II. Suppressing, Destroying, and Ignoring Information in the “Information Age”

Who is unaware of the importance of using the best and most complete information available when dealing with the problems we face? We spend vast sums on a wide variety of scientific research, constantly trying to improve and expand education, and we appreciate the impressive improvements in information technology. We recently moved into what is widely called the “Information Age.” It would seem that everyone understands the importance of information. Yet large amounts of information, or knowledge, which could be used to improve the lives of billions of people are being systematically ignored or destroyed with policies that are applauded by many of those who fancy themselves fully aware of the importance of information.

People tend to think of information primarily as the result of scholarly inquiry and scientific discovery, but in a 1945 essay the economist F. A. Hayek pointed out that most information needed to make the best use of our resources is “knowledge of the particular circumstances of time and place.”Footnote ¹ This consists of information on preferences and conditions unique to particular people and places, information that is constantly changing and impossible for any group of experts to know in its totality. Hayek emphasized that all this information can be communicated from those who have it to those who are in the best positions to make use of it only through market prices. It is market prices that inform consumers how much producers have to sacrifice to make additional units of goods and services available to them, and inform producers how much consumers value additional units of the goods they are producing and the combination of inputs that produce those goods at the minimum sacrifice of value elsewhere in the economy. The amount of information communicated through market prices swamps the amount communicated by cell phones, land-line phones, faxes, e-mail, text messaging, and other technological marvels associated with the “information economy.” These devices are clearly very valuable, but much of their value comes from making it easier for people to more quickly and conveniently access market prices. As one of us has pointed out in greater detail, the “information economy” is as old as economies based on private property, voluntary exchange, and market prices.Footnote ²

While governments can facilitate the creation and communication of the information contained in market prices by enforcing property rights, establishing an impartial judiciary, and maintaining a stable price level by not inflating the currency, a host of government policies prevent or distort this market communication. These policies limit, or prohibit, people from engaging in certain types of exchanges and thus prevent prices from communicating information about “the particular circumstances of time and place.” At a minimum, these policies suppress information that is “out there” by not allowing it to be communicated. But information on preferences, which is vital to making sound economic choices, simply doesn't exist—it isn't out there—without market exchange. As the economist James M. Buchanan states, “potential participants do not know until they enter the process [of voluntary exchange] what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know….”Footnote ³ Policies that hamper market exchange therefore destroy information and, as a consequence, cause resources to be wasted.Footnote ⁴

Examples of information-destroying policies are unfortunately abundant. Corporate Average Fuel Economy (CAFE) standards are government mandates on the average gas mileage that different categories of vehicles sold in the United States have to meet. These standards for cars were enacted in 1975 and originally justified as a way of reducing American dependence on foreign oil. In 1979, CAFE standards were applied to light trucks, but at a lower miles-per-gallon (mpg) requirement than for cars. The average mpg requirement for cars was increased in 1985, and the average requirement for light trucks was increased numerous times from 1979 to 2007. In 2007, the CAFE standards were increased for cars for the first time since 1985, and for light trucks (including SUVs), with further average increases in mpg requirements scheduled through 2020, at which time all cars and lights trucks sold in the United States will be required to get an average of 35 mpg.Footnote ⁵ It is clear that, by imposing artificial constraints on the vehicles that can be made available, CAFE standards reduce the ability of automobile consumers and producers to communicate information to each other on the value of different types of vehicles and the costs of producing those vehicles. The result is resource waste, as resources are used to produce other products that are less valuable than the larger vehicles that could have been produced. Again, this conclusion does not depend on market exchange and the prices that emerge communicating perfectly accurate information, just more accurate information than is communicated by broad, and largely arbitrary, mandates generated in the almost complete absence of the information of time and place that is dispersed over millions of people.

It should be acknowledged that the justification for CAFE standards has expanded in recent years and is now seen as a way to reduce emissions of carbon dioxide that result from gasoline consumption. Assuming that carbon dioxide is a genuine pollutant, market prices, particularly the market price of gasoline, will not communicate adequate information on the full cost of buying low-mileage vehicles. This is true. But as we shall discuss in Section V, this is not a compelling argument for broad mandates such as CAFE standards. Rather, it may be a case for a tax on gasoline that hopefully comes close to internalizing the pollution externality on gasoline consumption and allows individuals to make use of the information that only they have when deciding on the type of vehicle most appropriate for their situation. With such a tax, there would no longer be a case for CAFE standards as a way of reducing carbon dioxide emissions.

Consider next U.S. ethanol policy, which broadly consists of subsidizing the production and use of corn-based ethanol and imposing import restrictions on ethanol that could be obtained cheaper from other countries. Obviously, this policy distorts price information by communicating to consumers that domestic, corn-based ethanol is less costly than it really is, while communicating that foreign alternatives are more costly than they really are. As in the case of CAFE standards, more accurate information would be communicated, and less waste would result, from imposing a tax on automobile fuel that reflected, as accurately as possible, the environmental cost from its use, and allowing people to respond to the resulting prices when choosing the type of fuel to use. This would eliminate any justification for subsidizing the production and use of domestic ethanol. And, of course, there never has been an environmental case for import restrictions on ethanol.

