Ronald Coase Discusses Global Warming Regulation

Of Individual Liberty and Cap and Trade
Robert H. Frank
The New York Times
January 9, 2010

Some people oppose measures to limit greenhouse gases because they believe that global warming is a myth. These denialists may have a little extra spring in their step during the current cold snap, but their influence has been steadily waning.

The biggest remaining obstacle is disagreement over the legitimacy of proposed solutions. At the heart of attempts to curb carbon dioxide emissions are two related proposals: taxation of those emissions and a system of tradable emission permits, also known as cap and trade. Both have been attacked as unacceptable restrictions on individual liberty. The attacks have come from both sides of the political aisle, but have been pressed with particular insistence by conservatives and libertarians.

It’s a puzzling objection, because both proposals are squarely consistent with the framework advocated by conservatives’ patron saint regarding matters related to private actions that harm others. That would be Ronald H. Coase, professor emeritus at the University of Chicago and the 1991 Nobel laureate in economics, who will turn 100 this year.

Mr. Coase (the name rhymes with “dose”) summarized his framework in a 1960 paper titled “The Problem of Social Cost,” which has become one of the most-often-cited economics papers ever published. He stressed that actions with harmful side effects — negative externalities, in economists’ parlance — are quintessentially practical problems. They are best solved, he argued, not by chanting slogans about rights and freedoms, but by steering mitigation efforts to those who can perform them most efficiently.

The pre-Coase tradition was to view externalities in terms of perpetrators and victims. The owner of a factory that emitted smoke was a perpetrator, for example, and those who were harmed by it were victims. The conventional view was that perpetrators should be restrained from harming victims.

Mr. Coase’s profound insight was that this view ignored the inherently reciprocal nature of externalities. Smoke harms others, yes. But preventing smoke causes harm, too, because smokestack filters are costly. Our shared interest, he reasoned, was to use the least costly means of reducing the relevant damage.