TCS Daily

The "Rights" of Future Generations

By Carlo Stagnaro - September 22, 2003 12:00 AM

During the 1990s, "the greenhouse effect" became a sinister phrase. According to radical environmentalists, "excessive" economic growth is pushing up the earth's average temperature. They argue that this will determine a radical change in humanity's current situation. The effects will include desertification, worldwide tropical diseases, the loss of thousands of endangered species, and eventually the collapse of humanity. The normative inference from such a claim is that we should adopt global regulation to inhibit free trade, global population control, and some sort of "sustainable development" (which is, in essence, development without freedom to trade -- that is, no development at all).


In short, radical environmentalists claim that both humans and the environment would be better off if humanity got rid of capitalism. We will not address this claim. Rather, we'll contend that it is possible to define "net social benefits" (or costs) deriving from such "command and control" policies as the Kyoto Protocol.


The Kyoto postulation is that we have to make a decision today that is quite expensive (reducing emissions and increasing the cost of energy, thus increasing the cost of living) in order to produce a net benefit tomorrow. In other words, the costs that we have to face today will turn into a gain for our descendants -- that is, for people other than us -- tomorrow. This in turn assumes that we know a whole series of preferences that logically and practically cannot be known, neither by those of us living now or by future generations. Among the reasons for our inability to know that information, one is particularly important: the economic concept of "cost" refers to the value or to the satisfaction that an individual surrenders by making a choice -- and for this reason scholars refer to "opportunity costs."


The idea that we can somehow know the preferences of future generations is at the basis even of some sort of compromise between Kyoto advocates and some free market supporters. The advocates of emission trading assert that such a scheme may allow us to enjoy both the benefits of the free market and the long-run benefits of emissions reductions. As far as the "efficient central planning myth" (so named by Roy Cordato) is concerned, it has been quite successful -- to the point that the Bush administration has often considered emissions quotas as an acceptable compromise. Perhaps this is a choice made in the name of realpolitik. It is probably true that the quota system is somewhat better than a system where the emissions are set authoritatively. Nevertheless, many problems exist.


To begin with, in a quota system scenario, the total amount of emissions permitted has to be set by government (or by an authority higher than individual governments, such as the UN). The quantification of such amounts is, however, by definition arbitrary, and after all responds to pure contingencies -- cut loose, that is, from market demands and scientific rationality.


Secondly, it is not clear how the quotas would be distributed. Would they be sold to companies in any given nation, or assigned at no cost? In the first case, their effect would be very similar to an energy tax; obviously the cost paid by corporations would have repercussions on the price of goods and services -- that is, in last analysis, it would further reduce the buying power of salaries. In the second case, what criteria would be used to assign the quotas? We would have to face the discretion of public administration -- most likely of bureaucracy -- and that would negate the rule of law.


Thirdly, quotas would be exchanged once assigned, and this "market" could follow either one of two possible paths. If the exchanges were allowed only within a nation's borders (or, at any rate, amongst homogeneous groups of countries, i.e. amongst the developed ones or developing ones) the effect of quotas would be, once again, similar to a carbon tax, and it would determine a wealth transfer from the energy producers (that is, from the consumers) to the government. Alternatively, if quotas could be exchanged at a global level, the Kyoto Protocol's effect would be to transfer wealth from the corporations of developed countries to the populations (or, more likely, to the governments) of the developing countries. In fact, since the unit cost of emission reduction would be much lower for the inefficient companies of the Third World than the relatively cleaner Western companies, it is reasonable to expect that, in relative terms, the Protocol would increase the production costs of the rich countries as compared to the poor ones, and this would determine a different economic resource allocation -- or political rather than economic reasons.


In any case, regardless of the above objections -- which cannot by any means be ignored -- instituting quotas has the same, fatal flaw as any other form of central planning. It rests on the assumption that the government knows better. Better than the plethora of market operations, which deals with conscious decisions every day in the realm of economic life. Knowledge, as Nobel Prize winner Friedrich von Hayek demonstrated, is spread through society and cannot be centralized in any superior bureaucratic body. Central planning can never be efficient; in economic terms, it cannot produce the best allocation of resources, since the order such planning intends to create simply cannot exist outside the continuously evolving context resulting from the independent and competitive actions of many. Solutions to problems such as global warming cannot arise if not from the efforts of free individuals who put their creativity and genius at the service of others -- albeit for self-interest -- and who therefore create the opportunity for a better and wealthier future.


After all, the only "right" of future generations that we may conceive of is that our sons and daughters deserve to receive from our hands a wealthier and freer world than the one we inherited from our forbearers. A world where capitalism has been eradicated, and the price of innovation and progress has become too high to be ever met, will be neither wealthier nor freer.


Mr. Mingardi is Visiting Fellow of the Centre for the New Europe in Brussels.  Mr. Stagnaro is Fellow of the International Policy Network in London.

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