Another policy that prevents the use of vital information concerns water. There is always an area somewhere suffering from a drought, and the consequences are worse than they need to be because the water allocation policies of local governments ignore information on water usage. During periods of lower-than-normal rainfall, instead of allowing the price of water to increase, local governments invariably ration water by imposing restrictions on the visible use of water, such as watering lawns and washing cars. (As this is being written, there are strict limits on watering lawns in Atlanta, Georgia.) However, no restrictions are enforced on water usage that is not visible, such as taking long showers, not fixing leaky faucets and running toilets, and letting the water run while brushing your teeth. With higher water prices, consumers could be left free to use their information of time and place in determining how much water to use, and how. Each person would reduce her use of water for purposes that were less valuable to her (whether indoors or outdoors), and those who placed less value on water usage would reduce more than those who placed more value on it. Thus, water usage would be reduced at less cost (sacrificed value) than is currently the case with one-size-fits-all rationing mandates that are based on, and perpetuate, ignorance of important information.

III. Liberty, Markets, and Discovery

Hayek explicitly considered the importance of the information (and in particular the information of time and place) that was largely implicit in Adam Smith's discussion of the “invisible hand.”Footnote ⁶ But Hayek's and Smith's discussions are commonly used to emphasize the problem of making the best use of our resources at any particular time given existing resources, technologies, and preferences. In other words, the problem solved by the “invisible hand” is easily seen as reaching the ideal point on the existing production frontier. But even more important than achieving the best combination of existing possibilities at any time, is having policies and social institutions that channel self-interest into the creation and discovery of new resources, technologies, and processes that push back the limits of scarcity as represented by outward shifts in the production frontier. The key to understanding the conditions that foster this process of creation and discovery is to examine the mutually reinforcing interaction between liberty and markets, an interaction closely connected to the coordination of the “invisible hand.”

In markets, social coordination is best achieved spontaneously by giving individuals the liberty to use their local information as they choose, as long as they adhere to the general rules of private property and voluntary exchange. But while liberty is necessary for the proper functioning of markets, properly functioning markets are also necessary for liberty. Liberty is universally praised as a blessing, yet it is a fragile blessing because the public seldom backs up its praise of liberty with consistent and dedicated support. Even with evidence all around us of a close connection between liberty, social order, and economic prosperity in market settings, people still fear that the economy will descend into chaos if authorities are not allowed to impose a host of restrictions on liberty. Thus, maintaining our liberties, even when they are being directed in generally beneficial ways, is difficult, as we shall discuss in Section V. It should not be surprising, then, that the hope for maintaining individual liberty diminishes rapidly as reliance on markets, and the order this reliance creates, diminishes.

People simply will not tolerate liberty in the absence of markets. Without the informed discipline and social coordination of markets, liberty becomes license, and instead of being a force for mutual coordination and benefit, liberty becomes an invitation for people to pursue their interests at the expense of others. This occurs even in economies that rely primarily on market allocation. In situations involving pollution, for example, where the use of markets is limited because of the difficulty of assigning and enforcing well-defined property rights, people demand restrictions on the freedom to pollute because they know that it would not be used responsibly. Governments invariably take advantage of the public's intolerance of the freedom to pollute by restricting it in ways that not only reduce liberty, but, as we shall see, prevent pollution from being reduced as cheaply and effectively as possible.

More generally, despite the almost universal criticism of red tape and bureaucratic controls, people invariably demand them when markets have been rendered largely inoperative. When people are receiving and spending other people's money, rather than earning and spending their own in response to market incentives, the public's desire for some form of accountability always results in red tape and regulations. Not surprisingly, as the percentage of health-care payments made by third parties has increased, bureaucratic controls and red tape have steadily replaced individual freedom in medical decisions. As farmers depend more on federal largesse, it is predictable that more control over the operation of farms has been transferred to huge bureaucracies. The evidence is clear that such bureaucratic control and regulation impose costly inefficiencies with rigid rules, making it impossible to respond to the diversity of local circumstances and conditions that are constantly changing. Yet the typical response to the inevitable failures is that Congress should increase regulation or install better regulators with even more power. Of course, the result is even less responsiveness to changing conditions, which increases the urgency for yet more regulation and red tape. This process of steadily smothering liberty can be reversed only by increasing reliance on the informed discipline of market incentives that makes liberty possible, but policymakers rarely consider the connection between liberty and market incentives seriously. Nonetheless, we can consider it seriously and thus better understand why liberty and markets are essential to the most general and powerful means of solving problems—discovery and innovation.

