Firm and Super-Firm: The Early History of Pollution-Permit Trading

• In Event: Markets & the Environment I: The Environmental Logics of Finance

Abstract

How does neo-liberalism confront ecological crises? Just as nature abhors a vacuum, neo-liberals abominate ‘market failure’—their solution is always more markets. Ronald Coase attacked the dominant framework of ‘externalities’ in 1959 and 1960, most famously in his influential essay ‘The Problem of Social Cost’. Yet, he failed to elaborate how to create property rights in externalities. The solution to this problem was devised by John Dales, an obscure but well connected neo-liberal economist at the University of Toronto. In 1968, Dales sketched how to structure a pollution-permit market for the Great Lakes in Pollution, Property & Prices.

By studying his archival fond and published work, it becomes possible to see how neo-liberals devise and enact their ideology. He surmounted the problem that had dumbfounded Coase because of the unique attributes of Canadian neo-liberalism, an intellectual branch which has gone on to specialise in environmental problems such as surface-mining reclamation bonds and geo-engineering. Canadian neo-liberalism’s strength lies in environmental policy. Dales’ extensive practical work as an environmental consultant specialising in water problems for the Canadian government allowed him to see the impracticality of Pigovian taxes, which more cloistered economists failed to see. This on-the-ground work allowed Dales to perceive the state as a ‘super-firm’ able to create new markets and internalise transactions costs. Moreover, he argued that lakes, which are more salient in Canadian political ecology than in the US, required a different kind of economics than rivers (the latter being the focus of US ecological economists). The early history of pollution-permit trading reveals the problems that bedevil it now—such as 1) the creation of pollution ‘hotspots’ near poor and racialised communities; 2) the tendency for firms to manipulate the distribution of permits; 3) and the difficulty of setting an effective low cap—were all apparent at the moment of conception.

Author

• Troy Vettese, New York University