What comes to mind when we think of these two terms: free markets and environmentalism? Many people will assume that the two are incompatible — that free markets are detrimental to the environment and in order to reverse environmental degradation, more centralized control is needed. 

Indeed, when considering solutions to environmental crises, there is often a bias toward top-down, centralized state solutions. The idea that it’s up to governments to “do more” to protect the environment against free-market interests has become increasingly popular in recent years.

But while environmentalism and free-market principles may seem like opposing forces, the concept of free-market environmentalism offers a variety of unique and effective approaches to addressing environmental issues.

What is the definition of free-market environmentalism?

Free-market environmentalism combines the ideals of environmental protection with the principles of a free-market economy. It acknowledges that markets can provide powerful incentives for conservation and environmental stewardship, and that private property rights and contracts can be leveraged as tools to protect the environment. 

Indeed, advocates of free-market environmentalism hold that free markets, property rights, and tort law provide the best means of preserving the environment, internalizing pollution costs, and conserving resources. But how exactly does this work?

How does free-market environmentalism work?

One of the key principles of free-market environmentalism is the protection and clarification of property rights. By establishing clear and protected property rights, parties are able to negotiate improvements in environmental quality and use torts to prevent ecological harm. This approach empowers affected parties to obtain compensation from polluters, which can ultimately reduce or eliminate negative externalities.

By internalizing the costs of pollution and other environmental harms, the free market can incentivize businesses to adopt more sustainable practices. For example, if a company is required to pay for the pollution it generates, it will be motivated to reduce pollution levels to lower costs.

Businesses are incentivized to use resources sparingly and constantly improve efficiency to reduce production costs and gain an edge over their competitors. In a system where polluters are accountable for their emissions to the extent of a monetary value, they will take steps to minimize or prevent future environmental damage. 

For example, suppose a factory pollutes a nearby river. In that case, affected parties, such as residents or fishermen, can use tort law to compel the factory to compensate them for the damage caused. All of this, however, requires property rights to be clear and enforceable.

In addition, free-market environmentalism emphasizes the importance of innovation and technological advancements in promoting environmental protection. By providing incentives for businesses to develop and implement new technologies that reduce pollution and improve resource efficiency, free-market environmentalism can drive innovation in the private sector.

Furthermore, free-market environmentalism recognizes that market solutions are not all environmental problems. However, free-market environmentalists believe that government intervention should be limited and targeted and should not interfere with the efficient functioning of the market.

Ultimately, free-market environmentalism aims to promote a sustainable and prosperous future by harnessing the power of the free market to protect the environment. By incentivizing businesses to adopt sustainable practices and providing affected parties with the tools to hold polluters accountable, we can create a system where economic growth and environmental protection are not mutually exclusive but complementary goals.

What is the case against free-market environmentalism?

Critics of free-market environmentalism often argue that the focus on property rights and tort law can lead to the exploitation of natural resources for private gain, and that the market alone cannot be trusted to ensure environmental protection.

One concern is that the emphasis on property rights may prioritize private interests over the environment. However, this is not what free-market environmentalism is about. Instead, it seeks to empower affected parties to hold polluters accountable and obtain compensation for environmental harm. Moreover, incentivizing businesses to innovate and adopt sustainable practices can create a system where economic growth and environmental protection are complementary goals.

Some critics argue that the market and voluntary action alone cannot be trusted to ensure environmental protection, and that government intervention is necessary to address environmental issues.

Another concern is that the focus on tort law may result in lengthy legal battles and delayed action on environmental issues. However, it is important to note that free-market environmentalism does not necessarily exclude some degree of regulation or oversight in cases where the market alone cannot adequately address a specific issue.

While there are some legitimate concerns about the potential shortcomings of free-market environmentalism, these can largely be addressed through appropriate regulation and monitoring. By promoting sustainable practices and empowering affected parties rather than issuing decrees, free-market environmentalism can help protect the environment while also promoting economic growth.

Do we need degrowth to save the planet?

Free-market environmentalism aims to combine both environmental protection and economic growth, but many of its critics argue that these two aspirations are fundamentally incompatible.

Indeed, Greta Thunburg made her thoughts on the matter clear at the UN Climate Action Summit in 2019, where she famously proclaimed:

“We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you!”

The argument against economic growth is at the core of one of the most prominent criticisms of free-market environmentalism. Moreover, the idea that we must bring about deliberate degrowth to save the planet is frequently used to criticize capitalism more broadly.