The discoveries that push back the limits of what can be accomplished and propel all economic progress can never be achieved by staying with the easy and the obvious. Expanding the realm of the possible requires taking great risks—attempting things that few dare and that the more prudent would consider foolish, if not impossible. Almost all the technologies and products we take for granted today were first imagined by people whom almost everyone considered crackpots pursuing their “impossible dreams.” And indeed, the majority view is usually correct. Most “impossible dreams” really are impossible, and most heroic entrepreneurial ventures end in failure. But entrepreneurial ventures do not begin with hindsight, and the only way to discover which entrepreneurial activities can create more value than cost is by allowing people to pursue their dreams no matter how impossible they may seem. So liberty is essential to entrepreneurial discovery, but it must be liberty that is disciplined by market incentives.

While entrepreneurial liberty can be a powerful force for expanding the production frontier, the failures resulting from it are sure to move us away from the best point on the existing frontier.Footnote ⁷ We can tolerate the liberty of the wild optimists among us to direct scarce resources into improbable ventures only with assurance that the gains from the few successes will, over time, exceed the losses from the many failures. Entrepreneurs must be convinced to abandon their projects when the evidence is clear that their projects are losers. This requires not only good information, but stern discipline. The entrepreneurial optimism, energy, and tenacity that can be such a force for progress can result in more harm than good if not unmercifully subordinated to consumer preferences.

Again we return to the importance of market prices in communicating information of time and place, and providing the incentive for people to respond to this information in ways that best serve the general interest. Through market prices, consumers keep entrepreneurs informed on the value of their projects in a way that cannot be ignored. Entrepreneurs use inputs that can produce other goods, and the more consumers value these alternative goods, the higher the price of these inputs. At the same time, the prices that consumers are willing to pay for the products of entrepreneurs (or the prices that those financing entrepreneurial ventures think consumers will be willing to pay) communicate how much the entrepreneurs' productive efforts are valued. So no matter how much confidence an entrepreneur has in his venture, if consumers continue to inform him that they think it is worth less than it costs, he will eventually pay attention and respond appropriately. Bankruptcy is a powerful signal in terms of both information and motivation. Just as brakes allow cars to be driven faster, the readiness with which markets impose bankruptcy on entrepreneurs makes it possible for them to pursue far more projects of discovery with far more enthusiasm than would otherwise be possible.

The implication is clear. The most effective way to solve many problems is indirectly, with liberty and market incentives that unleash the entrepreneurial process of discovery and innovation to push back the realm of the possible—as opposed to trying to solve problems directly, with government dictates and mandates that restrict markets and stifle liberty. We shall now expand on the case for the indirect approach by considering the issue of global warming.

IV. Decreasing Global Warming by Increasing Liberty and Prosperity

Let us admit right up front that we are global-warming skeptics, not something that one readily admits in polite company these days. Our skepticism is rooted primarily in our knowledge of public choice economics, which convinces us that it is in the interest of politicians, bureaucrats, and assorted interest groups to frighten the public with exaggerated claims about impending crises.Footnote ⁸ Government grows when people are frightened, and those whose interests are tied to that growth do not hesitate to take advantage of this fact.Footnote ⁹ So one does not have to be particularly incredulous of political pronouncements to believe that most statements made by government officials and scientists, who are supporting more government power and funding to avert some crisis, are some combination of scientific speculation and politically motivated bamboozlement. Many of these statements are clearly dominated by bamboozlement.

Consider this 2006 statement (from the Web site of Al Gore's documentary An Inconvenient Truth): “Humanity is sitting on a ticking time bomb. If the vast majority of the world's scientists are right, we have just ten years to avert a major catastrophe that could send our entire planet into a tail-spin of epic destruction involving extreme weather, floods, droughts, epidemics and killer heat waves beyond anything we have ever experienced.”Footnote ¹⁰ Fifteen years earlier, but with similar urgency, we were informed that without prompt action, global warming would “trigger meteorological chaos—raging hurricanes … capable of killing millions of people; … record-breaking heat waves; and profound drought that could drive Africa and the entire Indian subcontinent over the edge into mass starvation…. Unchecked, it [global warming] would match nuclear war in its potential for devastation.”Footnote ¹¹ For other frightening comments on the impending consequences of global warming, run a Google search on the terms “global warming” and “crisis.”

But there is hope, we are told, that the looming destruction from global warming can be avoided. Since human activity has created the global warming crisis, it can be reversed by empowering the experts with the necessary political power and taxpayer money to enforce the right policies. For example, following the quotation in the previous paragraph from the Inconvenient Truth Web site, we are told:

Unfortunately, the experts whom we are to trust to save us from global warming are not squeamish about trampling on a few of our liberties. What are a few more lost liberties in “a last-ditch, all-out effort to help save the planet”? If given the authority, the crusading experts would impose controls affecting almost every aspect of our lives. Carbon dioxide, which has received top billing as the cause of global warming, is now defined as a pollutant that must be reduced significantly below current levels as required (at least for developed nations) by the Kyoto Protocol. The 1997 Kyoto Protocol is part of the International Framework Convention on Climate Change to reduce greenhouse gases and prevent climate change. Countries who agree to the protocol commit to reducing their emissions of greenhouse gases, or participating in emissions trading if they fail to do so. Participating countries are separated into two general categories: developed countries, which have emission reduction obligations; and developing countries, which do not have emission reduction obligations. Developing countries have no emission restrictions, but when an emission reduction project is undertaken by them, the project receives carbon credits which they can then sell to developed countries that have signed on to the Kyoto Protocol. Thus, developed countries transfer billions of dollars and give away technology to less developed countries for climate research and projects. Kyoto is a “cap and trade” system that sets national maximums on the emissions of developed countries by requiring a 5.2 percent emission reduction below their 1990 baseline over the period from 2008 to 2012. A serious effort to reduce carbon dioxide to Kyoto Protocol levels by government action would require greatly increasing the influence politics exerts over such concerns as our food, our transportation, our jobs, our houses, and our vacations by increasing the cost of the choices we make in all these areas, and more. No matter how the government chose to reduce carbon dioxide, the cost would be enormous. But we can depend on the most politically popular policies being more costly and/or less effective than they have to be, because they will be chosen more to disguise the cost, and transfer wealth to interest groups, than to reduce global warming (which, even if it is a serious problem, will not be clearly evident until long after current politicians have retired).

Five questions seem reasonable to ask before concluding that we should empower the government to make an all-out effort to directly combat global warming. First, is global warming really a serious problem? Second, has it been caused by human behavior and can it be reduced by changes in that behavior? Third, is the problem so serious compared to other global problems that it deserves a higher priority in terms of our attention and resources? Fourth, do we understand enough about the causes of global warming (assuming they are man-made causes) to know what direct government actions would solve this problem, and if we do, can we depend on government to take those actions?Footnote ¹³ And finally, even if we answer all the above questions in the affirmative, is direct government action the best approach for effectively combating global warming?

From what we have read, we do not believe the first question receives close to a unanimous affirmative answer from atmospheric physicists and other knowledgeable scientists in relevant disciplines.Footnote ¹⁴ We should emphasize that believing the Earth is experiencing a long-term warming trend, for whatever reason, is not the same thing as believing this is a problem. For example, economist Thomas Moore argues that warmer periods have been periods of the greatest progress and prosperity.Footnote ¹⁵ More recently, economists Olivier Deschenes and Enrico Moretti cite evidence that cold weather is far more a health risk than hot weather. They estimate, for example, that the shift in population from the cold northeastern states to the warmer southwestern states accounts for 8 to 15 percent of the gain in life expectancy in the United States over the past thirty years.Footnote ¹⁶ For the sake of argument, however, we will assume that the answer to the first question is yes—that global warming is a serious problem, at least in the long run. And we also answer yes to the second question—global warming can be reduced by changes in human behavior.

Regarding the third question (is global warming a high-priority problem?), eight internationally respected economists (including four Nobel Prize winners) considered seven problems or challenges (including global warming) and ranked seventeen policy approaches for addressing these problems in terms of cost-effectiveness at a 2004 conference in Copenhagen known as the Copenhagen Consensus. The levels of cost-effectiveness of the three policies aimed at directly combating global warming were ranked fifteenth, sixteenth, and seventeenth out of seventeen.Footnote ¹⁷ Such a consensus is hardly conclusive, but it does suggest that the answer to this third question is debatable.

Considering the fourth question (can we depend on government to be informed and motivated enough to take the best direct action against global warming?), we doubt that enough is known about global warming to determine with confidence what direct government actions are best for addressing it, and we are even more doubtful that government would take those actions if they were known.Footnote ¹⁸ Likewise, even if the answer to the first four questions is yes, implementing the most cost-effective direct government action against global warming still may not be the best policy. It is possible, as we are about to argue, that the best way for government to deal with global warming is to limit its negative impact on liberty and markets in order to give maximum rein to entrepreneurial discovery and increasing prosperity, which are the most potent, albeit indirect, forces for confronting most of our problems.

Granted, without direct government action, market incentives are unlikely to motivate a reduction in carbon dioxide, or other greenhouse emissions, over the short run. But global warming is a long-run problem, and government attempts to directly reduce greenhouse gases, even if successful in the short run, undermine the liberty, information flows, innovation, and market adjustments that are very likely the best way to reduce global warming over the long run. The first advantage of the liberty, information, and flexibility of markets is that they allow and motivate more effective responses to unforeseen (and unforeseeable) changes in the global climate. The globe may be warmer fifty or a hundred years from now, but few things are more changeable and less predictable than the weather, and anyone more interested in being honest than in pushing a political agenda would admit that one cannot be confident what the weather will be like that far in the future.Footnote ¹⁹ It is easy to forget that in the 1970s it was widely believed by scientists and the public that global cooling was a looming threat.Footnote ²⁰ Maintaining the system that enhances the flexibility to respond sensibly to global warming, global cooling, or something in between is surely more prudent than passing legislation that spawns a host of politically influential groups with strong vested interests in locking in particular solutions in anticipation of particular conditions.Footnote ²¹ Even if the planet does end up warmer with reliance on liberty and markets than with government mandates, a freer and wealthier world that is somewhat too warm can be preferred to a less free and poorer world with the “ideal” temperature.

