2 3 Austrian economics and climate change

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The Review of Austrian Economics ISSN 0889-3047Volume 26Number 2 Rev Austrian Econ (2013) 26:183-206DOI 10.1007/s11138-012-0174-8

Austrian economics and climate change

Graham Dawson

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Austrian economics and climate change

Graham Dawson

Published online: 26 February 2012# Springer Science+Business Media, LLC 2012

Abstract The aim of this paper is to outline and defend an Austrian policy responseto climate change. A privatised climate change policy, based on Austrian welfareeconomics, is the only way to defend to the greatest possible degree the liberties bothof fossil fuel users and people whose property rights will be violated if carbonemissions cause climate change. Neoclassical and ‘Post-Austrian’ analyses of climatechange are both theoretically unsound and impractical, in requiring for their imple-mentation a foundation in reliable scientific knowledge that is not available. Anthro-pogenic climate change is a putative interpersonal conflict rather than market failure.The use of fossil fuels should be subject to side-constraints designed to avoid theinfringement of other people’s property rights. Tort litigation would protect theserights, where necessary. Litigation would also promote the public understanding andeven the advancement of climate science.

Keywords Climate change . Neoclassical economics . ‘Post-Austrian’ economics .

Austrian economics

JEL B5 . K3 . Q5

1 Introduction

The Kyoto Protocol of 1997 that still expresses the world’s policy response to climatechange was shaped by neoclassical economics and the presentation of climate sciencedisseminated by the United Nations Intergovernmental Panel on Climate Change(IPCC). The policy framework that Kyoto put in place relies mainly on taxation,including carbon taxes, and emissions trading. Both of these policy instrumentsrequire precise and reliable information about the costs and benefits of climate changemitigation or abatement if they are to operate effectively and efficiently. Yet there areserious doubts about the accuracy and reliability of the version of climate science that

Rev Austrian Econ (2013) 26:183–206DOI 10.1007/s11138-012-0174-8

G. Dawson (*)Visiting Research Fellow in the Max Beloff Centre for the Study of Liberty,The University of Buckingham, Buckingham, UKe-mail: [email protected]

Author's personal copy

the IPCC presents. Moreover, the Kyoto policies are informed by a theoreticalperspective that is incompatible with the central concept of Austrian welfare eco-nomics, dynamic efficiency. The central claim made in this paper is only an Austrianpolicy framework can defend to the greatest possible degree the liberties both of fossilfuel users and people whose property rights will be violated if carbon emissions causeclimate change. That policy framework combines insights from two branches ofAustrian thought: positive economics (Sections 3 and 4) and the normative sub-discipline of welfare economics (Section 5).

The successful application of Neoclassical and ‘Post-Austrian’ perspectives toclimate change presupposes knowledge of the monetary value of the social costs ofclimate change and hence of the benefits of mitigation policies. The first step insecuring this knowledge is to calculate the effect of CO2 emissions on atmosphericconcentrations of CO2 and hence on global mean surface temperature. The next stepis to predict the effect of increases in global mean surface temperature on physicalphenomena such as sea level and the extent of deserts. Finally, a monetary value mustbe assigned to the impact of these physical changes on economic activity. Each step issubject to great uncertainty. The neoclassical and ‘Post-Austrian’ perspectives lack asecure foundation in scientific knowledge and are therefore unworkable.

The dominant neoclassical paradigm is also deficient on theoretical grounds.Neoclassical welfare economics is grounded in the defence of the rights of theindividual against the state but its application to environmental issues in generaland to climate change in particular subordinates individual rights to aggregate orsocial welfare, measured by the monetary value of the benefits and costs of policy.The standard approach to the economics of climate change is therefore incompatiblewith the classical liberal defence of individual rights and freedom.

The ‘Post-Austrian’ policy framework resembles the neoclassical approach inseveral ways. The ‘Post-Austrian’ advocacy of emissions trading assigns a centralrole to government intervention, based on the goal of aggregate welfare and thepresumed availability to the government of superior knowledge of the future devel-opment of resources. However, the ‘Post-Austrian’ argument for ‘collective effort’ isfound to be unsound.

The Austrian perspective on environmental policy is founded on the argument inMises (1949) that externalities are a pseudo-problem, arising not from market failurebut from an inadequate allocation or defence of private property of rights. Thisapproach to environmental policy is presented here as a contribution to the normativesub-discipline of Austrian welfare economics, the defining concept of which isdynamic or catallactic efficiency. The ethical foundation of dynamic efficiency isthe principle that ‘each person has the right to appropriate the results of hisentrepreneurial activity’ (Huerta de Soto 2009, p. 20). However, entrepreneurialactivity involves the exploitation of resources which others may also wish or beentitled to use. Conflicts over the use of resources and the infringement of propertyrights should be seen as legal disputes and resolved in the context of tort law.Environmental problems arise because one economic agent, such as a polluter, actsin a way that is inconsistent with other agents’ being able to carry out their plans andexercise their rights. If A’s use of fossil fuels causes B’s land to be destroyed throughinundation or desertification, this is evidently a tort. The policy implication is thatgovernment has no cause to intervene in market exchange where property rights have

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been allocated and legislative procedures exist that that make it possible for the victimto take legal action against the tort feasor, who must be shown to be causallyresponsible for a specific invasion of the victim’s rights.

The relation of this authentic Austrian environmental economics to scientificknowledge of climate change is entirely different from that of neoclassical and‘Post-Austrian’ economics. The application of Austrian economics to climate changedoes not depend upon foundations in scientific knowledge. It would be up to thecourts to decide, beyond reasonable doubt, whether the use of fossil fuels hasinfringed, or risks infringing, people’s rights, relying on expert evidence that reflectsthe views of the research community rather than the IPCC. Moreover, the applicationof Austrian economics to climate change would lead to court cases where the cross-examination of expert witnesses would promote the public understanding and theadvancement of climate science.

2 Climate science as a foundation for current policy instruments

The dominant neoclassical approach to devising policy instruments to mitigateclimate change requires giving a monetary value to the costs that may be incurredby some of those affected net of the benefits that may accrue to others. The economicimpact of climate change is measured by neoclassical economists as the ‘social costof carbon’. The ‘Post-Austrian’ support for emissions trading also presupposesknowledge of the social cost of carbon so that the optimal quantity of carbonemissions can be calculated. From an authentically Austrian perspective, costs aresubjective and therefore ‘social costs… do not exist as either measurable or eventheoretical concepts (Cordato 2004, p. 5).’ Even if we assume, for the sake ofargument, that social costs might in principle be measurable, the difficulties ofestimating them are immense.

Estimating the social cost of carbon is a multidisciplinary exercise in climatescience and economics. Integrated assessment models (IAMs) combine Global Cir-culation Models (GCMs) and economics models. GCMs are used to predict the effectof CO2 emissions on atmospheric concentrations of CO2 and hence on global meansurface temperature and then the effect of increases in global mean surface temper-ature on physical phenomena such as sea level and the extent of deserts. Economicscalculates the monetary value of the impact of these physical changes on economicactivity.

