Solving the long term environmental problems on the grounds of the directives originating from the Kyoto protocol would be similar to crossing the ocean by driving a car: at the end not only the Ocean would not be crossed, but the car would sink with all its crew.






The Kyoto protocol fixes specific deadlines for 159 countries to reduce green-house gas emissions: each country should reduce their emissions by a country-specific percentage and by a certain date.

The Kyoto protocol is a typical example of a top-down approach in dealing with environmental issues: a very limited number of people fix arbitrarily the objectives to be reached (in the case of the Kyoto protocol, the reductions of emissions and the timeframe for such reductions) and a series of national "measures" should follow to guarantee this result.

This approach fails to recognize that, in order to address environmental issues and create sustainable improvement, what is relevant is not fixing arbitrary objectives but, rather, creating the best possible conditions for an order which would develop spontaneously in the direction desired.

Environment conditions depend largely, directly or indirectly, on the long, medium, short and extremely-short-term choices of individuals (including organizations). Which products to buy, which means of transport to use for what, where to throw the empty plastic bottle I have in my hand, are just a few examples of such choices.

If, for each day, we considered the number of times each individual (in most cases without even knowing it) makes choices which affect the environment and if we considered the number of individuals, we would soon realize that every "measure" which does not create an effective incentive structure for these individuals and which does not take advantage of the specific knowledge each individual possesses, is bound to fail. In other words, every "environmental measure" which does not move in the direction of a "spontaneous environmental order" will fail in the long run.

Furthermore, every such measure should be limited by abstract rules, that is by general principles which bind the members of the community under consideration, and this is what makes the measure sustainable. For example, an "environmental measure" which violates the general principle of private property, even though it may be sold as a measure for a "sustainable environment", is unsustainable itself.

Environment is a long term thing, therefore every attempt to deal with it should be based on a long term perspective. But "long term" is a tricky word. It is usually associated with the timeframe of the issues at hand. However, I believe that "long term", which is the battlefield of the liberal ideology, is less about number of years and more about "spontaneity", less about quantity and more about quality.

The Kyoto protocol is usually considered as a "long term plan" as its timeframe extends over many years. However, since its results should be the execution of human design, I prefer calling it a "short term plan", as it does not create a virtuous circle, spontaneously reinforcing itself in years, but aims simply at curbing a vicious circle in a given number of years. In other words, it is a plan which does not affect the direction of spontaneous forces.

As Hayek says, spontaneous orders are the result of human action but not of human design, and it takes generations for them to develop, so every measure which endeavours to create the best possible conditions for the development of a desired spontaneous order is, in my opinion, a long term measure, while every measure which relies on commands and executions for the attainment of particular objectives is a short term measure, independently of the number of years involved.

And while human action adapts itself more or less immediately and spontaneously to new technology or new possibilities, human design does not: a 20 year plan is meaningless since it cannot foresee all the technological possibilities which will be developed in the meanwhile.

In a truly long term approach, one could never say by how much green-house gas emissions have to be reduced at a given date, no matter how far away in time this is.

The Kyoto protocol, which is still being opposed by the United States, is now being questioned also by other countries. The reason for this is, in part at least, motivated by the adverse negative effects that it would have on the GDPs.

I believe that a negative evaluation of the Kyoto protocol on the exclusive grounds of its impact on the GDP is incorrect: even though it is a fundamental index, the GDP is not a sufficient measure of economic prosperity, particularly in the long run. If two countries had the same GDP but one had a devastated environment while the other a healthy one, one could not possibly say that the economic position of these two countries would be the same, as well as one could not say it if, ceteris paribus, one country had individual liberties and the other did not, or one country had the rule of law and the other did not, etc.

