Local Coordinator Program

Close this search box.

Market-based solutions to climate change

Published on

Ignoring proposals for market-based solutions to reduce emissions and mitigate climate change will not lead to the best outcomes.

Markets have always been the best way to trade. Yet it was only with the industrial revolution, brought about through free societies embracing Enlightenment ideas, that economic growth and development on a large scale could occur. However, our increased production and consumption of resources has also led to conditions where animals and threatened plant species are being pushed to the brink of extinction through the destruction of habitats and climate change.

The political and development agendas of most countries have focused extensively on economic growth, which is highly dependent on production. As such, consumption has grown at a rate that has outpaced and overwhelmed the capacity of mankind to efficiently handle waste and the byproducts of manufacturing.

Furthermore, the lack of private ownership over large bodies of water and breathable air contributes to a version of the “tragedy of the commons.” As things currently stand, our planet has entered into a worrying new era, referred to as the Anthropocene, whereby humanity is compelled to find the means to confront the pressing issue of climate change.

How libertarianism can help find solutions to climate change

While the effects of climate change and global warming haven’t thus far been as dramatic as the typical movie-style depiction of tsunamis overpowering world cities, rising temperatures and the increased toxicity of air and water should raise many questions around how to engineer economic systems that can mitigate climate change.

Considering this issue from a libertarian perspective can play a major role in providing suggestions about how markets can correct the most obvious mistakes that contribute to climate change. The libertarian strategy generally advocates for a world governed by free markets and driven by individual choices.

Due to the skepticism of authority and state power in handling the climate change crisis, governments must exercise a limited role, without being the sole representatives of how markets could be used to tackle climate change.

Given the various shortcomings associated with central planning, market-based solutions are extremely important in addressing climate change. Due to their sensitivity to geographic and technological differences across society, market-based solutions ought to be an important part of any solution.

Outlined below are several key areas in which a market-based approach, with a greater global respect for individual rights, can tackle the issue of climate change.

Cap and trade (CAT) or emissions trading can help mitigate climate change

Businesses can comply with cap and trade by following the policies and regulations that minimize environmental harm. Government agencies are usually responsible for setting and regulating CAT policies. As such, these agencies sell or allot a set number of permits to allow a specific quantity of pollutants to be discharged over a specific period of time. Businesses and organizations thereby need to hold permits equal to the amount of emissions they generate.

For companies planning to increase their production and its associated pollution, permits for greater allowances can be purchased from willing sellers. This works because markets determine their prices — the price is based on the number of allowances, emissions, and the cost of reducing emissions (abatement costs).

Businesses must ensure that they reduce their emissions level to comply with the limit allocated by the permits they currently hold, in a system that has proven effective in reducing pollution at a rapid rate. As far as incentives are concerned, the market theory works much better than simply imposing bans.

If companies fail to meet the emissions limit set by their allocation or fail to report their emissions, they would face fines and have their production costs increased. As a result, choosing the least costly method and ensuring pollution is kept to a minimum will be the best strategy for these companies.

Most of the effects of climate change, such as rising sea levels and more frequent and severe heat waves, droughts, wildfires, and storms have a large cost that few market agents can assume responsibility over. Moreover, the costly impact of climate change isn’t reflected in the prices of those goods and services responsible for greenhouse gas emissions.

In addition to putting a price on those emissions, the CAT and emissions trading systems give businesses an incentive to reduce their emissions, not with governments mandating how to reduce emissions but by encouraging creativity and innovation to reduce emissions more efficiently.

The case for a carbon tax

Depending on its nature, a carbon tax can be categorized as either a Pigovian tax, or as a tax intended to correct an undesirable market outcome. The carbon tax is levied on the carbon content of different compounds essential to our everyday lives that pollute the air and water, such as fuels for transportation and energy. It is similar to the emission trading system (ETS) because it is referred to as a form of carbon pricing.

Currently, governments set a price that emitters must pay for a ton of greenhouse gas emissions. As a result of this, businesses must reduce emissions in order to reduce their carbon tax payments. Since businesses will seek ways to reduce emissions for a cheaper price than taxation, the market will be responsible for determining emissions.

Several cities and even countries are committed to achieving net-zero carbon emissions in the near future. Scientists and economists have generally agreed that carbon taxes reduce greenhouse gas emissions effectively and therefore curb climate change to a great extent, while also having the least impact on economic freedom.

In the current context, taxation is seen as an issue because people believe it is used excessively to rob people of their money, but a carbon tax stands with libertarian ideals in creating a free and healthy world for all. A carbon tax addresses the consequences of multinational corporations that do not care about the effects of their activities on the planet.

Putting a social cost on their actions and establishing some form of environmental justice is a way to make them responsible for their actions. In many cases, carbon tax revenues are used to better the lives of the most affected communities or animal populations. This way, the carbon tax system can be instrumental in dealing with powerful entities that do not want to deal with their poor environmental care.

Other taxes on a carbon equivalent basis

Taxing harmful substances that cause climate change should not be limited to carbon dioxide as the only taxable solution. In terms of climate change, there are many other human-induced pollutants or greenhouse gas emissions that are important, such as aerosols. As such, much can be done to further refine the existing energy taxes, which require individuals to pay a fee, charge, or tax for each ton of greenhouse gas they emit into the atmosphere.

Nonetheless, there is a constant and open debate on the question of whether these systems may infringe upon individual liberties and rights. Taking this step would help better understand how to mitigate deforestation, which is also a major contributor to climate change.

Market-based solutions to combat climate change are theories that take a considerable amount of time to study and test before they can be implemented. The efficiency and sustainability of their implementation must be evaluated by many scholars to avoid any potentially hazardous disruption to economic systems.

Although some people may be uncomfortable with the options and argue that the existing economic system isn’t contributing to climate change, scientific evidence shows that human activities do now cause increasingly damaging effects for our planet — 97% of peer-reviewed studies over decades indicate that human emissions are responsible for climate change. While there are scientific solutions for reducing emissions and greenhouse gases, ignoring proposals for market-based solutions to reduce such emissions will not lead to the best outcomes.

For further reading on libertarianism and climate change, be sure to click on the button below.

This piece solely expresses the opinion of the author and not necessarily the organization as a whole. Students For Liberty is committed to facilitating a broad dialogue for liberty, representing a variety of opinions. If you’re a student interested in presenting your perspective on this blog, send your piece to [email protected], and mention SFL Blog in the email subject line for your chance to be published and be seen!


If you enjoy reading our blog, be sure to subscribe to our mailing list for more content and updates

Students For Liberty is the largest pro-liberty student organization in the world.

To get started, please select your region on the map.

Asia Pasific