Tag: Tragedy of the Commons

Categories
Conflict & disaster Economics

[2949] Misaligned powers, incentives between the federal regulator and state authorities contributed to the 2021 great Malaysian flooding

The government has blamed the recent flooding on once-in-a-hundred-years rainfall. Blames have been assigned to climate change too.

I have never experienced such prolonged rainfall before, and it was an extraordinary experience. Thankfully I did not have to suffer the flooding. Unfortunately, many others did and they were cursed with an incompetent government at the helm that was slow to realize the problem, and slow to act upon it. For a government so used to living the crisis-mode, one would expect they would have some kind of preparedness, or seasoned enough to lead a proper competent response. But no, it was a disastrous handing. Old clueless men and women, they are.

The Environment Minister himself back in October dismissed the talks of big floods, despite the prevailing La Nina phenomenon that brought increased rainfall across the Asia-Pacific region. His dismissal played a deplorable role of lowering down the greater population’s guard. There are several persons in government should be fired for incompetence and negligence—lives were lost, properties damaged—and that particular minister is high in the long list.

But the severe floods across Malaysia has happened much more often than once in a century. Kuala Lumpur alone has had its share of several bad floods. The big one in Kelantan that happened less than 10 years ago. Clearly, there is more to it than just once-in-a-hundred-years rainfall.

And excessive logging is one of those several contributing factors.

Specifically, here, I would like to highlight the regulatory environment relating to logging. The system is flawed and provides excessive incentives leading to widespread environmental disasters that makes the big flooding possible. Instead of remedying the problem of misaligned incentives, the system makes the tragedy of the commons worse.

The two-part systemic flaw

There are two major parts of the systemic flaw: the state controls the issuance of logging permit, while the federal authority leads the environmental policing part. To further complicates matter, the federal regulator regulates peninsular matters only.

The approving authority trumps federal authority due to the current constitutional arrangement, as provided under the Ninth Schedule of the Constitution of Malaysia. The extensive power of the state governments over the forest is further clarified in the National Forestry Act 1984. In short, the federal regulatory body is powerless in the face of state governments.

Furthermore, the state governments, particularly the poorer ones like Pahang, suffers from adverse incentives arising out of the lack of revenue. In Malaysia, tax revenue (income tax and consumption tax are the major ones) is mainly the purview of the federal government and not enough has been returned to the states from the federal level. This insufficient sharing is also a reflection of the low-tax regime Malaysia has: you cannot share if you do not have enough in the first place. It is also a reflection of partisan politics, as Kelantan and Terengganu suffered before.

Given the state’s lack of tax revenue, and insufficient revenue support from the federal government, the states have to resort to other means of generating revenue: among them include monetizing land and the forest. With the goal of supporting state government operations, excessive logging permits are issued.

(In Sabah and Sarawak where the regulator comes under state authority unlike in the 11 states in the Peninsular, arguably the pressure for revenue forces the government to prioritize harvesting over protection. For instance, Sabah recently lifted its state-wide ban on timber exports that was imposed in 2018).

Additionally, many of these states come under the influence of the royal houses, which demand a share of the forest resources. The state government more often than not, would comply. I have a short family history to share here to illustrate the problem of toothless regulation in the face of state rights. An uncle of mine decades ago used to be a forestry officer in a certain large state. He stopped a logging operation linked to the royal house of the state. He ended up being transferred out of the state. The logging operation continued.

Managing the commons

One way to address the flaw and manage the commons better is to take away the states authority over the forest, and have the federal government compensates the state government through large institutional sharing of tax revenue beyond what is provided currently through items like capitation grants. The downside is that, as you can guess it, higher tax burden for everybody on average.

Through this realignment of powers and incentives, the pressures of deforestation through logging could be removed, and the regulatory authority would have stronger powers to preserve the jungle. That will help lessen the chances of big floods recurring (with all else the same).

Categories
Economics Liberty

[2099] Of Ostrom’s Prize in Economics, commons, coercion and libertarianism

Libertarians celebrate two winners of the Prize in Economics of whom one of them is Elinor Ostrom. That is because her works show that commons can be managed efficiently by groups of users rather than the State. I am unsure, however, if libertarians, especially the free market purists quite absorb the full implication after accounting for footnote associated with Ostrom’s works.

Her findings do very little to expunge coercion from solutions relating to large tragedy of the commons. This fact, through my observation, is what many libertarians have missed.