2.1 Integrated assessment models

2.1.1 General circulation models

There are many sources of radical uncertainty in the predictions of GCMs, which ithas been claimed the IPCC has failed adequately to convey. Discrepancies existbetween the confident assertions concerning the pace and causation of climate changeand the more qualified conclusions that an objective survey of GCMs suggests. Thisclaim is supported by an impressively thorough and incisive cross-examination of thecurrent state of climate science. Johnston (2010) compares ‘the picture of climate

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science presented by the Intergovernmental Panel on Climate Change (IPCC)and other global warming scientist advocates with the peer-reviewed scientificliterature on climate change (p. 1)’, finding that the ‘peer-edited literature seemsto conflict with the picture painted by establishment climate science’ (p. 1). Theclimate establishment (the IPCC and other global warming scientist advocates)engages in ‘stylized rhetorical techniques that seem to oversell what is actuallyknown about climate change while concealing fundamental uncertainties andopen questions regarding many of the key processes involved in climatechange’ (p. 1).

Uncertainty surrounds both the data that climate scientists use and the GlobalCirculation Models (GCMs) that predict future temperatures (see, for example,Spencer and Braswell 2011). Johnston (2010, p. 78) argues that the establishment(in effect, the IPCC) response to disconfirming evidence is virtually never to acceptthat the climate models might be wrong but to question the evidence. In many cases‘there is no indication that climate scientists are converging toward the use ofstandard observational datasets that they agree to be valid and reliable (Johnston2010, pp. 78–8). Failures to comply with standard scientific procedures concerningaccess to data, by the IPCC itself and by some of its contributing researchers, havebeen well-documented (Johnston 2010). There are severe limitations on the reliabilityof predictions made by climate models. The values of crucial parameters such as thesensitivity of the global climate to increases in atmospheric concentrations of CO2 arenot known and climate modellers have to make assumptions about such values.GCMs ‘differ because of their underlying assumptions and parameterizations, and itis plausible that choices are made based on the model’s ability to simulate observeddata’ (Knutti 2008, p. 1). The role of natural forces is not adequately recognized.Some scientists maintain that global temperature changes are caused largely bynatural forces including variations in solar activity (Baliunas 2002; Carter et al.2006; Singer 1999; Svensmark and Calder 2007).

In September 2010, the Royal Society, the UK’s most authoritative scientific body,reflected this growing uncertainty in publishing a revision of its guide to climatescience (Royal Society 2010). The principal message is that ‘The size of futuretemperature increases and other aspects of climate change, especially at the regionallevel, are still subject to uncertainty (p.3).’ A conclusion that is more damaging theclimate establishment case is that some uncertainties are unlikely ever to be signif-icantly reduced, because of, for example, the lack of observations of past changesrelevant to some aspects of… climate change (p. 12)’.

2.1.2 The ‘social cost of carbon’

The possible physical effects of climate change are well-known. Thermal expansionof the oceans and the melting of ice-caps are predicted to raise sea-levels to a degreethat threatens some coastal cities and low-lying areas with inundation. Regionalweather patterns may be disrupted, causing increased aridity leading to desertificationin some areas and to a greater incidence of extreme weather events. A loss ofbiodiversity is expected as climate changes more rapidly than the capacity forecosystems to adapt. The socio-economic effects of these physical changes areclaimed to include the displacement of possibly ‘tens to hundreds of millions’ of

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people through inundation and desertification and increased mortality from heat-related deaths and the spread of tropical diseases.

Hope (2005) sets out some of the limitations of IAMs: ‘Projecting climate at aregional scale stretches the capabilities of climate models. Translating changes inregional climate into physical impacts is in its infancy. The valuation of any physicalimpacts… requires assumptions that are controversial’ (p. 91). A brief account of theassumptions made by Stern (2006/2007) in deploying PAGE2002, an IAM designedfor UK government use, demonstrates how controversial they are.

Stern, (2007, p. xv) claims that ‘if we don’t act, the overall costs and risks ofclimate change will be equivalent to losing at least 5% of global GDP each year, nowand forever’. This estimate is already higher than the 1–2% loss of world GrossNational Product that most previous researchers found (Cline 1992). The addition of‘non-market’ impacts on the environment and human health increases the total costfrom 5% to 11% of global GDP. However, these estimates have been dismissed bysome commentators as ‘conjectural’ (Byatt et al. 2006, p. 205) and they fail toacknowledge the degree to which both disease and casualties from natural disastersare related to income rather than environmental factors (Carter et al. 2006, p. 187).The potential total cost rises from 11% to 14% of global GDP with theinclusion of estimates of the effects of positive feedback effects of climatechange. These have always been controversial and Johnston (2010) finds that‘the fundamental assumption in climate models used by the IPCC – of large positivefeedback effects – indeed the assumption that by itself is responsible for potentiallycatastrophic large temperature increases is strongly disconfirmed by the existingevidence’ (p. 47).

It is expected that the adverse effects of climate change will fall disproportionatelyon poor regions. Weighting the cost of these effects to reflect their greater burden onlow-income countries ‘could increase’ total cost by a quarter, taking the total cost ofglobal warming up to ‘around 20%’ of global GDP. Stern arrives at such a largeadjustment for poor regions because he assumes that vulnerability to climate changeis independent of development. However, according to Tol and Yohe (2006, p. 237),‘it is widely known that adaptive capacity and thus net sensitivity… to climate changeis very site specific and path dependent’.

Modelling the social cost of carbon entails the use of discounting to value costswhose occurrence extends into the remote future. The choice of discount rate is themost controversial assumption in modelling the monetary value of climate changeimpacts. On the one hand, Stern (2007) argues that any discount rate greater than zerounfairly devalues the interests of future generations. On the other hand are ethicalapproaches that many people find more convincing. Agent-relative ethics expressesthe view that agents naturally value people who are linked to them by kinship orspatial or temporal proximity above strangers who are remote in space or time. Thelow discount rates favoured by Stern (2007) virtually guarantee a high estimate ofcosts of climate change Tol and Yohe (2006, p. 238).

None of this proves or is intended to prove that Stern’s assumptions are wrong.The point is rather that, in a context where the policies advocated by neoclassical andPost-Austrian economics require precision and certainty, the modelling of the socialcost of carbon involves assumptions about issues of principle, rather than of calibra-tion or empirical estimation, that fail to command general assent.



