engage in environmentally costly behavior next year, through consumption choices, you will probably pay nothing for the environmental harms that you inflict. This is what is often called a tragedy of the commons.”


One reason markets bear some of the blame and responsibility for the climate change crisis is because market incentives can produce externalities that are hard to correct. Climate change mitigation strategies, such as research and development of more fuel efficient vehicles and technologies, are expensive, and the costs of climate change are far off. Market actors, both consumers and producers, don’t have proper incentives to make the costly changes today that would reduce the future costs of continued climate change.


A heavy handed approach to our climate change crisis would be for governments to step in with dramatic regulation – eliminating fossil fuel vehicles, setting almost unattainably high energy efficiency standards for furnaces and dishwashers, and limiting air travel. Such an approach, however, might anger the population and ruin any support for climate mitigation measures, making the crisis even more dire. I don’t think many credible people really support heavy handed government action, even if they do favor regulation which comes close to being as extreme as the examples I mentioned. Sunstein and Thaler’s suggestion of improved incentives to address failures in markets and change behaviors has advantages over heavy handed regulation. The authors write, “incentive-based approaches are more efficient and more effective, and they also increase freedom of choice.”


To some extent, regulation looks at a problem and asks what the most effective way to stop the problem is if everyone is acting rational. An incentives-based approach asks what behaviors need to be changed, and what existing forces encourage the negative behaviors and discourage changes toward better behaviors. Taxes, independent certifications, and public shaming can be useful incentives to get individuals, groups, and companies to make changes. I predict that in 10-15 years people who are not yet driving electric cars will start to be shamed for continuing to drive inefficient gas guzzlers (unfortunately this probably means people with low incomes will be shamed for not being able to afford a new car). In the US, we have tried to introduce taxes on carbon output, but have not been successful. Taxing energy consumption in terms of carbon output changes the incentives companies have with regard to negative environmental externalities form energy and resource consumption. And independent certification boards, like the one behind the EnergyStar label, can continue to play an important role in encouraging technological development of more efficient appliances. The incentives approach might seem less direct, slower, and less certain to work, but in many areas, not just climate change, we need broad public support to make changes, especially when the costs are high up front. This requires that we understand incentives and think about ways to change incentive structures. Nudges such as the ones I mentioned may work better than full government intervention if people are not acting fully rational, which is usually the case for most of us. Nudges can get us to change behaviors while believing that we are making choices for ourselves, rather than having choices forced on us by an outside authority.
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.

Cities and Environmentalism

Cities can look like dirty places with no greenery or living plants among the concrete, asphalt, and towering buildings. At the same time, however, cities can be much more efficient and environmentally friendly than rural or suburban places. I live in the Western US and we expend a lot of energy just to move things from one place to another. A lot of the energy we produce just goes into moving water around. For us to get from our homes to our places of work can require a lot of driving by ourselves in a car. And because the West has so much open space, we have built large neighborhoods with houses spaced out from one another, requiring more concrete for sidewalks, more asphalt for roads, and more copper for electric lines.


The amount of resources needed to build suburban and rural connections between people is much greater than the per capita need within cities. As Jeremy Nowak and Bruce Katz write in The New Localism:


“The linkage between culture and cities also has to do with environmental sustainability and how its associated values translate into imperatives to re-purpose legacy places. Cities are ideal places for environmental stewardship, which is important to the culture: urban dwellers are not as car dependent as people in the suburbs, and urban life can be more energy efficient. Urban dwellers can use public transportation, walk, or ride a bicycle to work. Thus urban civic activism based on retrofitting the older built environment emerged in concert with an environmental ethos.”


I live in Nevada which is a state with a lot of rural space. I live in one of the two major metropolitan regions, but in the smaller of the two and toward the outskirts of town where the suburban starts to give way to the rural. I currently have an incredibly long car drive to work. The people I live around generally don’t seem to be as worried about environmental concerns, or if they are, then like me they may chose to ignore them or to accept living with a feeling of guilt because our way of life is in some ways very costly and resource demanding. The challenge is that it is hard to change and do much about our environmental impact, and we like our space, our quiet neighborhood, and our affordable homes.


People who live in the middle of a city don’t have as many of the same barriers to living a more energy efficient and environmentally considerate life as I do. When car reliance is less pronounced, it is easy to go without a car and decry the damage done by cars to our environment. When you spend less time in traffic and have more ability to use your time, you can engage in more pro-social and pro-environmental movements. Given the state of climate change, this is a positive aspect to cities. People can live more efficiently and be more inclined to advocate for a more environmentally considerate way of life. A shift in what we view as a good life (away from the picket-fence-two-car-garage-and-a-dog-in-a-yard to a life of greater connections in a city with less individual space) is a change in values, and is something that is leading to a revival of city centers and urban societies across the country. As networks and connections matter more and more, living close to people and having more interactions is becoming more valuable than having one’s own space and things.