Advocates for degrowth believe that an economic model aiming for perpetual growth is inherently unsustainable and that this pursuit of growth is a driving force behind the climate crisis. Proponents of degrowth argue that continued economic expansion will only exacerbate environmental problems, and that a fundamental shift in economic thinking is necessary to address these challenges.

However, these ideas are predicated on the flawed assumption that economic growth has an inherent, linear link to environmental degradation.

Is economic growth bad for the environment?

In the environmentalist sphere, economic growth is often viewed as inherently destructive, as industrialization and development has required increased resource consumption, greater levels of pollution, and an overall degradation of natural habitats.

One of the main arguments against economic growth is that it leads to increased greenhouse gas emissions and contributes to the climate crisis. 

However, economic growth can lead to greater investment in clean energy and sustainable technologies. As societies become wealthier, they can afford to invest in research and development of new technologies, which can help reduce pollution and improve environmental quality.

An example of this can be found in the shift from copper to fiber-optic technology. Fiber-optic cables require less energy to transmit data over long distances, use less raw materials, and have a longer lifespan compared to copper cables.

Furthermore, economic growth can also lead to greater environmental awareness and education. As people become more affluent, they tend to place greater value on environmental quality and are more likely to demand policies and practices that prioritize sustainability.

The luxury car industry is a prime example of how economic progress is evolving toward environmentally-friendly innovation and decarbonization. This shift is mainly driven by the growing consumer demand for sustainable and eco-friendly products.

Another reason for this shift is the development of new technology and innovation. Luxury carmakers are investing in electric and hybrid vehicles, as well as alternative fuels such as hydrogen fuel cells. These new technologies not only reduce carbon emissions, but also provide other benefits such as improved performance and efficiency.

Overall, while it is true that economic growth can have negative environmental impacts, evidence suggests that it can also lead to positive environmental outcomes. 

For instance, we can observe positive correlations between prosperous economies and improved environmental quality for certain indicators such as air pollution and deforestation.

Furthermore, economic growth can create incentives for conservation and environmental protection, as individuals and societies become more affluent and prioritize environmental values. This can lead to the creation of parks, wildlife reserves, and other protected areas that conserve biodiversity and reduce habitat destruction.

While economic growth tends to initially be conducive to a sharp increase in emissions, once countries reach a certain level of economic development, the relationship between economic growth and environmental degradation becomes anything but linear.

This phenomenon can be explained by a concept known as the Environmental Kuznets Curve.

The Environmental Kuznets Curve explained

The Environmental Kuznets Curve is a concept that suggests that, while economic development and environmental degradation are initially positively correlated, this relationship eventually reverses as economies reach higher levels of development. Over time, economic growth can indeed improve a society’s environmental impact.

Essentially, the relationship between economic growth and environmental impact is not linear but rather parabolic. The curve is named after the economist Simon Kuznets, who first observed a similar pattern between economic growth and income inequality.

The Environmental Kuznets Curve serves as a foundation for the free-market approach to environmentalism. It is illustrated by the graph below.

The Environmental Kuznets Curve

As countries develop, they first become more environmentally destructive. We have seen that in the case of, for example, the United Kingdom. When the first and second industrial revolutions came about, Britain began rapidly industrializing with the use of coal and charcoal — exploiting its natural resources, burning coal in massive quantities, and cutting down its trees to provide more resources for energy generation in steam engines.

Turning point income between environmental decay and environmental improvement

At a later stage, the economy becomes more efficient and produces more wealth while emitting less carbon. Capitalism fosters innovation, and thanks to that, we have spare capacity to have a lower negative impact without sacrificing productivity. More wealth also allows for expanding priorities beyond survival. It means we can also prioritize sustainability, enabling civic society to participate more in preserving the environment.

This is important because many environmental issues, such as air and water pollution, or even deforestation, are caused by human activity and are exacerbated by poverty and lack of access to resources.

While it is not guaranteed that the environmental outcomes will become better, historically, in the vast majority of cases, long-term economic growth has done just that.

Per capita CO2 emissions

Environmental track records: capitalism vs socialism

When discussing potential solutions to environmental issues, it is often mistakenly assumed that socialism, in one form or another, with greater governmental power to take decisive action, would lead to better environmental outcomes and a swift reduction in carbon emissions.

However, in practice, socialist governments have proven widely ineffective at environmental management. 

Over the past 70 or 80 years, it is abundantly clear that countries viewed as more capitalist, in other words having embraced free-market principles to a greater degree, such as the United States and Western Europe, have a far superior environmental track record than those countries that adhered to socialism or communism, such as China or the former Soviet Union.