My opinion about the Kyoto protocol is negative not exclusively because of its effects on the GDP (a healthy GDP is the necessary condition for the development of the applied research for hydrogen cars and for the development of the relative market), but also because the means adopted to tackle the problem are completely inadequate: solving the long term environmental problems on the grounds of the directives originating from the Kyoto protocol would be similar to crossing the ocean by driving a car: at the end not only the Ocean would not be crossed, but the car would sink with all its crew: in the short run (t=0), improving the environmental conditions with commands and executions is as effective as improving the economy of a country by printing money or by redistributing it: the aim could easily be reached by impeding the use of cars and all production activities. The problem is what happens at t=1.

So what could be a favourable alternative solution? Of course the problem is quite complex and there is no easy answer to this question beyond the general characteristics of the approach to follow. A liberal approach would focus more on rules rather than on objectives.

The United States seem to be in favour of a solution which includes tradable property rights (in this case tradable pollution rights) at macroeconomic level and taxes.

Here I would like to suggest an idea which could be the basis of a proposal which could constitute one very particular microeconomic element of a much more complex long term environmental strategy.

The idea is quite simple and definitely not innovative from a theoretical point of view, as it is a very practical microeconomic application of the Coase's theorem and of the principle of tradable property rights. In fact it is more an application than an original idea.

Before describing it very shortly, however, I would like to emphasise the fact that it should be investigated much further not only in terms of actual costs, but also in terms of economic dynamics, red-tape consequences and, most important of all, in terms of principle (in particular regarding to government intervention, privacy issues and individual liberties). So at this level this is nothing more than a brainstorming thing.

For reasons of clarity I shall divide the presentation of the theoretical part from the presentation of possible practical solutions.

From a theoretical point of view, the idea is based on the concept of "Private Co2 Emissions Rights" (PER) to be distributed yearly by the state to all citizens (from 0 years of age) on a pro-capite basis.

If the private emission rights for year 2006 were, say, 100, Mr. Smith could drive his car every year up to 100 units of PER with no extra cost (tax). If he wanted to drive his car for more than 100 units of PER per year he should "re-charge" his PER units card by purchasing a package of, say, another 100 units at the official price, say €100 per 100 units.

The number of PER units used would be directly proportional not only to the number of kilometres driven, but also to other key factors such as the pollution factor of the car driven (ceteris paribus, 100 PER units would last much longer for a hybrid car than for a SUV car), the driving style, etc.

The PER units would be proprietary, that is freely tradable between individuals (say on e-bay). As such, they could also be transmitted from generation to generation, like private property, and accumulated. The fact that the PER units could be freely traded by the individuals is particularly important. Since the official price offered by the state is fixed (in our example, 100€ per 100 units), the price of private trading has to be lower (if it was equal or higher there would be no incentive to buy it from an individual rather than from the state).

Of course, one key point is "who will decide how many kilometres, on what type of car, having what type of driving style, will correspond to 100 PER units?". If this was decided by the typical bunch of wise guys behind their desks, one could say that this would look more like an order and less like a spontaneous one. The answer to that question should be as much as possible the picture of the actual current situation: the average driver, who drives an average number of kilometres per year on an average car should not find his situation changed (for instance, he should not pay more car-related taxes than he currently does).

A consequence of this status quo starting situation and of the national (or local) definition of PER units' "purchasing power", is that 100 PER rights in Italy (where bikes are as rare as public transport) should unfortunately allow initially a much higher number of kilometres than, say, in the Netherlands (where bikes are used regularly and public transport is more efficient).

Of course, some individual differences, also significant, would occur: the person who uses the car for working would be disadvantaged as compared to the one who does not, but no more disadvantaged than the person who uses the mobile phone for working as compared to the one who does not.

If initially the average driver should not find any difference, where is the gain? The gain would not be in t=0, but in t=i , and the higher the "i", the greater the gain. That's the virtuous circle effect of spontaneous orders.