On purists, I know, I know, I have been accused as a purist myself but if I am a purist, then you are in for a big surprise at how other people can be purer in this thinking that me. These purer purists, if I may say so, are more anarchist than libertarian, with their hostility against the State bordering madness. I may sympathize with these anarchists however but I am convinced that the state of anarchy is unstable and in fact, detrimental to individual liberties. I am becoming more convinced of that position as I finally begin to read Robert Nozick’s Anarchy, State and Utopia, further settling in the minarchist pool of libertarians.

Many, I have seen, tend to celebrate one conclusion of Ostrom’s work but tend to ignore the other consequence that comes from the footnote to the celebrated conclusion. Most unfortunate, that footnote does not eliminate the case for intervention. Such intervention or really, coercion, may not originate from the State but by groups of individuals nonetheless.

A group of individuals should really be no different from the State if there is coercion. Coercion is really the key here and it is not whether it is the State or not. This is what most libertarians, when discussing this, have overlooked. To miss it is to miss the entire point of libertarianism.

When it comes to commons, I have long accepted the need for government, or any kind of intervention for that matter, for fear of tragedy of the commons occurring. I first accepted it when I first learned of it as an undergraduate in economics. Concern for tragedy of the commons, is perhaps, the only remnant of environmentalist thinking that remains with me.

That is the reason why, if I want to differentiate myself from other libertarians, I identify myself as a green libertarian. The green symbolizes my concern for market failures, which is what tragedy of the commons really is.

Market failures here are not as left-wingers tend to define it, which is more of rhetoric wrongfully attacking free market principles through mischaracterization and misleading definition but rather it refers to the economic definition, which is when there is a large difference between public and private costs, or more concisely, when there is externality. Examples include emissions of carbon or harvest of the ocean. It is for this reason too that I am largely supportive of Pigovian taxes: I definitely would like, for instance, to see fuel subsidy in Malaysia be replaced with carbon tax.

While I am admonishing libertarians here, I too made a mistake of celebrating Ostrom’s work prematurely, thinking that it solved my problem. I am well aware how hard it is to reconcile my concern for market failure with free market libertarianism that I hold. So, I was happy to see Ostrom seemingly offering a solution to me by stating users of commons do spontaneously organize themselves to prevent tragedy of the commons. Alas, upon further reading, I realized that I initially failed to comprehend the full conclusions by overlooking the footnote. And I do think libertarians who are celebrating Ostrom are misreading her conclusions by not reading the footnote too.

Traditional solutions to tragedy of the commons do not fall within the compound of pure free market libertarianism that completely intolerant of government intervention save for the classical liberal purpose of the state and that is the protection of individual negative rights. Such solutions typically involve the allocation or assignment of rights to users of resources of commons. In other words, to price such rights to internalize externality and then auction to it to achieve allocation efficiency.

In commons with multiple claims on it, some entity — government or some local body — has to be the final arbitrator for allocation of rights purpose and that will require coercion. These rights may be in form of permits that expire regularly or outright privatization (privatization is attractive but it does present complications; for instance, how do you privatize the atmosphere with respect to climate change? Clearly, enforcement of such rights is impossible, at least with current technology). Ostrom simply discovers that local groups may be better managers of the commons than government. She does not specifically say that it is will be done voluntary.

Yes, these local bodies can be voluntarily formed by users of commons. Self-organization out of spontaneous order which of voluntary in nature can be achieved but as stated in a write-up by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences[1] and Ostrom’s article in Science Magazine[2], size of users and engagement time length matter, among others, affect the success of having such spontaneous order. There are multiple other factors but I am in the opinion that these two are the most important. The bigger the size, the harder it is to agree on voluntarily act to prevent exhausting the commons and make everybody worse off. The shorter the period of engagement, the harder it is to reach to an agreement.

The issue on number of users is really a matter of cost. As in the case of climate change, which is really the biggest common of all, bringing 6 billion individuals together is clearly unfeasible. Consider also the fact that even with hundreds of representatives sitting together in one hall, an agreement is hard to achieve. The planned climate summit in Copenhagen organized to find a replacement for the failing and expiring Kyoto Protocol is widely expected to fail.

On top of this, monitoring activities are costly. Monitoring is important because there is a strong incentive to — out my lack of creativity in selecting a word — cheat in the case of tragedy of the commons. Monitoring and enforcement are important in discouraging cheating.

On time length, it is a matter of repeated game. To make it more explicit, it is a repeated prisoner’s dilemma where cooperation is clearly a better option for both to failure to cooperate but there exists strong incentive to not to cooperate. Repetition of that game with the ability to communicate could bring about cooperation but again, that is highly dependent on the size of participants. Ultimately, achieving cooperation may take too long a time before the system collapses.