Countries with market economies have been far more successful in fostering prosperity than their centrally-planned counterparts. Considered in the context of the Environmental Kuznets Curve, these more successful economies have been better able to foster innovation and move away from harmful environmental practices as more individuals are in a position to care about long-term sustainability.

Socialism and environmentalism

Socialist regimes are characterized by centralized planning, which means that decisions about environmental issues are often made by a small group of officials with little input from local communities. Natural resources tend to be viewed as commodities to be exploited for the benefit of the state, rather than as finite resources that need to be managed carefully.

In China, the Great Leap Forward, an unsuccessful, top-down campaign aimed at rapidly industrializing the country in the late 1950s and early 1960s, led to environmental devastation on a massive scale in addition to causing tens of millions of deaths.

Furthermore, these regimes often lacked the mechanisms of accountability necessary to ensure that environmental regulations were enforced. This meant that polluting industries could operate with impunity, and local officials often turned a blind eye to environmental violations in order to meet production targets.

To this day, China continues to struggle with air and water pollution, with some cities experiencing hazardous levels of smog. Similarly, countries of the former Soviet Union experienced severe environmental problems, such as the Chernobyl disaster, which had devastating effects on the environment and human health. In addition, pollution from heavy industry and the extraction of natural resources led to air and water pollution, as well as soil degradation.

The Aral Sea: a government-induced environmental catastrophe

The Aral Sea was a landlocked body of water located in Central Asia, between Kazakhstan and Uzbekistan. It was once one of the largest lakes in the world, covering an area of around 68,000 square kilometers.

However, in the mid-20th century, the Soviet Union began a massive irrigation project to divert water from the rivers that fed the Aral Sea, primarily the Amu Darya and Syr Darya rivers, to grow cotton and other crops in the arid region.

As a result, the water levels of the Aral Sea began to drop rapidly, and by the 1980s, the sea had split into two separate bodies of water, the North Aral Sea in Kazakhstan and the South Aral Sea in Uzbekistan. By the early 2000s, the South Aral Sea had almost completely dried up, leaving behind a salt-encrusted desert that had once been the seabed.

The consequences of this environmental disaster have been severe. The disappearance of the Aral Sea has led to a range of health problems for people living in the region, including increased rates of respiratory illnesses, cancer, and other diseases linked to the toxic dust and salt particles that are blown into the air by the dried-up sea bed.

In addition to the health impacts, the loss of the Aral Sea has had devastating economic and social consequences for the people of Central Asia. The fishing industry that once thrived on the sea has collapsed, leaving thousands of people without work. The region’s climate has also been affected, with changes in weather patterns leading to more frequent droughts and dust storms.

Overall, the story of the Aral Sea is a tragic example of the consequences of government directives on the environment. It serves as a reminder of the importance of responsible stewardship of our natural resources.

The fate of the Aral Sea also relates to the tragedy of the commons — another major problem that free-market environmentalism is concerned with addressing.

The tragedy of the commons and the Coase theorem

The tragedy of the commons is a well-known concept in economics that describes how a shared resource can be overused and depleted over time. 

This phenomenon can be seen in many different areas of life, from environmental issues like overfishing and deforestation to social problems like congestion in public spaces. In each case, the problem arises from the fact that users of the shared resource will prioritize their own short-term gains over its long-term health and sustainability.

The Coase theorem is a concept in economics that suggests that in the presence of property rights, bargaining between parties can lead to efficient outcomes even in the presence of negative externalities. The tragedy of the commons is a situation where the exploitation of a shared resource by individuals leads to its depletion, and the Coase theorem is often cited as a potential solution to this problem.

The Coase theorem suggests that if property rights are clearly defined, parties can negotiate and come to a mutually beneficial agreement, regardless of who is initially assigned the rights. This means that if there are negative externalities, such as pollution or depletion of a common resource, the affected parties can negotiate with the polluters to reach an efficient outcome. This is because, in the absence of transaction costs, the bargaining process will result in the allocation of resources to their most valued use.

To address the tragedy of the commons, there are a few different solutions that have been proposed.

One solution to the tragedy of the commons is to assign property rights to the resource, so that individuals can negotiate and come to a mutually beneficial agreement. This can be done through the creation of a market for the resource, or by assigning the property rights to an entity that can manage the resource more efficiently. 

By doing this, the negative externalities associated with the tragedy of the commons can be internalized, and individuals can negotiate to reach a more efficient outcome.

(Find out more about the tragedy of the commons in our article “The tragedy of the commons explained”) 

Can technology solve the climate crisis?

