Save the environment. Cap it!

Conservation, using less at a given level of technology by giving up some utility, is equally ineffective (PDF 450KB) (another great read at the link). We still face the indirect effects from conservation as we spend elsewhere in the economy, and if you believe all consumption has equal environmental cost per dollar (due to indivisibility once more and conceptually boundary problems to traditional input-output analysis of embodied resources - maybe more on this another time) you are back to where you started.

Further, conservation, like waste, is a relative concept, and by definition we can’t all do it. And we wouldn’t do it either due to the tragedy of the commons problem, where it is in each person’s best interest to defect from a co-operative conservation strategy. Terence Tao once again explains:

However, if there are enough private citizens sharing the same resource, then the "tragedy of the commons" effect kicks in. Suppose for instance that there are 100 citizens sharing the same energy resource, which is worth $1200 x 100 = $120,000 units of energy. If all the citizens conserve, then the resource lasts for $120,000/$400 = 300 months and everyone obtains $1800 long-term utility. But then if one of the citizens "defects" by using two light bulbs, driving up the net monthly energy cost from $400 to $404, then the resource now only lasts for $120,000/$404 ~ 297 months; the defecting citizen now gains ~ $7 x 297 = $2079 utility, while the remaining conserving citizens' utility drops from $1800 to $6 x 297 = $1782. Thus we see that it is in each citizen's long-term interest (and not merely short-term interest) to defect; and indeed if one continues this process one can see that one ends up in the situation in which all citizens defect. Thus we see that the tragedy of the commons effectively replaces long-term incentives with short-term ones, and the effects of voluntary conservation are not equivalent to the compulsory effects caused by government policy.

If energy efficiency is a counterproductive action for our environment, and personal conservation is useless, what should be done? As renowned ecological economist Blake Alcott points out (PDF 183KB):

If Jevons is right, efficiency policies are counter-productive, and business-as-usual efficiency gains must be compensated for with physical caps like quotas or rationing.

It really is that easy. If you a concerned about greenhouse gases, a cap on greenhouse gases is what is required. If you are worried deforestation, you create a cap by “fencing off” areas that are not be touched. If you are worried about over fishing, you create a cap. Whether these caps/quotas are tradeable is a secondary concern, but do enable the cap to be met most efficiently.

What about a tax instead?

Many commentators argue that taxing negative externalities (such as a carbon tax) would not only reduce greenhouse gas emissions, but would provide a “double dividend” of improved economic efficiency because more distortionary taxes could be reduced. However, the very nature of reducing other taxes to make the tax revenue neutral would mean that other sectors of the economy, where taxes were reduced now, have greater purchasing power to pay for those goods now bearing the new tax burden. Thus the double dividend comes at a cost to the primary dividend of reducing externalities.

Politics and ideology probably explain why the most basic economics is tossed out the window when it comes to the environmental protection. Then again, maybe we just can’t acknowledge that such a thing of beauty - efficiency - could possibly have a downside.