Climate Policy: Adaptation, Part I, Theory

Hurrincane Sandy once hit the coastline of Atlantic City, New Jersey 

Originally appeared in MasterResource, a free-market energy blog, on May 20, 2015.

In the absence of property rights to the commons, there are still two other entrepreneurial responses that lean in the direction of rational optimism: one is discovering new ways of getting more from limited resources—productivity; and the other is finding substitutes for increasingly scarce resources.

Rather than simply throwing up our hands in despair with respect to what appear to be intractable problems of establishing property rights and encouraging markets in regard to global climate, we turn to a major theme of free market environmentalism—dynamic markets provide the best hope for human interaction with dynamic environments.

Once we abandon static models of market equilibrium and recognize that people respond to changing environmental conditions (e.g., experiencing rising sea levels), as well as resource prices that reflect those conditions (e.g., falling beachfront property values), the prospects of gloom predicted by the 2014 IPCC Report or by National Climate Assessment Report for the United States, [1] become less likely. This is because human action through market processes, entrepreneurial activities, and institutional evolution allow us to adapt to the dynamic environment, including climate change, especially when changes are incremental, allowing time for adaption.

The dynamic processes, found in both ecosystems and markets, demonstrate an important connection between ecology and economics as discussed in chapter 2 of our book, Free Market Environmentalism for the Next Generation. Much like the interaction of organisms in nature, the market process emphasizes the interaction of individuals based on factors that are time- and place-specific, i.e., based on experience.

Just as individual species fill niches in ecosystems, entrepreneurs find market niches and specialize in production and marketing to fill niches. Successful entrepreneurship depends on the entrepreneurs utilizing local knowledge and resources more efficiently than other individuals. As a result, inefficient resource use in markets and in ecosystems is crowded out in an evolutionary process where sustainability means profitability.

The ability of market institutions to resolve conflicting human demands on the environment relies on entrepreneurs guided by market prices to reallocate inputs and outputs. Entrepreneurs appear to follow Emma Marris’s environmental advice that we should “give up romantic notions of a stable Eden . . . and try just about everything” (2011, 170). They do not see markets in equilibrium; they see market opportunities and take action. In some cases, their actions will be unsuccessful. However, just as poor adaptations in nature are eliminated, albeit slowly, via Darwinian evolutionary processes, bad decisions in markets are purged by economic losses.

Markets powered by entrepreneurs provide a way of adapting to a dynamic world of changing human demands on nature’s bounty as it changes, too. In cases where property rights solutions seem impossible, as with high-seas fisheries or the global atmosphere, institutional entrepreneurs are always on the lookout for ways to improve property rights. [2]

The flip side of costs not accounted for in market transactions—such as the cost of climate change not accounted for when we purchase gasoline to power our cars—are the benefits not being captured by would-be owners of the atmosphere. If an institutional entrepreneur can define and enforce property rights to an unowned resource, he captures the value of the resource. As discussed in chapter 6 of our book, Free Market Environmentalism for the Next Generation, water rights west of the 100thmeridian where pioneers found water law from the East inadequate for their needs and hammered out the prior appropriation system.

In the absence of property rights to the commons, there are still two other entrepreneurial responses that lean in the direction of rational optimism: one is discovering new ways of getting more from limited resources—productivity; and the other is finding substitutes for increasingly scarce resources. When fish get harder to catch, fishermen whose incomes are at stake have every incentive to find ways of increasing productivity of fisheries (e.g. fish farming) or lowering their production costs, or both.

And to the extent that fewer fish of one species means that the price of those fish will rise, market opportunists have an incentive to find a substitute that is cheaper. Hence, farmed salmon becomes a substitute for wild salmon, and imitation crab meat becomes a substitute for the real thing. The substitutes are never perfect, but they do lower the price for the consumer and reduce some of the pressure on the more scarce resources.

Finally, when humans experience changes in their environment and have time to adapt to the changes, they have shown a remarkable ability to do so. Rising sea levels is one of the major concerns about global warming. As the National Climate Assessment Report puts it:

Sea level is projected to rise by another 1 to 4 feet in this century. A wider range of scenarios, ranging from 8 inches to 6.6 feet of rise by 2100, has been suggested for use in risk-based analyses. In general, higher emissions scenarios that lead to more warming would be expected to lead to sea level rise toward the upper end of the projected range. The stakes are high, as nearly five million Americans live within four feet of the local high-tide level. (NCADAC 2013, 4)

Such hyperbole ignores the fact that sea levels are rising very slowly, giving people time to move. In fact, according to the U.S. census, between 1990 and 2008, “the growth in coastline counties fell below the growth for the nation and its noncoastline counties” (Wilson and Fischetti 2010, 3), suggesting that the geographic distribution of the population is dynamic, perhaps even already responding to global warming concerns, and certainly responding to catastrophes such as Hurricane Sandy by not returning to coastal areas.

To be sure, such responses are more likely for people who have good information about alternative places to live and who are better able to afford the move, again suggesting that sacrificing income today may hinder adaptation in the future.

Read Part II here.

[1]  For more information, see U.S. Global Change Research Program(2014).

[2]  For a discussion of institutional entrepreneurs, see Terry Anderson and Peter Hill, The Not So Wild, Wild West: Property Rights on the Frontier (Stanford: Stanford University Press, 2004), chapter 2.

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