Even if we could be sure that government would initially address carbon emissions with the most effective direct policies for reducing them, those policies may not be the best way to solve the problem of global warming. We grant that government can create direct market-based incentives to reduce carbon emissions (with policies such as “cap and trade” or carbon taxes—more on these policies in Section V), incentives that do not exist under market arrangements without such policies.Footnote ²² Unfortunately, such market-based approaches invariably mutate under the influence of special-interest politics, often ending up doing more to protect the privileges of organized groups than to protect the environment. Nonetheless, even if direct government action does get us to a better point on the existing production possibility frontier by reducing carbon dioxide more in the short run than will existing market incentives, this is unlikely to be true over the long run. As we emphasized earlier, the big advantage of relying on liberty, informed and disciplined by market incentives, is not that it gets us to the best point on the existing production possibility frontier, but that it does the best job expanding the frontier of possibilities. And this is certainly true when considering the possibilities regarding energy sources.

The best hope for reducing the carbon dioxide that results from human activities is by reducing our reliance on fossil fuels. The question is, what will result in the fossil fuel age most quickly and efficiently passing into history? Very likely, the best answer is giving entrepreneurs the liberty, guided not by government mandates and subsidies, but by the information and discipline contained in market prices, to pursue their insights, hunches, and improbable (and often impossible) dreams. There are many alternative sources of energy that may eventually become safer and cheaper than fossil fuels—wind, solar, nuclear, geothermal, ocean tides, and others that today seem too bizarre to mention or have yet to be thought of. And no one currently knows which of these possible energy sources (or which combinations of them) offer the best hope for the future. But the freedom to experiment with a wide range of possibilities, subject to the financial feedback from failure and success, offers us the best chance to move beyond the fossil fuel age as quickly and efficiently as possible. This is best described as a roundabout process that only indirectly addresses global warming or any other particular problem. And this process will surely fail to make the best possible use of resources at any given time; that is, it will fail to achieve the best position on the existing production frontier. But relying on liberty, markets, and entrepreneurial discovery may yield the most effective way of dealing with problems in general, including global warming, by expanding the production frontier, increasing prosperity, and moving us beyond the fossil fuel age.Footnote ²³

V. Some Political Realities

One could agree with our argument on the importance of expanding the production frontier to solve problems, but still believe that it is important for government to enact policies to combat some problems, including global warming, directly. After all, one can argue, direct and indirect solutions are not mutually exclusive, as it is possible to confront problems immediately with direct measures that do little to undermine the long-run and indirect benefits realized from liberty and markets. We accept this argument as a theoretical possibility and, indeed, one that we would give the benefit of the doubt in some cases. But what government can do to effectively address problems and what government actually does are almost always very different. Experience and public choice theory suggest that one should be skeptical of the argument that direct government approaches to solving problems will be designed and implemented in cost-effective ways by maintaining most, if not all, the advantages of liberty and markets.

The political process contains strong biases against solving problems indirectly with liberty and market incentives and strong biases in favor of direct approaches requiring controls and regulations. When problems arise, whether real or imaginary, politicians see real advantage in riding to the rescue with bold and direct action that appears to take care of the problem. Even when such action is counterproductive, as it often is, it usually does more to increase politicians' reelection prospects than would a policy of allowing free people to solve problems (in unanticipated and mostly unobserved ways) by productively cooperating with one another through markets.Footnote ²⁴

There are three political disadvantages associated with indirect market approaches, even though they advance the general interest far more effectively than direct government approaches. First, the benefits from the market approach are created less dramatically than are the apparent benefits from direct government action, and they are spread so widely that few notice them. Second, even if the benefits are noticed, it is difficult, if not impossible, for the public to trace them back to particular policies and politicians, making it unlikely that politicians can claim credit for them. And third, indirect market approaches do not lend themselves to concentrating favors and privileges to politically organized interest groups, while this is easily accomplished with direct government action. These favors and privileges are easily identified by those who receive and appreciate them, while the costs (which invariably exceed the special-interest benefits) are widely diffused and largely ignored. As Hayek pointed out, politicians “who hope to be re-elected on the basis of what their party during the preceding three or four years has conferred in conspicuous special benefits on their voters are not in the sort of position which will make them pass the kind of general laws which would really be most in the public interest.”Footnote ²⁵

Even if we assume that the political process leads to direct solutions that are the most cost-effective at dealing with problems when they are enacted, they are unlikely to remain so for long. A serious problem that governments invariably face is that their solutions create obstacles to new and better ways of doing things. Government solutions always spawn a host of interest groups whose members benefit from the existing approaches and are strongly motivated to use their political influence to oppose threats to the status quo. Long after the “creative destruction” of innovation would have completely altered and vastly improved problem-solving approaches in market settings, government solutions remain in place, despite having become outdated and ineffective (and likely counterproductive). Indeed, the more ineffective a government program becomes at solving problems, the more effective it often is at justifying a larger budget to expand its efforts.