3 The dominant paradigm: Climate change as market failure

The dominant paradigm in the economics of climate change is neoclassicalenvironmental economics, which informed the Stern Review, commissioned bythe UK government to assess the costs and benefits of climate change. TheStern Review analyses climate change as a market failure and indeed not justany market failure but ‘market failure on the greatest scale the world hasseen’ (Stern 2007, p. 27). Market failure occurs when a market fails to maximisewelfare, by failing to find the level of output (of goods produced using CO2) thatbrings marginal social benefit and marginal social cost into equilibrium. The neo-classical analysis of the optimum level of production has been applied to the‘production’ of pollution and to carbon emissions. Ideally the production of goodsand services would take place in a low- or non-carbon economy. However techno-logical change on the required scale takes time and meanwhile damage is being done.The second best or interim solution is therefore to reduce the level of output producedusing fossil fuels in order to reduce the harm caused by carbon emissions.1 The sizeof that reduction is found by estimating a monetary value to the costs incurred bypeople whose lives have been adversely affected by climate change minus thebenefits accruing to other people and comparing it with the costs of moving to alow-carbon economy. For example, the Stern Review reported that by 2100 thedamage wrought by climate change might reduce the value of the world economyby between 5 and 20 per cent and yet that this catastrophe could be prevented at a costof only 1 per cent of the world economy. On the face it, Stern presented governmentswith an unarguable call for policies to be put in place urgently to reduce CO2

emissions.Stern’s calculation of the ‘social cost of carbon’ is clearly an application of direct

or act utilitarianism, which is the principle that an act is right or wrong, obligatory or

1 Neoclassical economics informed the market-based policies, notably carbon taxes and emissions trading,that were negotiated as part of the Kyoto Protocol in 1997, with the aim of reducing carbon emissions at thelowest possible cost. However global climate change policy initiatives seem to be on a decline from thehigh water mark of climate alarmism, which might be identified with the publication of the Stern Review,sponsored by the UK government, in 2006. The recession following the credit crunch in US and EUindustrial economies has cooled enthusiasm for a hair-shirt policy stance; we no longer need climate changeto offer us austerity. There is also a widespread realization that the emerging markets are far fromcompromising their catch-up growth by signing up to emissions reduction targets. A global climate changemitigation policy regime, whether taxes or a trading system, seems to be a distant prospect.

A carbon tax penalises, not output produced using fossil fuels, but the CO2 actually emitted. Ifproducers switch to a less carbon-intensive production technology, they do not need to reduce output.However carbon taxes encounter two main problems. First, they work only in the long run because, in theshort run, demand for carbon-intensive activities, such as electricity generation and transport, is unrespon-sive to changes in price (Helm et al. 2005). A carbon tax is therefore ‘a good source of revenue for the[government] (Smith 2000, p. 8).’

Second, any tax directed towards mitigating climate change must be internationally harmonised.Otherwise, firms in high-tax countries have an incentive to relocate to countries with lower climate taxes toavoid competitive disadvantage. The tax would merely redistribute carbon-intensive activities withoutachieving a global reduction in carbon emissions.

Many countries, including some members of the European Union, subsidise fossil fuels, particularlycoal. For example, in Germany ‘coal remains untaxed under the ecological tax reform introduced in 1999’(European Environmental Agency 2004, p.14); this subsidy was worth about €3.5 billion in 2001. Theworld is a long way from a globally harmonised carbon tax

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prohibited, according to the amount of utility, welfare or well-being that it produces.2

The optimal policy towards climate change is the one which is expected to producethe greatest possible amount of net welfare, that is, the greatest balance of aggregateor social welfare benefit over cost. Neoclassical environmental economics, applied toclimate change in this way, is vulnerable to the objection that it has departed from itsfounding principle of Pareto efficiency in subjugating the property rights of individ-uals to act-utilitarian considerations.

It is deeply ironic that the neoclassical economic analysis of climate change reliesupon act utilitarianism because the central concept of neoclassical economics, Paretoefficiency, was formulated as a response to a concern about the capacity of utilitar-ianism to lead to injustice. Pareto argued that utilitarianism was an unsound ethicalfoundation for economic analysis because the application of the principle of utilitycould inflict injustice upon innocent parties: ‘Assume a collectivity made up of a wolfand a sheep; the happiness of the wolf consists in eating the sheep, that of the sheepin not being eaten. How is this collectivity to be made happy’ (Pareto 1906 [1971],p. 45)?

The act- utilitarian answer to this question is that it depends on the balance ofutility between the wolf and the sheep; if the wolf obtains more utility from eating thesheep than the sheep enjoys from surviving, then happiness is maximised in the wolf-sheep collectivity if the wolf eats the sheep. For Pareto however to sacrifice theinnocent sheep to the collectivity is unjust. No doubt this fable is ecologically naïveabout nature red in tooth and claw but it has a powerful rhetorical appeal as anintuitive defence of the rights of the individual against society.

Pareto goes on to define the concept of Pareto optimality in such a way that itprotects the rights of the individual. As Mishan (1981) put it, ‘the [Paretian] econo-mist accepts as his objective data the choices or subjective valuations of individualmembers of society – and nothing more (p. 8).’ In subscribing to this subjectivistprinciple, Pareto was true to the classical liberal ideals out of which economicsdeveloped and of which Austrian economics is today the only true heir. The subjec-tivist axiom stated by Mishan (1981) may be justified by appealing to the ethicalproposition that each person is the best or only judge of her or his own welfare. Onthis foundation which Austrians share, Pareto built the idea of Pareto efficiency,according to which an outcome is efficient if it is not possible to make any individualbetter off, in her own estimation, without making another individual worse off, in hisown estimation. True, in thinking in terms of outcomes rather than processes, Paretohas already been led astray by the idea of equilibrium from nineteenth centuryphysics. But the damage is limited by the condition that any change to the allocationof resources must not worsen the position of any individual in his or her ownestimation. So Paretian economics can make an unimpeachable claim to be theguardian of the rights of the individual.

The authentically individualist and subjectivist approach taken by Pareto wasrelinquished by later neoclassical economists when they introduced the ideas of

2 A reviewer has pointed out that rule utilitarianism is consistent with the Austrian approach and reaches asimilar solution to the problem of climate change to the one advocated in this paper. Rule utilitarianismholds that an act is right if it conforms to a rule or set of rules such as property rights and it is the set of rulesthat is judged in terms of its effect on aggregate utility. I do not follow up this interesting line of thoughthere because I take Stern’s neoclassical approach to be an act-utilitarian one.



market failure and externalities. The social optimum where marginal social benefitequals marginal social cost is not the same as the Pareto optimum, precisely becausethe government has intervened and overruled individuals from engaging in voluntarytransactions. The Pareto optimal equilibrium reflects the principle that in a compet-itive market agents are the best judges of their own welfare. The existence of externaleffects is no reason to abandon this principle and appeal to the contradictory maximthat the state is the best judge of the welfare of every member of society. The freedomof the individual to produce and consume is constrained according to a calculus of thenet value of the activity to ‘society’.

