Free Market Environmentalism

Blog, Environment, Les Routledge

Over at Grist, there has been a discussion emerging about the relative merits of command-and-control regulation versus “free-market environmentalism” that is supported by secure property rights.

Before being shoved aside in the 1970s by the more politically attractive federal statute law, common law made it clear that no polluter had the right to impose unwanted costs on the owners of private property. Centuries of legal precedence affirmed that people had a legal right to have their property free from pollution. Upon examining the history of the common law, economists Roger Meiners and Bruce Yandleconcluded that the common law “can protect the environment more effectively and fairly than can congressional statutes and bureaucratic regulations.”

This article digs into the issue of transaction costs and to me that is the key of making a common-law, property-rights based model work.

In situations where there is a significant asymmetry of knowledge and monetary knowledge between two parties in dispute, the transaction costs connect to achieving an optimum economic outcome can be insurmountable.  In these situations, I would suggest examining the concept of a no-fault insurance model where the insurance company becomes a proxy for injured parties, compensates them for their losses, and then seeks legal recourse to recover that cost from the offending party.

A topical example of where this model could be looked at is the concern about petroleum development, and in particular hydraulic frac’ing, and ground water safety.  In my mind, neighboring land owners should be compensated for losses related to contaminated water without the need to assign fault before compensation is paid.  As a second step, the insurance company could fund the cost of researching the cause of contamination and pursuing compensation through the courts as permitted under common law.

In some situations, research may find that the cause of water contamination is natural or that there is no offending party.  In those situations, the instrument could function in a manner comparable to how one can insure their property against damage from nature such as wind or hail.

From my limited perspective, it makes sense to insure third party land owners for losses that might result from industrial activity such as petroleum development.  While the frequency of occurrence of spills or contamination may be low, providing an assurance they will be made whole in the event of a mishap could remove one form of opposition to development.  This approach could head off the undesirable situation like the development of natural gas in Quebec where a moratorium has been imposed on the sector until it can be proven to be “safe.”