Technology has the potential to play a crucial role in addressing the climate crisis. Instead of viewing technological development solely as a contributor to environmental problems, we should consider how technology offers powerful tools for solving the climate crisis.

One of the most promising technologies for addressing climate change is renewable energy. Advances in solar, wind, and hydro power have made them more efficient and cost-effective than ever before. Increased use of renewable energy can reduce our reliance on fossil fuels, which are a major contributor to greenhouse gas emissions. Additionally, the development of energy storage technology can help solve the intermittency problem associated with renewable energy sources.

Moreover, dematerialization, the process of using fewer natural resources to produce goods and services, is a critical concept in environmental sustainability. Technology plays a key role in driving dematerialization, as it enables the development of products and services that are lighter, more durable, and more efficient in their use of resources.

The use of digital technologies, for example, has reduced the need for physical products and materials. Streaming services for music and video have replaced CDs and DVDs, while e-books and online publications have largely replaced paper-based books and magazines. The development of digital technologies has also enabled remote work and virtual meetings, reducing the need for transportation and associated emissions.

Another technology with great potential for reducing greenhouse gas emissions is carbon capture and storage (CCS). CCS technology involves capturing carbon dioxide emissions from power plants and other industrial facilities and storing them underground. This can help reduce the amount of carbon dioxide released into the atmosphere, while still allowing us to continue using fossil fuels.

Smart technology can also play a role in reducing energy consumption and emissions. For instance, smart grids can optimize energy use and reduce waste by incorporating renewable energy sources and enabling demand response. Furthermore, smart buildings can use sensors and automation to reduce energy use and improve efficiency.

Overall, technology can be a powerful tool in addressing the climate crisis. It is important that the development of these technologies is not hampered by government interference and subsidies for legacy industries to ensure that innovative technologies can be deployed at scale and make a meaningful impact.

How governments subsidize pollution

Governments around the world are subsidizing polluting industries — contrary to the principle of the free market. Subsidies are a form of government intervention that provides financial support to certain industries, and they create an uneven playing field in the market. This distortion can lead to inefficiencies and market failures that harm both the economy and the environment.

When governments subsidize polluting industries, they are essentially giving them a leg up in the market, making it harder for cleaner, more sustainable alternatives to compete. As such, this creates a market failure where the true cost of pollution is not reflected in the price of the product, and polluting industries are able to externalize the costs of their activities onto the environment and society.

Moreover, subsidies for polluting industries are also an example of crony capitalism, where government favors specific industries at the expense of others. This leads to corruption and rent-seeking behavior, where companies focus more on securing government subsidies than innovating and competing in the market.

For instance, in the United States, the oil industry is estimated to avail of somewhere between 10 and 50 billion dollars annually in subsidies.

Why free-market environmentalism is the only viable solution

Free-market environmentalism is based on the idea of competition driving innovation, efficiency, and economic growth, ultimately to the benefit of the environment.

Free-market principles provide the most effective and efficient solution to the climate crisis. The climate crisis requires a large-scale shift toward a sustainable economy that reduces greenhouse gas emissions while promoting economic growth. The key to achieving this shift is the free market, which enables innovation and investment in clean technologies.

In a free market, businesses are incentivized to find the most cost-effective solutions. This competition drives innovation and encourages the development of new technologies that can reduce greenhouse gas emissions.

Furthermore, the free market provides an efficient means of distributing resources to the most efficient and sustainable projects. When government subsidies distort the market, it can lead to misallocation of resources and investments in less efficient projects, whereas a free market allows businesses to allocate resources more effectively and encourages them to invest in clean technologies and reduces the reliance on fossil fuels.

In addition, free-market principles promote individual responsibility and accountability. Businesses that emit high levels of greenhouse gasses are held accountable for the environmental damage they cause, and individuals are incentivized to reduce their carbon footprint. This leads to a culture of responsibility and encourages people to make more sustainable choices.

In conclusion, free-market environmentalism provides the most effective solution to the climate crisis. By incentivizing innovation, promoting efficient resource allocation, and encouraging individual responsibility, the free market provides the best path toward a sustainable economy that reduces greenhouse gas emissions while promoting economic growth

It is time to embrace effective, positive solutions to address the climate crisis and create a sustainable future for generations to come.

For more content on related issues, be sure to check out the landing page for our Green Liberty campaign by clicking on the button below.

Further reading

How sustainable farming is paying off for Australian farmers

The tragedy of the commons explained

How markets can save rhinos from extinction

Market-based solutions to climate change

How the profit motive can protect the environment

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