Further strengthening the argument, status quo effect is strong. Look at the Israeli-Palestinian conflict. Such conflict can be modeled as hawk and dove model, which is essentially another form of prisoner’s dilemma. They could cooperate and skip the deadly conflict, but they do not. In a game like this, it is crucial for trust to be built at the very beginning.

Trust simply takes a long time to rebuild once broken, if it is to be rebuilt at all, if the first step proved to be disastrous. This, known as tit-for-tat game, is one of the basic important lessons of game theory, in my humble opinion.

Given that, solving the problems of the commons through voluntary means, are likely hard if not impossible. Thus, intervention is still required to introduce market instruments like quotas, permits or taxation. Intervention may originate from the government, or some local groups but it is an intervention nonetheless, with not too implicit coercion demanding certain positive action, positive as defined by Isaiah Berlin when he differentiated between positive and negative rights.

If Ostrom is to be celebrated, then it is decentralization from government to local groups. That however should be mistaken as solving the problem of tragedy of the commons by voluntary means. Someone or something has to assign rights to users to commons. That means, the element of coercion, unfortunately, is still present.

That certainly does not solve my problem of reconciling concern for tragedy of the commons and free market libertarianism.

To summarize: it is a common and somebody or someone has to take control and assign rights to solve the problem of externality, i.e. tragedy of the commons. It does not have to be the government and local groups may be better manager but something or someone has to act as the assigner. And the footnote to Ostrom’s works indicate that it is hard to do so voluntary, save for, I think, localized commons. In the end, the element of coercion exists.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — See Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009: Economic Governance. Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences. October 2009

[2] — See A General Framework for Analyzing Sustainability of Social-Ecological Systems. Elinor Ostrom. Science Magazine. July 24 2009.

Categories
Economics Environment Politics & government

[2066] Of in Down Under revisiting carbon trading and carbon tax debate

Before I begin, I must admit that there is much reading for me to do to understand the current debate on carbon emissions trading in Australia. I have not been following Australian affairs as closely as I should; I am still stuck with the New York Times, the Wall Street Journal and to a lesser extent, the Washington Post. But each time I took a peak at least up until two weeks ago, either The Australian or the Australian Financial Review, emissions trading, and climate change at large, seemed to dominate the headlines.

Even on campus here at the University of Sydney, a number of posters critical of the scheme are up.

While the debate is unique to Australia in a sense that the Liberal and others out of government squabbling with each other — the odd thing is that, the Liberals, who under Howard administration was friendly to the idea (in fact, it was the Liberal government that first introduced the idea), and the Greens are against the idea of carbon trading, at least in its current form as proposed by Rudd government — as well as the fact that the government does not have enough vote to get it past unilaterally, the mechanism of the policy is largely the same.

There is even a possibility of a general election if the bill failed to be passed. It is a possibility because the general sentiment is that, if there is an election today, the Liberals are going to get further beating with the Rudd administration strengthened. WIth that strengthened government’s position within the Parliament, the bill can then be passed without much trouble.

I acknowledge the need to address negative externality associated with greenhouse gases emissions that massively contribute to anthropogenic climate change. I have written it about in the past. As a freshman and later as a junior at Michigan, I wrote two papers related to the issue, though not specifically on the trading scheme. The acknowledgement, really, is the reason what I identify myself as a green libertarian.

For the benefits of those unfamiliar with the term externality and alien to the field of economics, here is a short introduction to it. Externality is a market failure where individual or private cost does not correspond to social or public cost. As a simple demonstration, in a situation of no law against littering at all, an outsider littering in a public space effectively suffer no cost of doing so. The community living in that public space however does suffer from the cost associated with that littering. Somebody has to clean it up but the one causing it does not suffer the cost of cleaning it up. Instead, the community does. That misalignment of private and public cost is externality, or more precisely, negative externality.

Meanwhile, positive externality is where private action brings about public benefit. For instance, if a person has a collection of really good music and he plays it on the radio that he bought, positive externality is when you happen to sit close enough to him to listen to the music without paying anything for it. You get the benefit of good music. Here, he enjoys the music and you do too without paying. Of course, if he plays bad music, the situation immediately switches from positive to negative externality. He enjoys it but you risk deafness, and uncompensated at that.

A model known as Tragedy of the Commons is the most utilized model to impress the consequence of negative differential between private and social cost. In the model, there is a grazing field, henceforth called the commons. Headers of cows have their cows grazing the field freely because it is a commons and an unregulated one at that. It is then in the interest of the herders — assuming that there is little cooperation between them — to have their cows to graze the commons more and more. They compete for the use of the commons and this competition leads to overgrazing as everybody seeks to keep resources from the commons to themselves. Overgrazing then will turn the whole commons worthless as it is left dead without grass. In the end, everybody loses in the long run.