The neoclassical approach to the economics of climate change is incompatiblewith the classical liberal defence of individual rights and freedom. Two examples ofthe application of neoclassical policy analysis make this clear. First, the aggregatelevel of analysis and measurement can lead to the coercion of the individual orminority by the majority. A consumer or producer of goods produced using fossilfuels has a right to act upon her belief that carbon emissions do not threatendangerous climate change until a court finds that she is guilty beyond reasonabledoubt of having committed a tort. The majority does not have the right to confiscateher income in order to reduce carbon emissions on the basis of probabilistic state-ments about the effects of climate change on aggregate or social welfare. Second, theprospect of a net beneficial impact of climate change on well-being provides anotherillustration of the reliance on act-utilitarian principles: ‘It may well be that aggregatehuman welfare would be maximised in a warmer, wealthier world, or that gains fromclimate change will offset environmental losses. Such claims, even if demonstrated,would not address the normative concern that the consequences of anthropogenicglobal warming would infringe upon the rights of people in less developed countries(Adler 2009, pp. 298–9).’3 Once again it is individual rights that are the ultimateground of concern, in that they must not be overridden by calculations of aggregatesocial welfare.

In its zeal to abate climate change in the net interests of global society, the UKcollectivity unjustly starves the wolf when it so constrains manufacturing firms thatare rendered uncompetitive in world markets or pushes low-income households intofuel poverty. If world leaders were to permit climate change because on balance itmakes global society better off, they would be unjustly sacrificing the sheep whoseterritory has disappeared beneath the waves or been transformed into a desert.

4 The ‘Post-Austrian’ economic perspective on climate change

The Austrian perspective on environmental issues has been applied to climate changepolicy in a very different way from that which I adumbrated above (Section 1).Nentjes (2005, p. 348) acknowledges that Mises, Hayek and Rothbard, whom hedescribes as ‘neo-Austrians’, held that environmental problems arise out of an

3 Adler (2009) fails, however, to convert this concern with individual rights into a policy that will protectthem, aligning himself with the Free Market Environmentalism of Anderson and Leal (2001) in advocatingemissions trading, which rests upon the same utilitarian foundations as neoclassical environmental eco-nomics (Section 4.1).

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incomplete specification of property rights. Violations of those rights are to berectified through recourse to tort litigation based on strict or no-fault liability, inwhich the question whether the damage could have been avoided is not an issue. Theonly question is whether there is a causal link from the defendant’s action to theclaimant’s damage. However, according to Nentjes (2005), in the case of climatechange tort litigation is impractical and inappropriate: ‘Climate change… even [has] aglobal scale: hundreds of millions of emitters as well as entities suffering damage areinvolved. It is unthinkable that court action by private plaintiffs could successfullyhold the multitude of tort feasors liable for damage and retract compensation orreduction of emissions. The neo-Austrians have a blind spot for public good charac-teristics of modern environmental pollution, which thwarts solution through privatelaw’ (Nentjes, p. 354).

The alternative ‘Post-Austrian’ policy framework which Nentjes (2005) advocatesis presented as a synthesis of neo-Austrian arguments for privatizing economic use ofthe environment and the ‘old-Austrian’ case put forward by Menger for governmentintervention. The ‘Post-Austrian’ policy turns out to be the creation of an emissionstrading scheme. Cordato (1999) provides a devastating critique of carbon emissionstrading, from what Nentjes (2005) would see as a ‘neo-Austrian’ perspective. Nentjes(2005) follows Anderson and Leal (2001) in interpreting the property rights approach(for Nentjes, of the ‘neo-Austrians, although Anderson and Leal rely on a Coaseanapproach) as the foundation for a plan ‘to change emission space into an economicgood’ (p. 359) and welcomes the proposal, put before the European Parliament in2002, to establish a cap and trade CO2 emissions trading scheme as offering ‘thepromise of a real breakthrough’ (p. 362).4 In support of emissions trading Nentjes(2005) relies upon an argument from a neo-Austrian. The genealogy of this argumenthe traces back to Hayek, who, uncharacteristically, claimed that the government islikely to know more about future uses of natural resources than most individualresource owners (Hayek 1960, p. 370). That knowledge can be utilized ‘only bydispersing downwards all the generic knowledge available to the government’ (ibid.).Since the government has ‘superior knowledge of national environmental impacts ofpollution’ (Nentjes 2005, p. 359), emissions trading puts it in the best possibleposition to set the cap on total emissions.

The Post-Austrian view is a misinterpretation and a misapplication of Hayek’sargument in The Constitution of Liberty, which is itself unsound. Moreover, the Post-Austrian advocacy of emissions trading is vulnerable to the charge of reliance onutilitarian arguments that undermines the neoclassical economics of climate change.

4.1 Nentjes’s interpretation of Hayek’s argument

There are three critical points to be made about Nentjes’s (2005) use of Hayek’sargument. First, it is a misinterpretation in that it is presented as if it were a purelyepistemic argument, hinging on the government’s allegedly superior knowledge,when it in fact depends upon an unstated ethical assumption. In general, Hayekmaintains, arguments for government regulation of markets with the aim of conserv-ing natural resources are invalid. Income will be maximised if the depletion of non-

4 For a devastating critique of carbon emissions trading, from an Austrian perspective, see Cordato (1999).



renewable natural resources should be left to the market, which offers better foresightthan government planning. Nentjes, however, is right in noticing that Hayek makesan exception to this general principle but fails to realize the significance of thequalification that the exception applies only in cases where income maximisation isnot at issue. If the goal is instead to preserve the natural beauty of an area or a site ofspecial scientific or historical interest, then, Hayek claims, the acquisition of the landfor the provision of such amenities is ‘an appropriate field for collective effort’(Hayek 1960, p. 375). The argument up to this point is that such sites are publicgoods, in that they benefit the public at large (non-rivalry) and individuals cannot becharged (non-excludability).

There is more to the Hayekian case for collective effort than the familiar publicgood argument. Nentjes (2005) goes on to quote Hayek’s claim that ‘there are somefacts concerning probable future developments which the government is more likelyto know than most of the individual owners [of the natural resources]’ (1960, p.370).The government’s presumed superior knowledge of future developments is foundattractive by Nentjes in the context of climate change, because it suggests that theHayekian argument for government intervention is based upon its claim to superiorknowledge and Nentjes takes it for granted that the IPCC has disseminated suchknowledge to governments around the world. However Nentjes (2005) overlooks thedependence of this epistemic argument on a premise concerning the aim of collectiveeffort; the epistemic argument is deployed on the assumption that the aim of collec-tive effort is not income maximisation but the preservation of sites of aesthetic,scientific or historical significance. Whether the aim of preserving natural beautyshould be afforded priority over the goal of maximizing income is not a matter ofknowledge or economic analysis but of ethics, of a judgement of value that is prior tothe epistemic argument for collective effort. In general Hayek’s position on theeconomics of natural resources is the expected one that markets offer better foresightthan government planning. Nentjes (2005) fails to recognize that Hayek’s epistemicargument for collective effort or government intervention was directed at the specialcase where the goal of income maximization has been replaced by the aim ofpreserving sites that have judged to have a particular kind of value.

