Climate Change and Agriculture - The Oxford Topic of Food, Politics, and Society - page 463

One of the primary solutions that economists have long proposed to this conundrum
is to ensure that social costs and benefits are internalized into economic actors' deci-
sion making. Equalizing social and private costs is generally referred to as the polluter
pays principal (PPP). Doing the same for benefits is providing payments for environ-
mental services (PES). The distinction between PPP and PES is a small one, however,
because governments could punish for not doing approved things (e.g., a fine for fail-
ing to set aside land for forestry) and reward for not doing disapproved actions (e.g., a
payment for reducing deforestation) (see also Engel, Pagiola, and Wunder 2008). Game
theory suggests in this regard that PPP will serve better to prevent an action and PES
to incite action (Dixit and Skeath, 2004). We thus regard both principles as part of the
same continuum, which we term full-costing . The usefulness of considering both can be
seen in the case of the Green Revolution. Although it succeeded in protecting marginal
lands, biodiversity, and forests, the subsidies for fertilizer use in Asia led to their overuse
and misapplication. Overuse, in turn, harmed water resources, a harm that was never
directly compensated. Full-costing policies would have encouraged further land pres-
ervation and either prevented the overuse of fertilizer or provided funds to repair the
damages it created.
There are three primary classes of policy action put forward by economists to effect
full costing: imposing Pigouvian taxes and subsidies, creating a market where limited
permits to pollute are traded, and establishing Coasian property rights (see additional
readings for more information). Each of these options encounters technical, practical,
and political challenges in implementation. Even Pigou (1954), the father of the PPP,
argued toward the end of his career that governments will rarely have the information
necessary to identify the optimal level of tax (or subsidy) that would ensure perfect full-
costing. The practical challenges deal with implementation, assuming we knew the right
target. As with Pigou, Coase (1991) likewise argued that the point of his theorem was
to highlight how central the transaction costs are that prevent the mutually beneficial
trades it envisions. Even if we know the right target and how to get there, obtaining
political permission to do so may be a stumbling block.
On the other hand, understanding the weaknesses of each method can help pol-
icy analysts identify which will be most conducive to solving different problems. For
instance, consider the shape of the relationship between human action and environ-
mental quality discussed earlier. To the extent that human activities impact the environ-
ment approximately linearly, fixed per-unit taxes/subsidies or cap and trade with a fixed
price will be sufficient. If the price of environmental harm/benefit is fixed and impacts
are nonlinear, however, any price will sometimes underincentivize and sometimes
overincentivize adjustment inefficiently. In such a case, policies that reduce Coasian
transaction costs in order to encourage private deals will be most beneficial. If there are
significant threshold effects, such as the extinction of a species, cap and trade will be far
more appropriate than a simple tax. Programs are more likely to be enacted in situations
in which it is most favorable, both politically and environmentally, so it is likely that new
programs will have smaller impacts ceteris paribus and a lower chance of being enacted
than those currently in place.