The libertarian argument for government-mandated carbon markets

Following up on her post from last week concluding that the idea of a carbon tax is fatally flawed (her post is here, my thoughts are here), economist Lynne Kiesling is responding to questions about how she can be both an avid free-marketer and an advocate of a government-mandated and -designed market in carbon emissions.

It’s a good question. The beauty of markets is supposed to be that they arise naturally. At their best, without distortions or created by either governments or monopolists with undue power, free markets just let individuals figure out what’s best for themselves, by themselves. When two rational parties enter into an exchange freely, they both come out of it better off. In the end, everybody goes home either happy or fully cognizant of what he or she has to do to become happy. And all this just… happens. Such markets are, in a play on words that pleases me, organic.

So what the heck are free-marketers doing calling for the government to set up markets in carbon?

Kiesling’s answer is great:

Many of what we think of as the most free and most capitalist of our market institutions, such as financial exchanges, involve elaborate contracts and laws enforcing those contracts. This legal context determines the rules by which we exchange; the context and the rules form the market institution. The quality of that institution and its variation across places or across time can affect how much exchange actually occurs, and how much net benefit is created through exchange. Even in free markets, the market institution is carefully designed, although in most organic markets the design process is a very distributed one, building upon centuries of legal precedent and experience, so it doesn’t look like it’s highly designed or deliberate.

The problem is that in markets coming out of regulation or in markets that have never existed before, the market institution has to be designed in less-than-organic circumstances. That’s the hard part, because it introduces a political dimension to the design of market institutions that is not present in more organic situations, because there are special interests in the status quo and special interests in the future setup, all trying to influence the design of the rules in the market institution.

It ain’t easy, and everybody wants to get their fingers into it to poke in special holes for their own benefit. If they get to, the thing won’t work. Protecting carbon markets and related environmental measures from that kind of interference may be where rigorous, unbending free-marketers can make their biggest contribution to the environmental movement.

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