Environmental Markets vs. Environmental Mandates: Capturing Prosperity and Environmental Quality (ESG: Myths and Realities)

Today everyone claims to be an environmentalist, but what constitutes environmental quality varies. For some, it avoids a “Malthusian trap,” named for the Reverend Thomas Malthus, who, in 1798, postulated that humans would continue to reproduce until the population demands exceed their ability to produce food, after which famine, disease, and pestilence would check human population growth. Centuries later we still hear fears of “limits to growth,” of a “population bomb,” of a “silent spring” in which wild species go extinct due to human negligence, and of “the end of oil.” For others, environmentalism has more to do with romantic views of nature as Henry David Thoreau observed in Walden and as John Muir believed untamed wilderness should be.

To these we can add environmental ethics as promoted by Aldo Leopold’s Sand County Almanac. Accordingly, we should honour animal rights, recycle even when doing so does not save resources, and protect land from development.

All of these perspectives on environmentalism played a role in the passage of a regulatory alphabet soup in the United States—the WA (Wilderness Act, 1964), the CAA (Clean Air Act, 1970), the CWA (Clean Water Act, 1972), and the ESA (Endangered Species Act, 1973), to mention a few. These were all based on the premise that private individuals and companies will not be good environmental stewards, thus making command and control necessary to ensure environmental quality.

But unfortunately, many of these regulations have actually thwarted environmental and economic progress.

For decades, economists have focused more on institutions as the driving force in economic growth. Countries with more secure property rights and a rule of law that recognizes individual rights are more likely to prosper than those using mandates to guide human and physical capital investment and natural resource use.

And the same institutions that promote economic growth also promote environmental quality. This is not to say that environmental mandates have no place, but the fact is that environmental markets align individual incentives with efficient resource use for land, minerals, water, fisheries, and air. The more that environmental markets can supplant environmental mandates, the better the chance for us to have both environmental quality and prosperity.