Rent-seeking and property rights in environmental law

Jonathan Adler is guest-posting over at the Atlantic on conservative approaches to environmental law.  In general, I can only support someone who is valiantly trying to make arguments about why conservatives should support efforts to address climate change, and developing climate change policies that are consistent with conservative and libertarian principles.  But I want to address another argument that Jonathan made in his introductory post, an argument that I’ve seen regularly repeated among not just conservatives but also economists.

The argument is that market-based mechanisms for addressing environmental problems (e.g., taxes, tradeable permits, property rights) are not just preferable because they might be more economically efficient than other regulatory tools, but also because they are less vulnerable to what economists often call “rent-seeking.”  Rent-seeking describes efforts by various interest groups to use government powers to extract economic benefits – these are usually seen as problematic because they are both economically inefficient and because they often have undesireable consequences in terms of wealth distribution.  One example of rent-seeking that many economists point to are farm subsidies: These subsidies use taxpayer money (therefore money that is extracted from the public as a whole) to pay money to farmers, including agribusiness entities that are richer than the average household.  The subsidies distort economic decisionmaking by farmers and are often regressive in their income outcomes.  Related are minimum price supports for farm products (milk is the most significant current example).  Again, farmers get more money, but in this case consumers (again, including lots of poor people who pay a higher percentage of their income for food) pay the burden.

Conservative commentators have long asserted that there are many examples of inefficient rent-seeking in environmental law – like regulatory provisions that put a disproportionate burden on new facilities, while letting old facilities pollute at much higher levels (these regulations act as barriers to entry that protect incumbent firms).  Jonathan’s post summarizes the classic argument that these kinds of regulatory systems are far more vulnerable to rent-seeking than market-based systems.

Rent-seeking is a result of the public nature of the decisionmaking process, in which the government compels all citizens to comply with the laws, pay taxes, etc.  It is the compulsory nature of law that allows rent-seeking to occur.  But market-based mechanisms – whether they be taxes, property rights, or tradeable permits – are also public decisions as well.  You don’t have a choice to pay your taxes; you don’t have a choice about whether to comply with property rights.

So the question is: Why should we assume that the establishment of a property rights system or a tax system would be any less vulnerable to rent-seeking than the establishment of a regulatory system like we have under the Clean Air Act?  You might argue that tax or property systems or tradeable permit systems are simpler, and therefore makes rent-seeking harder to pursue because it faces more public scrutiny.  But Waxman-Markey was a tradeable permit system, and it was hardly simple; nor is our tax code a model of simplicity either.  Moreover, it’s unclear to me why public scrutiny would make rent-seeking less likely – farm subsidies are pretty direct and open, and they’ve lasted for decades.

Another possibility might be that tax and property systems just need to be set up once, and require less administrative processes.  Less ongoing decisionmaking therefore creates fewer opportunities for rent-seeking.  There might be more to this perhaps – but consider the large bureaucracy that we need to run our tax code (Treasury letter rulings, IRS enforcement systems), or the fact that there is a large bureaucracy that is needed to interpret, adjust and apply a property system to a changing world: courts.  (At least, that was true under the common law system; today legislatures do more and more of that work.)  And there’s no reason to think that courts are somehow immune from rent-seeking.

You could, of course, try to make your tax and property systems very rigid, so that they don’t have major changes that open the door to rent-seeking.  Strict takings doctrines that make changes to property systems unattractive (because they require compensation to all parties who are adversely affected) can do this.  But that may be the last thing we need when environmental problems are dynamic (because of changes in economics, technology, and ecology) and suffused with large amounts of uncertainty (meaning that we might want to adjust our policy over time as we learn more about the nature of the environmental problem).  Even worse, if everyone knows that the tax or property system you’re setting up will be rigid and last for a long, long time, that means that the economic stakes for that initial decisionmaking process will be very, very high – creating an incentive for even more rent-seeking efforts at that initial stage.  In other words, by eliminating later changes to the environmental policy system, you might just increase the rent-seeking frenzy around the initial creation of the system.

None of this means that market-based mechanisms can’t be less vulnerable to rent-seeking in particular circumstances, but my hunch is that this varies a lot more depending on the specific political and economic context (as Jonathan himself states in a later post).

Reader Comments

12 Replies to “Rent-seeking and property rights in environmental law”

  1. I don’t argue that tradeable permit systems are necessarily less vulnerable to rent-seeking than regulatory systems (particularly where the value of tradeable rights is not connected to the value of the resource used, as it is with catch-shares) and I’ve argued cap-and-trade is more vulnerable than an emission or consumption tax. Nor do I argue that any transitional initiative would be less vulnerable. I do argue, however, that a system of secure property rights is less vulnerable than a system of administrative regulation once it is in place. This is true for a variety of reasons. Relative simplicity and transparency are part of the story, but so too is the simple fact that there will be less potential for rent-seeking the less the government may be used to forcibly transfer or capture rents. Property-based systems may have their problems — I have a new paper discussing the limitations of the traditional libertarian preference for common law adjudication — but relative vulnerability to rent-seeking is not one of them.