Of course, the market is not particularly well suited to solving some problems, because well-defined and well-enforced property rights are not easily established without explicit government policy. Pollution that is discharged into the atmosphere or waterways and imposes costs on large numbers of people over wide areas is unlikely to be internalized into the decision calculus of the polluters without some action by government. Unfortunately, government pollution policy has predominantly resorted to centrally administered commands and controls, with government authorities telling polluters how much to reduce their pollution, or how to reduce their pollution, or both. The command-and-control approach allows little scope for pollution-reduction decisions to be informed with information on local conditions. This explains why economists overwhelmingly favor market-based approaches, such as pollution taxation or transferable pollution permits, over command and control. These market-based approaches allow polluters to pollute as much as they want as long as they pay the tax on each unit of discharge, or pay the market price for the permits required. This freedom, disciplined by the tax or permit price, results in more pollution reduction by those who can reduce cheaply than by those who find it costly to reduce pollution, with all polluters motivated to reduce as cheaply as possible. This means that the amount of pollution reduction that takes place is achieved at a much lower cost than would be the case with a command-and-control approach. And this is not just a theoretical assertion. Studies of the cost differences in pollution control under command-and-control and market-based approaches have been made, and the cost advantage of the latter over the former is impressive.Footnote ²⁶

When pollution problems generate immediate and unequivocal harm, one might make a plausible argument that government action, even if seriously flawed, is better than the alternative of taking no government action at all. Of course, if government action is taken, it is to be hoped that it will be with the enactment of market-based approaches. But given the political realities discussed in this section, it may well be that the best response to the concerns over global warming is to hesitate to empower government to do something right away with the policies it will almost certainly impose, and rely instead on the superior ability of freedom and markets to expand the frontier of possibilities over time. The opportunity we have, and should take advantage of, with global warming is that the threat is not immediate. Carbon dioxide, though now officially classified as a pollutant, poses a very tenuous and delayed threat, if a threat at all.

Some argue that even if the threat of global warming is not immediate, this is no reason to delay addressing the problem, since immediate action will reduce the risk of serious problems that will be more costly to avoid, if we can avoid them at all, if we wait. But taking immediate action also carries real risks to both current and future generations. The precautionary principle slices both ways, since taking action to reduce the threat of one risk inevitably subjects us to the threat of another.Footnote ²⁷ Enacting policies to reduce global warming would reduce the current standard of living in the hope of benefiting future generations that will, in all probability, be far better off than we are, no matter what we do. Indeed, empowering government to fight global warming could reduce our descendants' well-being not only by reducing their wealth, but also by increasing global temperatures, or preventing them from falling as much as they otherwise would.Footnote ²⁸ As discussed in the previous section, the planet could be cooler in the future if we take no direct action against global warming, thus unleashing entrepreneurship and technological advances, because this approach could move us more quickly and efficiently beyond the fossil fuel age. And even if the planet is warmer in the future because we do nothing today, the additional innovation and wealth passed on to our descendants could more than offset any damage from the additional warming. It is also possible that direct government policies will have no noticeable effect on the planet's temperature in the future, so our political efforts to combat global warming today will do nothing more than make both current and future generations poorer.Footnote ²⁹ There are two reasons why what we do today might not beneficially affect future temperatures. First, there is a possibility that the global climate may be almost completely unaffected by what we do. And even if this is not true, there is the second possibility that the policies that would beneficially alter the Earth's temperature if enacted are not the policies that politicians will enact.

Politicians are unlikely to see much advantage in taking serious action against global warming by significantly reducing carbon emissions since the costs of doing so are sure to be immediate and large, while any benefits are highly debatable and will be long delayed. This does not mean that politicians will not see an advantage in appearing to take serious action against global warming. That politicians can benefit from substituting rhetoric and theater for serious solutions is explained by the miniscule probability that any individual's vote will determine the outcome of state, federal, and most local elections.Footnote ³⁰ The implication of this simple arithmetic of voting is that voters have little motivation to become well informed in deciding how to vote, or to follow up on the effects of the policies their elected officials enact in response to their voting. In contrast, organized groups are politically influential (their “votes” have significant influence on outcomes) and, therefore, are strongly motivated to be well informed on issues that affect their interests, and to follow up by lobbying for policies that benefit them most. So while politicians are serving up the pretense of public-interest action to the general voter, they are serving up concentrated benefits to politically influential interest groups.