Second, now that Hayek’s argument in favour of collective effort has beenrevealed to be not purely epistemic but dependent upon an ethical premise, theunsoundness of the argument becomes clear. It is meaningless to claim that sites ofoutstanding natural beauty or scientific, cultural or historical significance benefit ‘thepublic at large’ because there is no such thing as the public at large. Some individualsmay be presumed to have little or no interest in visiting such sites and hence wouldderive no benefit from their preservation. Those individuals who have been accus-tomed to visiting such sites may reasonably be said to have acquired limited propertyrights in them. These may be thought of as defensive property rights, in that, whilethey not entitle people who appreciate the beauty of a particular landscape to a claimon the public purse to preserve it, they do confer a right to defend access to it. Forexample, it is for the courts to decide whether to permit the construction of askyscraper in front on your house, blocking out a view across green fields to a sandycove and sunsets over the sea. If the landscape or the monument attracts people froma wide area or even nationally, then a subscription to purchase it would be appropri-ate. In practice people are not dissuaded from supporting such schemes by resentment

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at the prospect of non-subscribers getting something for nothing. There is thereforeno special goal of preserving sites of outstanding natural beauty or special signifi-cance that might be thought to override or replace in certain circumstances the aim ofincome maximization. Rather is it the case that preserving such sites is simply oneaspect of protecting the property rights of individuals.

Third, Nentjes’ application of his misinterpretation of Hayek’s argument forcollective effort to the problem of climate change is inappropriate. According to(Nentjes 2005, p. 359), emissions trading places the government in the best possibleposition to set the cap on total emissions because it has ‘superior knowledge ofnational environmental impacts of pollution.’ This Post-Austrian view is a misappli-cation of Hayek’s argument. It is questionable whether the knowledge claim made onbehalf of government is ever sound. In the case of climate change, it is egregiouslyinvalid. What would be the source of superior government knowledge about thefuture use of natural resources, when all information relevant to efficient resourceallocation is disseminated through relative price movements? In the particular case ofclimate change policy, it is extraordinary that Nentjes (2005) argues that the mainadvantage of trading is that it enables the government to disseminate its generalknowledge throughout the carbon market. A major problem with emissions trading isthat it presupposes that the government or a supranational authority knows the correctlimit to the exercise of property rights in the use of the atmosphere as a carbon sink.No government can have ‘superior knowledge’ of the damaging effects carbonemissions because no such knowledge exists.5 The knowledge requirements of the

5 No less than a carbon tax, an effective carbon trading scheme will not be effective without globalcoverage, which requires international political agreement on issues that the UK and EU member stateshave so far failed to resolve in connection with their own trading schemes. Whether carbon trading actuallyreduces emissions depends crucially on the quality of government decision-making in the design of theemissions trading system. First, the scheme should cover all carbon emissions with no industries exempt. Infact the UK ETS and EU ETS both include significant exemptions, being limited to carbon-intensiveindustries that are not at immediate risk from competition in international markets. The use of fossil fuels inindustries that are granted exemption is in effect subsidised and, other things equal, can be expected toincrease.

Second, the number of permits allocated by free distribution must be limited, and at least some permitsshould be auctioned. Free distribution has been used by the UK and the EU in order to win acceptance fromsceptical firms, but it acts as a barrier to the entry of new firms, undermining the degree of competition inindustries covered by the scheme. Incumbent firms receive a free allocation of permits when the tradingsystem begins, but new entrants have to purchase permits at the prevailing market price. The implication isthat ‘the free distribution system imposes a bias against new users in the sense that their financial burden isgreater than that of an otherwise identical existing user’ (Tietenberg 2005, p.184).

Third, the quota, the quantity of CO2 that may be emitted, must be sufficiently lower than ‘businessthan usual’ to lead to the reduction in emissions that is believed to be necessary to avert dangerous climatechange. The EU ETS has not secured a reduction in emissions because national quotas have been toogenerous. Firms such as electricity generators had increased prices in anticipation of having to purchaseextra permits at the predicted market price. But too many permits had been issued, the price of permitscollapsed and the funds raised for purchasing permits became windfall profits. The distributive effects onsociety were regressive, with money being redistributed from electricity customers, many of whom are onlow incomes, to shareholders who may be expected on average to be more affluent.

The prospects for international collaboration to establish an effective and globally comprehensivePigovian tax, carbon tax or carbon trading regime seem remote. Moreover, it is far from clear that climatescience can provide a reliable estimate of the safe atmospheric concentration of CO2 that would inform theefficient rate of CO2 emissions reduction. Too much trust in computer modelling helped to bring us thecredit crunch. How much trust should we place in computer predictions of future climate change and itseffects?



Post-Austrian climate policy of emissions trading are no less demanding than those ofthe dominant neoclassical perspective.

4.2 The Coasean nature of emissions trading

Coase’s (1960) position shares with most Austrians the view that environmentaldamage is a case, not of market failure, but of a failure by government to defineand allocate property rights. Coase’s property rights framework also remains com-mitted to the Paretian principle that each agent, placed in a competitive market, is thebest judge of his own welfare. However, while Pareto is concerned exclusively withtradable goods, Coase extends the scope of the competitive market to includeproperty rights. If government defines and allocates property rights, they become,on the assumption of low or no transactions costs, tradable and disputes can be settledby bargaining and the exchange of property rights without the need for governmentregulation of or intervention in market processes. The Coasean bargaining solutioncontrasts sharply with the Austrian appeal to tort litigation to protect property rights.

The real problem with the Coasean approach is that, far from protecting individualrights, it undermines the right to own and hold property. In a Coasean world theownership of property is never an absolute right but only provisional, until someonein effect makes a higher bid for the use of the property. Suppose that differentgenerations of a farming family have been growing crops on land for decades,perhaps even centuries, and that, as a consequence of climate change, the land isturning into a desert. From a Coasean perspective there are now two equally validclaims to the right to use the atmosphere, either to promote the growth of crops or as arepository for carbon emissions.

In most contexts other than climate change, conflicts of this form are to be resolvedthrough voluntary exchange. But how voluntary is Coasean exchange? Coase givesan incomplete specification of voluntary exchange that transforms property owner-ship into an empty vessel. Coasean bargaining presupposes a market in propertyrights in which every property holder is a willing participant. From the perspective ofAustrian welfare economics, the absolute right to property demarcates the limits tomarket exchange. It is wrong to assume that every aggressive act against a person’sproperty, including pollution, puts that property in jeopardy by making its ownershipa subject for bargaining. A market is an arena to which sellers choose to take thegoods they have for sale and meet potential buyers with the intention of closing adeal. The question whether the exchange is voluntary is not answered merely byobserving an absence of coercion on the trading floor, as it were. It is also necessaryto inquire into the terms on which the seller finds herself in the market. Did she attendwillingly on her own initiative? Or was the market imposed upon her, as someonewho was enjoying the fruits of ownership with no thought of selling until anotheragent invades her property and thereby inducts her into an auction? There can be nojustification for conscription into voluntary exchange. Property ownership in anentirely Coasean world become almost as insecure as it would be in a Hobbesianstate of nature.