Another important aspect in Katz and Nowak’s quote is the focus on rebuilding and re-purposing. Cities have existing infrastructure that needs to be updated as people move back into and begin to redifine their cities. This gives cities the chance to establish themselves as cleaner and better versions of what they have always been. The way that streets, buildings, and open spaces are used can be reimagined during this transition, allowing them to become more environmentally sustainable and more economically inclusive. This helps reduce the overall carbon footprint of city residents and helps them become places where people can actually live, work, and enjoy their time.

Do What Is In Us

Lord of the Rings can be read as a reaction against the industrial age, a reaction against military might, and a reaction against colonial conquests. The most clean, well functioning, and happiest places in the book are places of nature, where hobbits live peacefully with plenty in the shire, and where elves live with wisdom and respect for trees, forests, rivers, and valleys. Tolkien seems to express the idea that we should live a bucolic life that is more connected with nature, tending to it to receive the gifts that nature gives us as opposed to laying down our black mastery of the planet and bending it to our will as we do with roads, railroads, dams, and the machinery of war.


In the story, Gandalf says, in a reaction to Sauron trying to rule everything, “Yet it is not our part to master all the tides of the world, but to do what is in us for the succor of those years wherein we are set, uprooting the evil in the fields that we know, so that those who live after may have clean earth to till. What weather they shall have is not ours to rule.”


Succor is defined, according to the dictionary in my Kindle, as “assistance and support in times of hardship and distress.” Gandalf says that we should live our lives in a way that sets the world up to be more successful and bountiful in the future. We should strive to remove bits of evil from the world, to constantly make small improvements or do our little part to make the world a better place. We should not do this just for ourselves and for our happiness, but so that future generations can inhabit a world that can still provide for their needs.


This message is important for me. We can set out to be the best, to always have more, to accumulate as much fame and notoriety as possible, and to rule the world with golden towers and green acres everywhere we go. Or, we can accept that the world is not ours, we can strive toward mastery of a few things without spreading ourselves too thin, and we can focus on our corner of the world and what is in our power right now to make the world a better place. This may look like picking up trash along our local street, it may look like calling our grandma, or it may look like smiling at that person smoking outside the Walmart and saying hi rather than giving them a contemptuous look and treating them like trash. We can strive to be great and to make lots of money and influence the world, but what really matters is if we take small steps daily in the ways we can to make the world better for the future, even if that means we inconvenience ourselves a little to do the good work.

Preservation of Our Environment

Taking care of our shared spaces and maintaining our environment is not something we do a great job of. Fields, rivers, lakes, and outdoor areas are everyone’s shared responsibility, and because of that, they are no one’s individual responsibility. We will maintain our own lawns or pay people to do our home landscaping, but when it comes to our public outdoor spaces, we often fail to maintain and preserve the land we share. These spaces are expensive to maintain, the threats of invasive species are hard to understand, and it is not clear who should be the person that spends the time and energy taking care of our public places. In political science this dilemma is known as the Tragedy of the Commons, and Cory Booker addresses it in his book United.


Booker writes, “We are all dependent on nature, so we all have a stake in the preservation of our environment.” Taking care of our planet is important because it is the only one we have, and it is what sustains our individual lives, our societies, and the only life we know of in the universe. At the same time, taking care of the planet is unclear with ecosystems connected and dependent on each other in complex ways, with connections we are not always able to understand. Scientific research is expanding, but still not at a point where perfect models of natural processes such as rainfall, erosion, or phosphorous cycling are possible. But we depend on what we know about nature, and must continue to push forward and be cautious with how we use nature so that we can maintain what we have for not just our generation’s use, but for the use of future generations.


The truth is that we must use nature. We need to extract minerals, metals, and plant based materials from the earth. The physical structures that protect us and allow us to thrive come from what we pull out of the earth. Our medicines are dependent on plants and compounds that plants create, and our smartphones rely on rare elements mined form across the planet. Our dependence and demand for what the earth has to provide is very real and feels much larger than any one individual, making our personal responsibility feel tiny in comparison. Nevertheless, it is important that we use what the earth has to provide in a rational and reasonable manner, recycling what we can, eliminating waste when possible, and constantly striving to take things from the planet in the least disruptive manner. This responsibility is difficult and expensive, which is why the commons are ignored leading to the tragedy they face. We must understand that pollution, imbalanced extraction, and continued consumption do have costs that are greater than their immediate benefits, even if we only see the benefits now and can’t understand the costs of the future.