Can the Market Solve the Ozone Problem - Coursework Example

Can the market solve the ozone problem? One of the troubling features of the depletion of the ozone layer is its lingering effects. Ozone absorbs harmful ultraviolet radiation, thereby providing a shield for the Earth’s biosphere. Large doses of such short-wavelength radiation cause skin cancer. Some of the cumulative damages will not be apparent and will not be felt into the present generation’s calculations. Many of those who would be affected by a tremendous hole in the ozone layer are not present here to protest. That is why one might be less sanguine about the possibility of a market solution, even in an idealized market, because agents have only a finite life. However, it is not entirely impossible to say that a market solution is not possible to address the ozone problem. Challenge In the problem of the ozone depletion, it is necessary to address the problem that the market ignores the needs of future people. According to Avner De-Shalit (1995): Although prices may be high, the market will still be free, with no official obstacles to the depletion of the natural resources or the pollution of clean environment. Since natural environment are consumed on a ‘first come, first served’ basis, contemporaries may be willing to pay a great deal and use these resources rather than trouble with conservation. (p. 135) In light of this, it is fundamental that in order to capture the full effect of pollution, there should be the existence of some link between the present and the future. How can we achieve this? The answer lies not in the agents of the market - the population in today’s generation – but on the firm, which has the capacity to live forever. This starts with the owner of the firms, there is a potential of taking responsibility by looking beyond their lifetimes. An owner is in a better position to see the ozone problem in terms of its long-term effect than what is currently experienced from the perspective of his firm. It is safe to say that, as an owner, he must take care that the firm survives for his predecessors and heirs. The consequences of future environmental damage are reflected in the firm’s price – maximizing value requires consideration of all future effects of today’s actions. The quality of the environment, wrote Partha Dasgupta and Karl-Göran Maler (1997), is part of the capital stock, just like bridges and buildings and that there is every reason to treat the environment along with other capital as relevant input in a firm’s production function. (p. 38) This is one of the major factors in the market solution to the ozone problem. Unique The above argument underscores the uniqueness of the ozone depletion as an environmental problem for businesses. The effect of the ozone has a wider net than other environmental problems such as acid rain or water pollution. A company for example, aware of the environmental effect on the firm, may “go green” and refrain from polluting the rivers and the lakes, or cutting down forests. But this is often at the cost of polluting and depleting the resources of the poorer countries of the Third World. What this example cited are environmental problems that are localized. The ozone problem affects everybody regardless of the location and this factor could drive firms and their owners to act and become more concerned with addressing it. The “Pricing Approach” The ozone problem could also be effectively dealt with by a branch of economics that seeks to prevent or ameliorate environmental problems by using economic instruments. One of the most influential that could prove helpful in a market-based solution is the pricing approach. The argument here is that environmental problems arise because the environment is not priced and is thus a ‘free good’. (Johnston et al. 2000, p. 215) From this perspective, ozone destruction is treated as an “externality” problem arising from the fact that the release of chlorofluorocarbon (CFCs) into the atmosphere is free and thus not factored into economic decision-making. What constitute as a solution in this circumstance is by pricing the environment and amending existing market transactions or create new markets in environmental assets. For example, a pollution tax on companies releasing CFCs will be imposed; a government subsidy to support alternatives to CFCs as a way of pricing previously unpriced goods in order to amend existing markets in an environmentally friendly way. Alternatively, “government could issue pollution permits which together limit CFC emissions but which could be freely traded between companies so that those less able to reduce CFC emissions can purchase permits from those who are able to so.” (p. 214-215) The pricing approach supports the argument that the owner of the firm has the proper incentive to look beyond their lifetimes. Since the environment is a capital stock, then the firm asserts some form of proprietary rights over it. Although today’s investment will have a long-term effect on the capital stock, the presumption is that these effects will be reflected in today’s market value and an efficient outcome follows. The pricing approach clearly prioritizes the market although the initiatives come from the states. However, there is a pitfall to this argument: It is not enough to own the ozone layer above someone’s property and instead some entity must be assigned the rights to the entire ozone layer. In this example, literally millions of stakeholders and participants must negotiate over the disposition of this public turned private commodity. What is significant in the “pricing” or the economic approach to addressing the ozone destruction problem is that it highlights the principle that places the blame into the lap of the market: the ozone problem is a consequence of the ‘market failure.’ The market, therefore, becomes a key mechanism in order to correct the ozone destruction and in coming up with a suitable and effective solution to counter it. In addition, in pricing the environment – the ozone - the market is now in a better position to assess the economic activity and patterns with better information on the real costs and prices of commodity supply and demand. Environment as a Property As previously cited, one of the primary reasons why the mechanism of market processes cannot resolve environmental problems is that many environmental resources are not owned and exist outside the domain in which these mechanisms allegedly operate. Robert Naduae (2006) cited that the most effective way to internalize negative environmental externalities is to revise the legal system to allow for the assignment of ownership rights to environmental resources. To quote: If these resources were owned… the invisible hand would eliminate undesirable uses, and adverse environmental impacts would disappear without the need for government intervention. In this situation… there would be equivalence between paying someone for a good and charging someone for a bad in a state of general equilibrium where optimal social outcomes are necessarily realized. (p. 128) To cite an example of a market-based scheme addressing the ozone problem, we have those that were mentioned in the earlier discussion of the Kyoto accords. The scheme is characterized by a predetermined level of emissions that is established within a specific region, and that permits equal to the permissible total emissions are distributed among producers in the region. Polluters who keep their levels of emissions below that allowed in their permits can sell or lease their surplus permits to other producers or use them to offset emissions in other parts of their production system, say those located in different region. The result is that, because these permits are limited and have, therefore, scarcity value, this should provide sufficient incentives to create a market which they are traded. Market’s Role With regards to the Montreal Protocol, there is a great role placed on the market. The idea is that without it, there is a great possibility that the negotiations, which is finally moving forward towards an international cooperation to arrive at a solution, will bog down. Here is an insight from Gerrard, Ferroni and Mody (2001): The Montreal Protocol basically redirects incentives in a terrific way, so that once enough countries are in the agreement, everyone wants to come in, when there is pretty good assurance that compliance will take place. The companies believed a market would be available. But the market was only going to be available when the government intervened. (p. 95) Here one can see how the private sector is pivotal even in terms of public decision-making in order to develop policies with the ozone agenda. As it turned out, with the Montreal experience from which the Kyoto Protocol was modeled after, what the governments wanted was to require that chlorofluorocarbons be eliminated only if the cost of doing so wasn’t too great, but the cost depended on the innovations undertaken by industry – and industry doesn’t want to innovate unless it believes the market will be there. Because of this dimension, it is not surprising if there are people who would argue that the ozone problem is a different issue from climate change. Other market-based instruments that environmental economists use to posit economic solutions to environmental problems include subsidies, incentive structures, performance bonds, and deposit refund schemes. (Nadeau, p. 130) These are premised on metaphysical assumptions about part-whole relationship in economic reality that are foundational to neoclassical economic theory. A more detailed discussion of the entire range of market-based solutions developed by environmental economists that might be significant in the ozone problem could be found in Robert Stavins (2000) book, Economics of Environment. Public vs. Private An important dimension fundamental in a market solution to the problem is in regard to quantifying the problem after it is revealed or discovered. From here, it becomes possible for intervention, for instance from the part of a government in enacting statutes and policies that would establish a market-based solution. One should remember that what the current state of affairs is dominated by the free-market policies that do not promote accountability to future generations. But the potential for a market-driven solution is very promising in such a setting. The abatement of the ozone solution has been largely due to its transnational nature requiring the complex policy-making from national governments. (Ernst 2000, p. 36) This is understandably hard to achieve. We have seen this in the never-ending debate on the greenhouse emission reduction among countries. But with the globalized nature of firms, a market-driven approach is more promising than ever. Consider if, instead of states negotiating with each other, we have the cooperation among firms which are less likely to encounter the challenges posed by geographical, political, social and economic differences. The market is in a better position to negotiate among themselves and to initiate a coordinated approach to the problem. Here, there is no need to go through with the endless bureaucratic processes that plague intergovernmental efforts at a solution. All in all, private ownership and the market process, when they can be adopted, make resource owners and users accountable for the environmental costs they incur and reward them for value produced. This is true in the case at hand. If we are to review the market economies around the world, it is unmistakable that over the past two centuries, the benefits of replacing commons with private property rights and markets are confirmed. Not only such nations are consistently more prosperous, they also have better environmental quality. The point is that, for instance, if, indeed, the ozone would be granted property rights, given pricing, or, in general terms, measured by economic instruments, then the market can work to protect it not just because it is socially or morally required to do so, but because it is profitable for their businesses. More importantly, vital elements of the environment cannot be protected by market mechanisms simply because they exist outside the market framework. According to Saren et al. (2007), “without a market, economics views a resource such as the ozone layer (upon which all life depends) as ‘worthless’.” (p. 199) Unfortunately, the ozone, along with the vast majority of the biosphere is not covered by price such as air, water, common land, habitat, species, etc. References Dasgupta, P and Maler, Karl-Goran, M, 1997, The Environment and Emerging Developmental Issues, Oxford University Press. De-Shalit, A, 1995, Why Posterity Matters, Taylor & Francis. Ernst, W, 2000, Earth Systems, Cambridge University Press. Gerrard, C, Ferroni, M and Mody, A, 2001, Global Public Policies and Programs, World Bank Publications. Johnston, R, Gregory, D, Pratt, G, Watts, M, and Smith, D, 2000, The Dictionary of Human Geography, Blackwell Publishing. Nadeau, R, 2006, The Environmental Endgame, Rutgers University Press. Saren, M, Maclaran, P, Elliott, R, Goulding, C, Shankar, A & Caterall, M, 2007, Critical Marketing: Defining the Field, Butterworth-Heinemann. Stavins, R, 2000, Economics of the Environment 4th ed., New York: Norton. Read More