In the case of climate change, Anderson and Leal (2001) see emissions trading as aCoasean solution. Consider the structure of the interpersonal conflict to which fossilfuel use is alleged to give rise. Two economic agents, working at a distance from each

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other and oblivious of each other’s existence, make us, in very different ways, of theprevailing characteristics of the atmosphere. F uses fossil fuels in a productionprocess located in an industrial economy in the North, while G is a farmer in alow-income country in the South. There is no suggestion of an interpersonal conflictbetween them until it comes to widely believed in policy-making circles that carbonemissions from F’s factory are contributing to climate change, one of the effects ofwhich is to render G’s land unsuitable for agricultural use through aridity anddesertification.

For the Austrian, the crucial issue, assuming that the causal connection betweenfossil fuel use and desertification has been established beyond reasonable doubt or bythe preponderance of evidence, is to discover who has the prior property right in theatmosphere. Have G and his forefathers been farming the land for centuries, while Fhas been using fossil fuels in a production process only for decades?

Coasean advocates of emissions trading do not ask this question, simply observingthat there are two conflicting claims upon the atmosphere. F has a property right inthe atmosphere as a repository for carbon emissions, while G has a property right inthe atmosphere as an input in the agricultural process (in that, together with the soil, itconstitutes high-quality agricultural land).6

Carbon trading could violate property rights in one of two ways. First, if carbonemissions do not cause climate change after all, the fossil fuel user is coerced intopaying for the right to use the atmosphere as a repository for emissions, on the basisof government’s unsound scientific advice and act-utilitarian calculations of maxi-mum social welfare. Second, if carbon emissions do cause climate change, the farmerat risk of losing his land to desertification must hope that the aggregate calculation ofemissions reduction to be achieved is sufficient to save his it. It is a matter of luckwhether the calculation of net global benefit is on his side.

4.3 Climate science, economics and policy

From a neoclassical perspective, either a carbon tax or emissions trading ‘couldestablish the common price signal across countries and sectors’ that is necessary toreflect the value of external costs and reduce carbon emissions sufficiently to avertdangerous climate change (Stern 2007, p. 351). As a price instrument, a tax on fossilfuel use would raise the price of carbon directly and the higher price would secure areduction in emissions to a level that avoids dangerous climate change. As a quantitycontrol, an emissions trading system, also advocated from a Post-Austrian perspec-tive, directly sets the optimal quantitative limit on carbon, with the trade in permitssetting the carbon price as a side-effect. And, since it is the quota, the quantitativelimit, that controls the tax and hence the price signal, there is no real differencebetween price and quantity instruments. Tax is not a market-based instrument, as ifthe government were just another market agent; taxes impose an administered pricederived from a judgement about quantity. Taxes and trading both assume that thegovernment knows the optimal quantity of carbon emissions, the quantity that equal-izes the marginal social costs and benefits of using fossil fuels.

6 If the climate changes as a consequence of intrinsic variability of natural processes, that is unfortunate.



However, it is clear that IAMs cannot provide the knowledge upon which carbontaxes and trading depend. There is considerable uncertainty about the predicted rise inglobal mean temperature and the changes in regional weather patterns that it mightcause. The economic modelling of the monetary value of the consequent impacts onsocio-economic activity relies upon controversial assumptions. Whether the policyinstrument is taxation or trading, the optimal quantity of goods produced using fossilfuels is not a component of reliable knowledge but an issue on which reasonableminds may differ. There is no secure foundation in climate science and economics forthe instruments of conventional climate policy.

From an Austrian perspective, the unreliability of estimates of the social cost ofcarbon is irrelevant. And the question whether carbon emissions cause an increase inglobal mean surface temperatures is for the courts to decide. The courts will have todecide more than that. What matters to the Austrian economist is whether risingtemperatures are causally responsible for changes in regional weather patterns thatviolate the rights of many individuals to a climate unchanged by the economicactivities of other economic agents.

5 Austrian environmental economics and climate change

The application of Austrian environmental economics to climate change is free of therequirement of foundations in scientific knowledge. Moreover its application toclimate change would actually promote the public understanding and the advance-ment of climate science.

5.1 The Austrian perspective on climate change

The advocacy of an Austrian environmental policy is a normative project, based onAustrian welfare economics which has a close affinity with the libertarian politicalphilosophy associated with Nozick (1974). The central idea is that externalities are apseudo-problem, arising not from market failure but from an inadequate allocation ordefence of private property of rights. Conflicts over the use of resources and theinfringement of property rights are legal disputes to be resolved in the context of tortlaw.

Nozick’s starting point is moral, or at least ‘far from nonmoral’ (Nozick 1974, p.6): individuals have rights and these rights determine what people may and may notdo to one another. An individual is free to exercise their rights subject to moral sideconstraints that prohibit the violation of another individual’s rights. In an economiccontext, the exercising of individual rights includes engaging in entrepreneurialactivity and moral side constraints give rise to a legal framework including recourseto tort litigation. In this way voluntary exchange subject to moral side constraintsconstitutes the ethical basis of dynamic efficiency, which is the central concept ofAustrian welfare economics.

Dynamic efficiency is defined in terms of ‘its capacity to foster entrepreneurialcreativity… the entrepreneurial capacity to seek, discover and overcome differentsocial maladjustments’ (Huerta de Soto 2009, p. 8). For Kirzner (1997) dynamicefficiency consists in the ‘ability to encourage entrepreneurial alertness to valuable

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knowledge, the very existence of which has not previously been suspected’ (p. 67).The market ‘system operates within a framework of law which recognizes individualrights to property’ (Kirzner 1997, p 13). The only valid reason for restrictingentrepreneurial activity is therefore the entrepreneur’s commission of a tort, provenin court beyond reasonable doubt. If social and economic institutions satisfy thiscriterion, they constitute an ‘ideal institutional setting’ (Cordato 1992, p. 64). To thedegree that actual institutions depart from this benchmark, they warrant the normativejudgement that they impair dynamic efficiency.

From this perspective, carbon taxes and carbon trading represent the nadir ofdynamic inefficiency, obstructing entrepreneurial innovation and denying to individ-uals the right to engage in voluntary exchange, on the basis of utilitarian calculationsof aggregate welfare. A current example of such inefficiency is provided by the UKclimate policy. The UK Coalition government, in pursuit of the 2020 target for carbonemissions reduction set out in the Climate Act, is subsidising wind power, penalisingthe use of fossil fuels and artificially raising energy prices to make nuclear powercompetitive. This climate policy is, Lord Lawson believes, the most anti-manufacturing policy ever implemented by a British government; it ‘will do greatdamage… to manufacturing… at a time when it is clear that our principal competitorsoverseas have not the slightest intention of following suit’ (Lawson 2010). It will alsocause an increase in fuel poverty among low-income households. In March 2011 theUK government became the first in the world to announce the introduction of acarbon price floor, rising from £16 a tonne in 2013 to £30 a tonne in 2030. The idea isto raise the price of carbon permits in the European Union’s emissions tradingscheme, because the UK government feels that the current price is ‘too low toencourage investment in green energy’ (Pfeifer 2011). A carbon tax in all but nameis needed to supplement carbon trading.

