IPA's 'free market' carbon nonsense

Many are puzzled by the political theory of carbon markets. Why does the Institute for Public Affairs – a libertarian think tank – oppose a market in carbon?

Tim Wilson, for example, thinks that private property rights are good, intellectual property rights are important, but carbon markets are some kind of socialist plot. The difference seems to be that carbon markets aren’t “free” because they involve regulation, and carbon permits aren’t “natural” property.

Of course, there are distinctions. Physical land can be defended with a sword. You don’t need such elaborate official definition.

As Tim Wilson points out, you can have a society with only very basic land rights, little government, and a lot of swords. And without so much government defining the nature of property, he assumes, markets are more “free”.

It might be a more free world – depending on your definition – but few of us would want to live there. Most rights are more complicated than defending land with a sword – and a good thing too. For example, an easement – the right to cross someone else’s land – is the kind of property right that can only exist with government definition. Or take another example: mortgages – which provide a lender with the right to sell land even if the borrower has died – didn’t exist in many early legal systems.

Until government developed this concept, large-scale borrowing and lending, and the economic development that came with it, was practically impossible. 

The idea that property rights are more “free” if they aren’t regulated is just silly. The argument was settled as a matter of legal theory back in 1917 by Wesley Hohfeld. As he pointed out, a “right” cannot exist without a corresponding “duty”. Your “right” to own a house is meaningless, unless everyone else has a duty not to enter without invitation.

Unless we want a world in which everything is settled by the biggest sword, we require government regulation to define the corresponding “duties”, without which “rights” are meaningless. As Hohfeld demonstrated, a watch exists physically, but the legal rights to own it – the interests that are protected by governments rather than swords – are inherently intangible.

Without a vast array of property right definitions settled by government, the sophisticated economies of today would be impossible. A carbon market is no different in this respect.

But perhaps some property rights are more “natural” than others. For example, Tim Wilson characterises intellectual property as “natural” because it can exist as a “secret”. But much of the intellectual property that we care about is highly public, and the whole point of government intervention is to regulate how it is used in public. Before copyright law, composers rewrote each other’s tunes, and playwrights recycled each other’s plots.

Again, we could have a world in which the only intellectual property was secrets, but would we want to live there?

Using this concept of “natural property” Wilson thinks that privatising the atmosphere is consistent with free market principles, but creating carbon markets is not. The tradable title to atmosphere would somehow be more of a “natural property right” than a carbon permit.

This is nonsense on stilts. A carbon permit is still “property” – it just involves a different set of rights. A privatised atmosphere would involve a bundle of rights in which an owner has both a claim right to exclude others, and the privilege to pollute. A carbon permit involves an entitlement to emit carbon, and government is unable to prosecute the emission.

Either way, the bundle of rights is defined by government, just as government creates a huge variety of other property rights, from mobile phone spectrum to mining licences.

What’s really going on here is that most people are more comfortable with things they can touch and see. We also tend to be more comfortable with things that are familiar. We can touch houses and watches. We are familiar with intellectual property. By contrast, carbon emissions are invisible, and carbon permits involve a novel bundle of legal rights and duties.

A sophisticated society, and all the prosperity that comes with it, depends on legal regulation of complex bundles of property rights. Carbon permits and markets add to that complexity, but lead to a better environment. Relative to the alternative of government regulating many specific activities, carbon permit trading gives businesses more choice about whether or not to reduce their emissions, and how to do so. In that sense, they are more of a “market based” solution.

Tim Wilson may think this is “unnatural”, and so, less “free”. He may prefer a world in which the only property is what he can see, what he can defend with his sword, and which his grandfather would have known about. But his life in this world is likely to be, as Hobbes put it, solitary, poor, nasty, brutish and short.

John Daley is the Chief Executive of the Grattan Institute.  He never imagined that four years of studying legal theory would be so useful.