What would free market economist Milton Friedman do about climate change?

By Zachary Vasile

Advocates fighting to combat global climate change have a new ally in their efforts to reign in pollution: the usually hands off, market-centric Chicago school of economics.

NASA satellite image of Super Typhoon Vongfong, taken Oct. 9. Climate scientists largely agree that global warming may lead to more devastating super-storms like this one, which killed 9 people and caused over $42 million in damage in Japan, Taiwan, and the Philippines.
NASA satellite image of Super Typhoon Vongfong on Oct. 9. Climate scientists largely agree that global warming may lead to more devastating super storms like this one, which killed nine people and caused over $42 million in damage in Japan, Taiwan, and the Philippines.

Economists and thought leaders gathered at a symposium hosted by the University of Chicago this month to consider, “What Would Milton Friedman Do About Climate Change?” They parsed the Nobel Prize winner’s arguments focused on free markets and limited government intervention to discuss applications in a warming world.

Friedman, who died in 2006, had some wise advice. And to preface the discussion, presenters played a video of Friedman in conversation with television host Phil Donahue in 1979.

“There’s always a case for the government to get involved when what two people do affects a third party,” Friedman says in the video, when asked about harmful emissions. “The best way to go about it is to impose a tax on the amount of pollutants emitted by a car and make it in the self-interest of the manufacturers and consumers to keep down the amount of pollution in that way.”

Friedman, who taught at the University of Chicago for 30 years, served as an economic adviser to U.S. President Ronald Reagan.

Steven Cicala, an assistant professor at the Harris School of Public Policy at the university, used the analogy of a steel mill to explain Friedman’s philosophy.

“Say for this $100 worth of steel I’m selling, I inflict damages on Michael,” Cicala said, referring hypothetically to fellow speaker Michale Greenstone, director of the Energy Policy Institute at the University of Chicago.

“I burn coal and he has asthma. For every ton of steel, it costs him $20 in health costs. When I’m selling steel for $100 a ton, I’m not compensating Michael for the damage I do,” Cicala said.

Global greenhouse gas emissions by type of gas; United States Environmental Protection Agency
Global greenhouse gas emissions by type of gas. Source: U.S. Environmental Protection Agency

“Those costs are real and they’re not being reflected when I turn on a light or fill up my gas tank,” Greenstone agreed.

This sentiment was largely echoed by fellow speakers, who maintained that carbon dioxide emissions should bear a price for polluters. And if the market for such damage does not exist, they say, the government should help establish one.

“[Opponents say] ‘Isn’t that intervening in this market?’ That’s not the case. There is no market. The intervention of the government is to create a market and then get out of the way and let the market figure out the efficient allocation. The problem is that there is no market for carbon,” Cicala said.

The experts also put forward a number of other approaches, including taxing imports based on carbon content.

So how can a group of economists associated with the financial philosophy championed by hardline free market advocates openly endorse such a policy? Greenstone answers that question by saying that the American public, to some extent, misunderstands Friedman.

“Oftentimes people have a very libertarian view of the Chicago school of economics. But what characterizes it most really is what characterized him [Friedman], which is the pursuit of ideas wherever they went and no assumption ever going unchallenged,” Greenstone said.

The experts said they believe a carbon market would work better than trying to regulate carbon emissions directly through agencies such as the Environmental Protection Agency.

Global warming has been a contentious issue in American economic and political circles for more than two decades, but added cultural emphasis on the problem has wetted the public’s appetite for action. Still, U.S. legislative policy is not addressing it. The last proposed national carbon cap-and-trade program died in the Senate in 2009. Cicala says the national attitude about pollution needs to change to reflect the seriousness of the offense and used no uncertain terms.

“It is theft,” Cicala said. “If you’re manufacturing steel and selling it and not paying the people affected, you’re not paying for the whole cost of what you did.”