The essential point of an Austrian environmental economics is that environmentalproblems arise because one economic agent, such as a polluter, acts in a way that isinconsistent with other agents’ being able to carry out their plans and exercise theirrights. Climate change is an example of interpersonal conflict over the use ofresources as some individuals use the atmosphere as a carbon sink, changing theclimate and thereby making it impossible, for example, for other individuals to relyupon a climate that is subject only to natural fluctuations, as a resource for growingcrops in particular locations. Economic activity giving rise to CO2 emissions wouldproceed without hindrance from existing policy instruments but would be subject toside constraints concerning the avoidance of harm to others. If carbon emissions fromA’s use of fossil fuels is causally responsible for the ruination of B’s agricultural land,this is clearly a tort. It is for the courts to decide, calling on the testimony of expertwitnesses, whether CO2 emissions are responsible for such harm.

From the perspective of Austrian welfare economics, there should not be a publicpolicy towards climate change. It should be up to individuals or organisations whobelieved that fossil fuel use was infringing their property rights to seek redress in thecourts, which should build up a body of common law and establish precedents toguide the actions of the users of fossil fuels. The policy prescription is therefore toprivatising ‘climate policy’, repealing existing climate change legislation that enfor-ces carbon taxes and emissions trading schemes. International negotiations to setcarbon emissions reduction targets should be abandoned.



The purpose of a privatized climate change policy should be twofold. First, wherenecessary, that aim is to allocate the missing property rights (to a climate unchangedby human fossil fuel use) that will enable goal-seeking individuals to defend thoserights against invasion. Second, insofar as there is no need for new assignments ofproperty rights, the aim is to defend existing property rights invasion. In generalexisting national legislation is adequate and property rights are simply waiting to beenforced or protected, although there differences in legislation and judicial practiceacross countries concerning the importance of the law of nuisance with its emphasison strict liability and the law of negligence (Schäfer 2000; Schäfer and Schönenberger2000; Morris 2003).

The application of tort litigation to climate change might seem to be an impossibletask but, returning to the foundations of Austrian welfare economics in politicalphilosophy, Rothbard’s (1990) work on air pollution indicates the way forward. AsRothbard sees it, the question is: How much of a resource does a person own?Rothbard’s (1990) answer is that the person ‘owns a technological unit of theresource’ (p. 254) and quotes Prosser (1971) on the definition of ‘effective posses-sion’. The effective possession of a piece of land is ‘so much of the space above himas is essential to the complete use and enjoyment of the land (Prosser 1971, p. 70)’. Inthe case of air pollution, the height of the owned airspace will vary according to thefacts of the case’, that is, according to the ‘technological unit’.

The absence of explicitly allocated property rights in a climate unaffected byhuman activity would not render litigation unfeasible. The technological unit isthat airspace above a piece of land whose integrity is necessary for thecontinued use of the land for an established activity. The integrity of airspaceconceived as a technological unit might be measured in terms of temperature orhumidity if it is agricultural land. The rule of ‘coming to the nuisance’ holdsthat ‘the party that first used the resource should be granted the right tocontinue to use it’ (Cordato 1992, p. 103). How this might be applied in the caseof AGW requires extensive analysis but it is reasonable to envisage a presumption infavour of parties that have relied upon the prevailing climate to settle particular areas,using them for agriculture and other economic activities, long before the use of fossilfuels on an industrial scale.

If an activity undertaken on A’s property causes a nuisance on B’s property, A isliable, regardless of whether A intended the nuisance or took reasonable precautionsagainst it or whether any benefit accrues to the public (Morris 2008, p. 241). This isconsistent with Nozick’s (1974) libertarian principle of freedom of action subject toside constraints. In this context a side constraint is a rule prohibiting actions thatcause damage to property through AGW. From the perspective of Austrian welfareeconomics, the neoclassical principle of attempting to establish the optimal level ofcarbon emissions is unjust, in permitting individuals to be injured and their privateproperty rights overridden if the result is a net increase in benefit throughout societyas a whole (____________; Adler 2009).

There are many cases of climate change litigation going through the courts in theUS, so far without much success. However, according to Sheppard (2007), plaintiffshave not used tort litigation but have tried to prove that corporations have failed tocomply with environmental legislation. The exception is the claim that fossil fuelusers are responsible for damage caused by Hurricane Katrina (Freddoso 2010),

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which is ambitious in seeking compensation for the effects of a specific extremeweather event (see Section 5.2).

Legislation and judicial practice also differ across countries concerning the pref-erence for compensation through the payment of damages or injunctive relief; in thecase of AGW an injunction would constrain firms to reduce carbon emissions to alevel that does not cause dangerous AGW (Swanson and Kontoleon 2000). Adrawback of tort legislation is the difficulty of estimating the cost of damage anddetermining the level of compensation. The immediate objective of AGW tort cases isto establish causality; building on this, researchers have put forward a formula forattributing responsibility and assessing compensation, the fraction of attributable risk.

5.2 Strict causality, fraction of attributable risk and climate science

The concepts of dynamic efficiency and the ideal institutional setting are abstract andtheir application to the issue of climate change raises issues that lie outside the scopeof economics, in particular Austrian welfare economics. However, it seems to beimportant to comment, in the light of the political philosophy that underlies Austrianwelfare economics, on some of the issues on which the courts might be expected tohave to adjudicate.

The principle of strict liability and the law of nuisance focus on causality (Hoppe2004; Cordato 2004; Morris 2008) and it is precisely the question whether the humanuse of fossil fuels causes global warming that is at issue. There are two aspects to theissue of causality. First, the epistemic status of the putative facts of the case must beclarified: Rothbard states a clear principle: ‘To establish guilt and liability, strictcausality of aggression leading to harm must meet the rigid test of proof beyondreasonable doubt. Hunch, conjecture, plausibility, even mere probability, are notenough. In recent years, statistical correlation has been commonly used, but it cannotestablish causation (Rothbard 1990, p. 245).’ Second, it is important to clarify theextent of a property owner’s rights. Rothbard (1990) makes the point that ‘… no onehas a right to clean air, but one does have right not to have his air invaded bypollutants generated by an aggressor (p. 256).’ Both aspects of the issue of thecausality illustrate the importance of the reliability of scientific knowledge of climatechange (Section 2).

Rothbard’s principle that statistical correlation cannot establish causation is incon-trovertible. However, climate scientists and economists do not rely merely on corre-lations but construct models, simplified representations of reality, to explain andpredict processes and events (Section 2). So it might seem that the question is: Canmodels establish causation? But the issue is not as simple as that, because thepredictions of models are normally expressed in probabilistic terms. What are theimplications of probabilistic modelling for liability for climate change damage?