    A final point, that i won’t elaborate on here, property-based systems are actually far more dynamic than administrative systems, and far better able to account for changes in information and the environment. Indeed, that’s part of what makes markets so valuable.

    And, for those interested, here’s a survey of rent-seeking in environmental law I wrote some years back:
    http://www.cato.org/pubs/regulation/regv19n4/v19n4-4.pdf

  2. I don’t argue that tradeable permit systems are necessarily less vulnerable to rent-seeking than regulatory systems (particularly where the value of tradeable rights is not connected to the value of the resource used, as it is with catch-shares) and I’ve argued cap-and-trade is more vulnerable than an emission or consumption tax. Nor do I argue that any transitional initiative would be less vulnerable. I do argue, however, that a system of secure property rights is less vulnerable than a system of administrative regulation once it is in place. This is true for a variety of reasons. Relative simplicity and transparency are part of the story, but so too is the simple fact that there will be less potential for rent-seeking the less the government may be used to forcibly transfer or capture rents. Property-based systems may have their problems — I have a new paper discussing the limitations of the traditional libertarian preference for common law adjudication — but relative vulnerability to rent-seeking is not one of them.

    A final point, that i won’t elaborate on here, property-based systems are actually far more dynamic than administrative systems, and far better able to account for changes in information and the environment. Indeed, that’s part of what makes markets so valuable.

    And, for those interested, here’s a survey of rent-seeking in environmental law I wrote some years back:
    http://www.cato.org/pubs/regulation/regv19n4/v19n4-4.pdf

  3. But Jonathan, the property system has to be created at some point in time by a public decisionmaking process. So the relative analysis of property systems versus regulation still has to take into account not just which system is better after it is created (even if you’re right about that) but also which system is better at the time of creation. If everyone one knows that the property system will last a long time, won’t they have all the more incentive to rent seek at that time. And might that not just offset any benefits the property system has in terms of rent-seeking after it is established?

  4. But Jonathan, the property system has to be created at some point in time by a public decisionmaking process. So the relative analysis of property systems versus regulation still has to take into account not just which system is better after it is created (even if you’re right about that) but also which system is better at the time of creation. If everyone one knows that the property system will last a long time, won’t they have all the more incentive to rent seek at that time. And might that not just offset any benefits the property system has in terms of rent-seeking after it is established?

  5. These ideas seem good and useful and thoroughly thought-out, but I don’t see why they should be classified as “conservative environmentalism” or “libertarian environmentalism” rather than plain vanilla mainstream environmentalism. The Problem of Social Cost and the Tragedy of the Commons postulated property rights as a private-sector led alternative to the standard government-led solution of Pigovian taxation. Jonathan’s embrace of a carbon tax over cap and trade is therefore a recognition of the limits of Hardin and Coase’s libertarian insights, not an application of them. To the extent that we’re talking about a choice between command and control (e.g. RPS) regulation and regulation by taxation, I don’t think there’s anything particularly conservative or libertarian these days about preferring the tax. Most of the liberals I know recognize the advantages of a carbon tax. The opposition to the idea comes mostly from unreflective Norquistism, a creature of the populist right.

  6. These ideas seem good and useful and thoroughly thought-out, but I don’t see why they should be classified as “conservative environmentalism” or “libertarian environmentalism” rather than plain vanilla mainstream environmentalism. The Problem of Social Cost and the Tragedy of the Commons postulated property rights as a private-sector led alternative to the standard government-led solution of Pigovian taxation. Jonathan’s embrace of a carbon tax over cap and trade is therefore a recognition of the limits of Hardin and Coase’s libertarian insights, not an application of them. To the extent that we’re talking about a choice between command and control (e.g. RPS) regulation and regulation by taxation, I don’t think there’s anything particularly conservative or libertarian these days about preferring the tax. Most of the liberals I know recognize the advantages of a carbon tax. The opposition to the idea comes mostly from unreflective Norquistism, a creature of the populist right.

  7. Eric —

    Two comments. First, property rights systems can evolve without being designed. See, e.g., Ellickson or my work on private ordering in fisheries. Second, even assuming there is just as much rent-seeking at the time of creation — and that’s a wash — once set up it dissipates. As we’ve seen from successful economic liberalization efforts generally (e.g. Thatcher’s in the UK or the New Zealand reforms), or with efforts such as have led to the creation of various rights-based fishery reforms, the rent seeking in the creation/recognition of property rights usually takes the form of buying off/compensating those whose interests might be affected (e.g. compensating those who get excluded from a catch share regime), and not creating a continuous stream or potential for rents. So, empirically, it appears that we get far less rent-seeking through such approaches (in addition to encouraging economic interests to lobby for more sustainable practices (e.g. ITQ holders lobbying for lower catch limits).