Every year the "purchasing power" of PER units would be gradually revised according to a series of factors such as the new (environmentally-friendly) technology available for instance, or the level of (environmentally friendly) public transports available. From t=0 onwards, individuals would start using their individual knowledge for protecting the environment without even knowing it. And the efficiency of environmental policies would start to be gradually understandable also to common individuals, who will start seeing it reflected in a number, as much as they see reflected in the purchasing power of their income the effectiveness of government's economic policy.

The "purchasing power" of PER units could also have a geographical composition: residents in the major cities may be entitled to less units per year as compared to all others, since they usually benefit from better public transport (but admittedly this is a quite delicate and more complex matter...).

People would start to understand the cost of pollution without realizing it, as they understand the cost of a mobile phone re-charge. The "social" cost of pollution, invisible to the individual, would be transformed in a private cost fully visible, with all that follows.

This system would also be extendable in the long run to other environment-sensitive sectors such as air transport, and at a later stage for who knows what. The difficulty would of course be the first stage, since this implies a change in the way individuals think. Once (and if) individuals will have got accustomed to consider the environmental impact of their activity, and to use their own knowledge to streamline it for their own private purposes, the extension to other environment-sensitive sectors should be quite spontaneous, and mainly a technical matter.

One could argue that this system is rather regressive (ending up in the wealthy driving and the poor not): to some extent this system is regressive, but in fact much less than current car-related taxes, or parking permits, which also do not differentiate between different incomes. In fact, one interesting part of this system (the one which makes it significantly less regressive than the current ones) is that the poor who does not own a car, or the old person who does not drive, or the unemployed, can sell their PER units every year, having an additional income. In other words, this system, transforming the environmentally-friendly style of life of individuals (may it be voluntary or not, known of or not) in an economic asset, would operate like an architect who would make individuals discover a room in their house which they were not even aware of. A room they can rent out.

Another interesting issue is the one about individuals of an age between 0 and 18. The accumulation of capital could offer the new adults some added possibilities and an incentive to increase or invest that initial capital accumulated: at 18 one young man/woman would be able to choose how to spend the capital "earned" through his involuntary ecologically-friendly behaviour: he could use it to start a business with some friends (in countries where this is still possible), to make a trip or, say, to buy a motorbike. In any case he would get the idea that being environmentally friendly pays.

How can all this be made possible on a practical level? Though certainly complex, the technical implementation of such a system would be certainly doable with the existing technology. One key issue would be about technical standards: even though the different countries (let's say EU countries, but the more countries the better: ideally all the 159 countries that have signed the Kyoto protocol) can have (should have) a different purchasing power of PER units, the technical standards should be exactly the same. In fact there should be one single universal technical standard.

Practical technological solutions can be many, and this is probably not the right place to discuss them. In a nutshell, from a front-end perspective, an example of practical solution could be similar to this one: Mr Smith would switch on his car and authenticate himself on the on-board PC device using a pass-code for identification. This device would register data and compute them. When possible (i.e. when within a mobile network range) the device would transmit the data to a centralised server for internet-based data consultation, administration and transaction-related functionalities (possibly even based on online banks).

How much would such a system cost? Probably a lot, though there would be significant economies of scale and though it would probably be less than the loss in terms of GDP because of the Kyoto protocol implementation projected by some research centres (but it should be pointed out that here only Co2 emissions would be involved, which are only a part of the greenhouse gasses covered by the Kyoto protocol, though there are also other forms of pollution involved which are not covered by the Kyoto protocol, such as acoustic pollution and "traffic").

Again, it is only a brainstorming idea which, at the end of the day, when properly investigated, could turn out to be not only impracticable as too much expensive but also, firstly and most important, incompatible with liberal principles (for instance it would extend even further, rather than limiting as very much desirable and badly needed, the government intervention, though perhaps it would do it less, especially in the long run, than directives such as the Kyoto protocol and with better results). For this I would be particularly grateful to have some feedback, especially regarding this latter issue, by someone interested who happened to read this article:

Giovanni Birindelli: gb_at_catallaxy.com

© Institut Hayek, 2005

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