Greenhouse gases emissions is more or less like that. Economic progress in general and definitely in the current framework, requires consumption of energy and by and large, it produces greenhouse gases, in particular, carbon dioxide. Meanwhile, carbon emissions impose little cost to individual emitter, i.e. little private cost. Assuming that economic progress is desirable, it is in the interest of individuals to commit to progress and emit carbon. But if everybody continue to emit carbon, combined emissions contribute to climate change (I will not go into the science) and climate change imposes cost on all in the end, i.e. social cost. There is obviously more nuance — for example, the cost will not be evenly distributed and in fact, some may experience benefits from climate change; one example of such benefits is the opening of sea route up down in the Arctic Ocean — to the whole issue but that simplification here is done to show why carbon emissions phenomenon, which contributes to anthropogenic climate change, is a negative externality.

The solution to this negative externality or tragedy of the commons is to equalize private and social cost. This can be done by pricing the externality. In terms of climate change and carbon emissions, it means pricing carbon.

Two most popular solutions in mainstream discussions involve tradable quota (more popularly called cap and trade) and tax (carbon tax). The tax is also known as Pigovian taxes, named after a British economist that first proposed such tax to align private and social costs, Arthur Pigou.

By quota, it means assigning rights to emit to market participants and then letting these participants trading among themselves given their endowment. The typical setting is that the government gives (either freely or auctioned) certain amount of quotas to all industries (or even individuals) players. Once endowed with permits, all players are allowed to trade it so that these players can reach to their efficient level of emissions, given multiple constrain.

Carbon tax on the other hand is simply a tax on all activities that emit carbon. I am being sloppy with definition here because even human being organically emit carbon. The idea is to reduce carbon emissions from perhaps, mechanical and electrical operations, as well as one of commercial and industrial of nature. Here again, I am being sloppy but let us not dwell on the matter because that is not the reason for this long-winded entry.

Theoretically, the two methods are the same. A certain number of quotas or permits can have the same effect to a certain level of taxation.

However, political impacts of the two policy differ and most often than not, quota is the most the popular one because nobody likes to be taxed. Quota, despite its ability to imitate the impact of carbon tax, does not directly impose tax and therefore, less obvious in its impact. It is being considered in the United States and Australia — with great controversy in Australia — and it is already in force within the European Union.

The granting of quota however is a messy business vis-à-vis carbon tax. I warn though, much written below is not original. The issue has been debated over and over again by various individuals that trying to cite them may seem like trying to cite somebody just to indicate that the sky is blue.

Firstly, the granting of quota appears to be arbitrary. How exactly does the government determine how much quota a particular firm will get? Past emissions? Forecast emissions?

If it is past emissions, paraphrasing the efficient market hypothesis, past data does a bad job at predicting the future because it does not incorporate future data that are not yet available. If forecast is used, clearly the firm has the incentive to provide overly optimistic forecast that the imposition of quota does little or even nothing to align private and social cost.

Secondly, who should get the quota is a huge problem. Relative over-endowment of permits to certain players in the market and under-endowment to others may turn the whole scheme into an unfair wealth distribution exercise rather than a mechanism to reduce carbon emissions. Some firms may find it more profitable to trade permits rather than engage in productive activity.

Thirdly, the quota system is overly open to political compromise that it stops becoming an equivalent of a tax. This happens when quotas are granted freely such as what happened in Europe and may appear to be the case in Australia. Free quotas, coupled with the first issue, tend to render the whole exercise worthless that it is practically business as usual.

Fourthly, for tradable permits to become an equivalent of carbon tax, it needs to be auctioned. The problem is that, the auction component is almost never implemented. In Australia in its current proposed form, only a fraction will be auctioned while most will be given freely. In Europe, auction is a foreign term. In the US, 85% of the permits will be given freely, if the Senate passes the American Clean Energy and Security Act or more commonly called the Waxman-Markey Bill. The House of Representative narrowly passed the bill earlier in June this year. This is perhaps the cost of political compromised.

Fifthly, the auctioning, monitoring as well as the assignment of permits require a kind of bureaucracy which I am, as a libertarian, unwilling to see taking root. That bureaucracy will require resources to run, definitely more than mechanism for carbon tax demands for.

Carbon tax does not suffer from the complexity revolving around bureaucracy and distributive issues. Imposition of tax rate can be introduced uniformly. Sure, some will lobby to be hit with more generous levels of taxation or even request for downright exemption but compared to cap and trade method, carbon tax, even under compromised outcomes, is better. Unlike tradable permits which must be auctioned in order for it to be effective, tax imposes direct cost to carbon emissions to align private cost with social cost.

This is why I prefer carbon tax.