    More broadly, the more government decisionmaking remains in the system the more rent-seeking you get, which leads to more government intervention, etc. It feeds on itself until we get something resembling the current tax code (or the Waxman-Markey bill). Jonathan Rauch’s book, Democracy’s End documents this dynamic fairly well. It’s a vicious circle that ends up swallowing the government’s ability to do the things we want it to do.

    JHA

  8. Eric —

    Two comments. First, property rights systems can evolve without being designed. See, e.g., Ellickson or my work on private ordering in fisheries. Second, even assuming there is just as much rent-seeking at the time of creation — and that’s a wash — once set up it dissipates. As we’ve seen from successful economic liberalization efforts generally (e.g. Thatcher’s in the UK or the New Zealand reforms), or with efforts such as have led to the creation of various rights-based fishery reforms, the rent seeking in the creation/recognition of property rights usually takes the form of buying off/compensating those whose interests might be affected (e.g. compensating those who get excluded from a catch share regime), and not creating a continuous stream or potential for rents. So, empirically, it appears that we get far less rent-seeking through such approaches (in addition to encouraging economic interests to lobby for more sustainable practices (e.g. ITQ holders lobbying for lower catch limits).

    More broadly, the more government decisionmaking remains in the system the more rent-seeking you get, which leads to more government intervention, etc. It feeds on itself until we get something resembling the current tax code (or the Waxman-Markey bill). Jonathan Rauch’s book, Democracy’s End documents this dynamic fairly well. It’s a vicious circle that ends up swallowing the government’s ability to do the things we want it to do.

    JHA

  9. Jonathan,

    If transitions are open to rent seeking, wouldn’t that equally be the case for the evolution of property systems? Isn’t an evolution just a gradual transition?

    I also don’t think it would necessarily be a “wash” to compare the rent-seeking around the creation of a property system with the rent-seeking around the creation of a regulatory system. If the property system is truly durable, then the rational actors involved in its creation will know that the stakes are high and therefore have even greater incentives to participate in rent-seeking, compared to the creation of a regulatory system that can be changed regularly later on.

    As for empirical evidence, I only know the environmental law literature well, but I’m not aware of any rigorous or convincing evidence in the literature. Much of the literature on rent-seeking in environmental law is anecdotal and therefore very limited in its ability to answer these questions (as opposed to raising questions, where anecdotes can be very useful); the quantitative work that I’ve seen is usually limited in scope, limited in its ability to detect causal relationships, ambiguous, and some of it is quite shoddy; the modelling work might have the most ability to have traction on this, but I’m not aware of a study that looked at the precise question we are debating here. If you do know of good empirical work that bears on this question, please do let me know, either through a comment here or by e-mail. I’d be interested in looking at it. It sounds like there is a lot of room for further exploration on this question, as I noted originally.

  10. Jonathan,

    If transitions are open to rent seeking, wouldn’t that equally be the case for the evolution of property systems? Isn’t an evolution just a gradual transition?

    I also don’t think it would necessarily be a “wash” to compare the rent-seeking around the creation of a property system with the rent-seeking around the creation of a regulatory system. If the property system is truly durable, then the rational actors involved in its creation will know that the stakes are high and therefore have even greater incentives to participate in rent-seeking, compared to the creation of a regulatory system that can be changed regularly later on.

    As for empirical evidence, I only know the environmental law literature well, but I’m not aware of any rigorous or convincing evidence in the literature. Much of the literature on rent-seeking in environmental law is anecdotal and therefore very limited in its ability to answer these questions (as opposed to raising questions, where anecdotes can be very useful); the quantitative work that I’ve seen is usually limited in scope, limited in its ability to detect causal relationships, ambiguous, and some of it is quite shoddy; the modelling work might have the most ability to have traction on this, but I’m not aware of a study that looked at the precise question we are debating here. If you do know of good empirical work that bears on this question, please do let me know, either through a comment here or by e-mail. I’d be interested in looking at it. It sounds like there is a lot of room for further exploration on this question, as I noted originally.

  11. Hat tip to Eric Biber,
    It never occurred to me that it might be possible to rent carbon credits instead of trying to sell them. Renting carbon credits seems like a good short term solution for anyone who may need some credit before the November election. What is a good price for renting one ton of credit that only costs about $15 to purchase outright?

    As previously noted on this forum, carbon credits are sold at various flea markets in Texas. The next time I go to the flea market I will inquire possible rentals and report back. Have a good day and thanks for trying to save us.

  12. Hat tip to Eric Biber,
    It never occurred to me that it might be possible to rent carbon credits instead of trying to sell them. Renting carbon credits seems like a good short term solution for anyone who may need some credit before the November election. What is a good price for renting one ton of credit that only costs about $15 to purchase outright?

    As previously noted on this forum, carbon credits are sold at various flea markets in Texas. The next time I go to the flea market I will inquire possible rentals and report back. Have a good day and thanks for trying to save us.

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Eric Biber

Eric Biber is a specialist in conservation biology, land-use planning and public lands law. Biber brings technical and legal scholarship to the field of environmental law…

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