The Commons and Climate: Can Economics Tackle the Challenge?

Sep 29, 2010

The Commons and Climate: Can Economics Tackle the Challenge?
RFF Feature
September 29, 2010 

Earth from SpaceOne hundred years ago, the American Economic Review published a landmark study highlighting what is now widely termed “the problem of the commons”—the gradual depletion of commonly held natural resources.

In a new RFF Discussion Paper, “The Problem of the Commons: Still Unsettled after 100 Years,” economist Robert N. Stavins finds that concerns about the commons have dramatically resurfaced in recent years as doubts grow about the carrying capacity of the planet, particularly over the issue of climate change.

“Commons problems have not diminished, and the lag between understanding and action can be long,” says Stavins, a professor at the John F. Kennedy School of Government at Harvard University and an RFF University Fellow. “While some commons problems have been addressed successfully, others continue to emerge. Some—such as the threat of global climate change—are both more important and more difficult than problems of the past. Fortunately, economics is well positioned to offer better understanding and better policies to address these ongoing challenges.”

Stavins notes that many renewable natural resources, such as water, forests, fisheries, and diverse plant and animal species, have been depleted or rendered extinct because of poorly defined property-right regimes. Market failures also have led to degradation of air and water quality, inappropriate disposal of hazardous waste, depletion of stratospheric ozone, and accumulation in the atmosphere of greenhouse gases linked to global warming.

“The irony is obvious: many nonrenewable natural resources, which are in finite supply, have not become more scarce over time, and none has been exhausted; but renewable natural resources, which have the capacity to regenerate themselves, have in many cases become more scarce, and in some cases have indeed been exhausted, that is, become extinct,” Stavins writes.
“This irony can be explained by the fact that while most nonrenewable natural resources are characterized by well-defined, enforceable property rights, many renewable resources are held as common property or open-access.”

Excerpts from the Paper

“Climate change is a commons problem of unparalleled magnitude along two key dimensions: temporal and spatial. In the temporal domain, it is a stock, not a flow problem, with greenhouse gases remaining in the atmosphere for decades to centuries. In the spatial domain, greenhouse gases uniformly mix in the atmosphere, and so the nature, magnitude, and location of damages are independent of the location of emissions. Hence, for any individual political jurisdiction, the direct benefits of taking action will inevitably be less than the costs, producing a free-rider problem, and thereby suggesting the importance of international—if not global—cooperation.

“There is widespread agreement among economists (and a diverse set of other policy analysts) that economywide carbon pricing will be an essential ingredient of any policy that can achieve meaningful reductions of CO2 emissions cost-effectively, at least in the United States and other industrialized countries. The ubiquitous nature of energy generation and use and the diversity of CO2 sources in a modern economy mean that conventional technology and performance standards would be infeasible and—in any event—excessively costly. There is somewhat less agreement among economists regarding the choice of specific carbon-pricing policy instruments; some tend to support carbon taxes and others cap-and-trade mechanisms.

“In truth, the two approaches are more similar than different. A carbon tax would directly place a price on carbon (most likely upstream, where fossil fuels—coal, petroleum, and natural gas—enter the economy), with quantities of carbon use and CO2 emissions adjusting in response. An upstream carbon cap-and-trade system would constrain the quantity of carbon entering the economy, with prices emerging indirectly from the market for allowances. Either instrument can be designed—in principle—to be equivalent to the other in distributional terms. If allowances are auctioned, a cap-and-trade system looks much like a carbon tax from the perspective of regulated firms. Likewise, if tax revenues are refunded in particular ways, a carbon tax can resemble cap-and-trade with free allowances.”