Very few people are even vaguely familiar with the science of global warming, yet a majority has been convinced that it is a problem, that it is at least partially caused by human activity, and that government should do something about it.Footnote ³¹ What most have heard is that the problem is largely the result of too much reliance on fossil fuels and the carbon dioxide released by burning them. So politicians are promising to take action. With few exceptions, however, the promised action involves enacting policies that do little to actually reduce our consumption of fossil fuels, or enacting tough policies that, assuming they are carried out, will not impose serious costs on the public until long after most current politicians are out of office.Footnote ³² The promises already implemented do far more to benefit interest groups than to reduce global warming.Footnote ³³

Every four years, presidential candidates, trying to get a good start in the Iowa caucuses, promise to subsidize ethanol as an absolutely essential step in fighting global warming.Footnote ³⁴ It is easy to explain this in terms of buying votes from Iowa farmers and attracting campaign contributions from Archer Daniels Midland, a major producer of ethanol. Explaining how corn-based ethanol (virtually the only type produced in the United States) will do much to reduce global warming is not so easy. A recent study by James and Stephen Eaves considered the energy required to produce ethanol and found that the net energy that would be obtained from devoting all of America's corn harvest in 2005 (the second-largest harvest on record) to ethanol would only replace 3.5 percent of our gasoline consumption.Footnote ³⁵ And the effect on carbon dioxide emissions is highly problematic, since making even a small dent in our petroleum use by producing ethanol would require cutting down many thousands of acres of trees to clear the land to grow the additional corn, which would release large amounts of carbon dioxide.Footnote ³⁶ Many believe that sugar cane would be a more efficient ingredient for ethanol, but sugar prices in the United States are too high to make that attractive (even to free-spending politicians) because of high sugar tariffs.Footnote ³⁷

Promising to impose tougher CAFE standards has become a popular way for politicians to show that they favor direct action against global warming. Yet it is not clear that the existing standards have done much, if anything, to reduce gasoline consumption. They contain exceptions big enough to drive an SUV through, and CAFE standards were, until 2007, accompanied by tax breaks for SUVs used in small businesses.Footnote ³⁸ In 2007, Congress passed and President George W. Bush signed legislation that would increase CAFE standards to 35 miles per gallon for cars. The automobile industry had successfully opposed any increase in the previous CAFE standard of 27.5 mpg for cars, which had not been changed since 1985,Footnote ³⁹ but recent public opinion polls indicate that 69 percent of the American public favors the increase.Footnote ⁴⁰ The higher mileage standard signed into law in 2007, however, would not be reached until 2020. In the meantime, we can expect Congress to come up with new CAFE loopholes that the general public will not notice as it continues to believe that CAFE mandates are more effective at reducing gasoline consumption than they really are. Consumer choice and innovation motivated by higher gas prices will likely do as much without tougher CAFE standards (or any CAFE standards at all) to reduce gasoline consumption. And market prices for gas would allow more effective use of liberty and the information of time and place that CAFE standards suppress and ignore. Yet politicians are more likely to oppose market increases in gas prices with price controls or threats against the petroleum industry than to eliminate CAFE standards.

Politicians are not necessarily opposed to higher gas prices, however, if the revenue goes to them rather than to petroleum companies. In 2005, the average American motorist paid 45.9 cents per gallon of gas in federal, state, and local gas taxes, with the tax exceeding 60 cents per gallon in some states.Footnote ⁴¹ The justification for the gas tax is to charge for the use of the nation's highways and raise the revenue necessary to build and maintain them. But much of the revenue from gasoline taxes goes to finance general government spending.Footnote ⁴²

A higher tax on gasoline might be justified, however, if the carbon dioxide emitted by gasoline-powered automobiles represents a serious negative externality by causing global warming. Higher gas prices would allow people to use their information of time and place to decide how best to reduce gasoline consumption, so that the reduction is achieved at far less cost than if government were to choose a few reduction approaches, such as ethanol subsidies and CAFE standards, and impose them on everyone. For example, people could decide to buy larger cars and drive them fewer miles, or car pool or use mass transit more often, or live in smaller, less fuel-consuming houses, or take fewer vacations, or make other fuel-saving adjustments more suitable to their situation and preferences than driving smaller cars.

While the gasoline tax approach would allow people to use their information to decide how to reduce gas consumption by a specified amount, political decisions on how much gas consumption should be reduced (or how high the tax should be) would be made in what almost amounts to an informational vacuum. But this is true with any market-based pollution-reduction policy implemented by government. Another problem with the tax approach is that given the magnitude of the carbon dioxide emissions being discussed (for example, the 1997 Kyoto Protocol calls for developed countries, between 2008 and 2012, to reduce their greenhouse gas emissions to reach levels at least 5 percent less than the baseline levels of 1990), the tax on gasoline would have to be very high. The resulting transfer of revenue out of the private sector and into the public sector would have an undeniably negative effect on the liberty and innovation that are likely to be our best long-run hope for moving beyond the fossil fuel age. This problem might be eliminated if other taxes were reduced enough to maintain revenue neutrality. But the public would be highly, and justifiably, skeptical of political promises to keep tax burdens from increasing with reductions in other taxes large enough to offset a large gas tax increase. Thus, public resistance to a gas tax increase (or, more generally, higher taxes on all fossil-fuel use) large enough to reduce greenhouse gases significantly makes such an increase politically unpopular.

What has come to be referred to as “cap and trade” is the market-based approach that politicians seem most attracted to. The idea is for government to issue transferable permits for an amount of carbon emissions that meet a politically determined standard. The advantage is that each carbon emitter can determine on the basis of local information how to reduce his carbon emissions, and by how much. Each would have strong motivation to reduce emissions as cheaply as possible. Those who can reduce their emissions cheaply will choose to reduce a lot and buy fewer (sell more) permits, while those who find it more costly to reduce emissions will choose to reduce less and buy more (sell fewer) permits. This market can include those who do not emit carbon at all, but who reduce carbon dioxide by specializing in planting trees or doing other things that reduce carbon in the atmosphere so that they can sell carbon offsets to carbon emitters.Footnote ⁴³ The result, if the market works well, is that the politically required reduction in carbon emissions will be achieved at the lowest possible cost. As with the tax approach, the obvious problem is that no market allows information to determine the desirable level of carbon emissions.

Another possible problem with cap and trade, however, explains why politicians find it attractive. The cap-and-trade approach allows politicians to claim that carbon emissions are being reduced by more than they actually are. It is very difficult to know how much carbon is actually being emitted or reduced, so carbon emitters can get away with discharging more carbon than they have permits for. Of course, this is a problem for the tax approach as well, since more carbon may be emitted than the amount on which the emitters pay the tax. But there is a supply-side problem in the case of buying pollution offsets. It is particularly difficult to know how much those who are selling carbon offsets are actually offsetting the carbon being emitted by those who buy them. For example, sellers of offsets can take credit for reducing carbon emissions by taking actions that they would have taken anyway.Footnote ⁴⁴

Another reason politicians can be expected to favor the cap-and-trade approach over a gas tax is that the former approach will initially be paid for primarily by businesses and, therefore, will give the appearance that businesses are incurring most of the cost. Of course, consumers, meaning everyone, ultimately pay the cost in the form of higher prices, but the perception that businesses are paying reduces the political cost of the cap-and-trade approach in comparison to a gas tax. This has the added political advantage of reducing the pressure on politicians to offset the government revenues received from auctioning off the carbon permits by reducing taxes.Footnote ⁴⁵ Despite this problem, however, a policy to reduce carbon emissions based on cap and trade, by taking advantage of market incentives and freedom, has a clear advantage over policies based on command and control.

If the government did enact a broad market-based policy to encourage emitters of greenhouse gases to consider the effect of their behavior on global warming, there would no longer be a global-warming justification for a host of existing or recommended government regulations. But these regulations have now either created their own politically influential constituencies, and are difficult to eliminate, or appeal to politically influential groups, and thus their enactment (or continuation) will remain politically attractive. Some of these measures (either already enacted or being considered) are (1) CAFE standards; (2) imposing higher costs on oil exploration and recovery, and prohibiting drilling for oil in the Arctic National Wildlife Refuge (ANWR); (3) eliminating all use of fossil fuels in federal buildings by 2030; (4) increasing government support for research on plug-in hybrid cars, lighter materials for use in transportation, and vehicles that can use renewable biofuels; (5) imposing tougher government energy standards on a wide range of household appliances; and (6) giving more federal money to low-income households to help them adjust to less fuel use and to weatherize their homes, and to local governments attempting to reduce fossil-fuel use.Footnote ⁴⁶

There is nothing wrong with increased energy efficiency, but even when externalities prevent it from being fully achieved in the market, having the government target a number of particular ways of reducing fossil-fuel use and then impose one-size-fits-all regulations and subsidies to achieve these reductions is more likely to reduce than to increase efficiency. Such government policies are responses to political considerations that fail to consider the information of time and place required to internalize externalities or adequately compare the benefits and costs of alternative policies. When government mandates override market prices, how does anyone have even the roughest idea, for example, whether another dollar spent mandating a particular biofuel is a more or less costly way to improve environmental quality than spending it on tougher energy standards on microwave ovens? And once a policy is implemented, it is extremely difficult to eliminate, no matter how ineffective or counterproductive it is, as interest groups coalesce around it. The political popularity of environmental policies, despite their serious deficiencies, results from a powerful combination of political short-sightedness, narrowly focused and influential interest groups, and a general unawareness that, in the long run, liberty and market incentives are the most effective way to create prosperity, promote energy efficiency, and protect the environment.

Nothing we have said is meant to suggest that liberty and markets alone would do anything close to a perfect job of eliminating the externalities that are the root cause of our environmental problems, including the problem of global warming. Our argument is the more modest one that environmental policies that rely primarily on liberty and market-based information and incentives would do more to indirectly protect the environment, and do so at less cost, than direct attempts to address environmental problems that government is almost sure to pursue if granted the power to do so.