Stott et al. (2004) consider the situation of victims of an extreme weather eventwho would be interested in claiming damages if the events can be shown to morelikely under anthropogenic climate change. The problem is that the event might be arandom occurrence and so might have occurred in the absence of anthropogenicclimate change. Stott et al. (2004) draw on the concept of fraction of attributable risk,which is used in epidemiology to predict the proportion of a population that is likelyto fall victim to an epidemic. In the context of climate change, the fraction of the risk



of an extreme weather event attributable to anthropogenic climate change is aprobabilistic quantity. Allen (2003) explains that if event A (for example, anthropo-genic climate change) has trebled the risk of an extreme weather event’s occurrencecompared to its pre-industrial probability, then ‘there is a sense in which A is “toblame” for two-thirds of the current risk’ (p. 891). Averaging over all probabilitieswould give a mean likelihood-weighted liability of ‘somewhat less than two-thirdsbecause of the uncertainty in how much the risk has increased’ (ibid.).

Owing to ‘finite observations and imperfect models’, Allen (2003) admits that weare not yet in a position to calculate a mean likelihood-weighted liability for thecontribution of greenhouse-gas emissions to the increased risk of particular extremeweather event: ‘But the point is, if we get the science right, we could be’ (p, 892). Itwould be a legal rather than a scientific issue, Allen (2003) believes, whether a jurywould accept ‘the concept of averaging over possibilities’ (p. 892). However, thisoverlooks the ethical issue whether it would be just to find an agent guilty of a tort onthe basis of a mean likelihood-weighted liability. It is arguable that this formulation ofthe concept of fraction of attributable risk self-destructs. It is unreasonable and unjustto require a fossil fuel user, F, to curtail production because there is a quantifiable riskthat production using fossil fuels has caused damage to the property of the victim, V.If the fraction of attributable risk were ‘somewhat less than two-thirds’, it wouldunreasonable and unjust to serve an injunction to cease using fossil fuels when thereis, presumably, a ‘somewhat more than one-third’ chance that the fossil fuel user isentirely innocent of causing climate change. What would one think if the fraction ofattributable risk were not ‘somewhat less than two-thirds’ but, say, 99%?7 Few wouldquarrel with a fraction of attributable risk of 99% but that is because such a highprobability would be interpreted as signifying causality beyond reasonable doubt. Itseems therefore that using the fraction of attributable risk as a criterion of culpabilitycollapses into the legal principle of strict causality proved beyond reasonable doubt.

If the Rothbardian view that it is necessary to establish causation beyond reason-able doubt ‘rather than mere probability (or preponderance of evidence) based on“statistical” evidence’ (Hoppe 2004, p. 89) is correct, it follows that there could neverbe any possibility of attributing liability for damages from climate change, becausethe natural variability of weather patterns implies that it is always possible, withrespect to any particular extreme weather event, that it might have occurred even inthe absence of climate change. From this strictly Rothbardian point of view, theimpossibility of attributing liability might be a satisfactory outcome. On the otherhand it seems to me that, in the particular case of climate change, people’s propertyrights are inadequately protected if we raise the bar of liability so high. Climate

7 Jaeger et al. (2008) employ a Bayesian learning methodology to the Alpine heat wave of 200 in order tocalculate the fraction of heat wave risk attributable to anthropogenic climate change, concluding thatanthropogenic climate change has contributed more than 90% to the probability of the Alpine heat wave of2003. The Bayesian procedure begins by attaching a weight to each of four rival hypotheses seeking toexplain the heat wave. This merely prioritizes the hypotheses, in that the weights are 1, 2, 3 and 4. Differentorders of priority are included to express the range of opinion among researchers. A hypothesis that aresearcher finds thoroughly implausible is still given a positive weighting. The Bayesian explicitly takes anon-critical attitude to the hypotheses and the result is no more than a survey of opinion. Jaeger et al. (2008)are open about this; they admit that this result is a reflection of research in progress rather than knowledgethat is true beyond reasonable doubt. However it is difficult to agree with their belief that their methodologyallows decision-makers to reach practically relevant conclusions.

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change is a special case for two reasons. First, the complexity of the global climatemay make it perpetually impossible to attribute liability on any basis than probability.Second, many potential victims face catastrophic losses. Perhaps a hybrid approachthat combines allegiance to strict causality beyond reasonable doubt at the theoreticallevel with preponderance of evidence at the applied level is the way forward.

The legal issue of attributing liability for climate change losses might be resolvedby disaggregating the concept of fraction of attributable risk. Let us suppose thatGCMs are improved and that they predict that greenhouse-gas emissions will lead toan increase in global mean surface temperature of n°C over the next n years with sucha high degree of confidence that it is beyond reasonable doubt that this anthropogenicwarming will occur. Let us further suppose that the models predict changes inregional weather patterns with a similar degree of confidence and that these changesincrease the likelihood of certain types of extreme weather event. In these circum-stances it would be beyond reasonable doubt that fossil fuel use has increased the riskof extreme weather events by x% and therefore, in the case of any particular extremeweather event, it is beyond reasonable doubt that fossil fuel use has increased the riskof its occurrence by x%. The principle of strict causality has not been abandoned, forit still applies to the general hypothesis that fossil fuel use causes a rise in globaltemperatures. However, the application of the principle of strict causality is limited tothe general hypothesis in recognition of the fact that natural variability makes itimpossible to extend the principle to the causation of particular extreme weatherevents. Fossil fuel users could be found guilty of a tort that takes form of actingdangerously, of taking risks with the rights of other people. They would be foundguilty if it was beyond reasonable doubt that they were taking risks with otherpeople’s rights.

This is the position in which we could find ourselves ‘if we get the science right’and the science then vindicates the AGW hypothesis. The great advantage of theAustrian welfare economics approach is that it is defined in terms of a process or aprocedure, recourse to tort legislation, rather than an outcome:

But let spotted leaves fall as they fall,Without ceremony or portent.8

An Austrian privatised policy does not presuppose a foundation in scientific knowl-edge. It is immune to developments in scientific knowledge and, unlike neoclassicaland Coasean policies, is not undermined by the current level of scientific uncertainty.Tort legislation remains a valid procedure whether the AGW hypothesis is eventuallyconfirmed beyond reasonable doubt or conclusively falsified.

Moreover, recourse to tort litigation may reasonably be expected to have beneficialdynamic effects. If early court cases found in favour of the plaintiffs and required theguilty firms to reduce carbon emissions at a certain rate, other firms using fossil fuelswould have a motive to pre-empt litigation by reducing carbon emissions over time.Allen (2003) predicts another positive development. The concept of fraction ofattributable risk could play a role in a market-based response to climate change.Allen (2003) believes that it could underlie a ‘climate change risk premium’ thatwould be ‘determined by the hidden hand of the market, not by politicians in tortuous

8 ‘Black Rook in Rainy Weather’, lines 9–10, Plath 1981.



intergovernmental negotiations’ (p. 892). The idea is that a ‘market would emerge incover against climate-related law suits’ (ibid.).

Climate change tort litigation would have a further round of dynamic effects onclimate science. Grossman (2003) refers to ‘the lack of public knowledge aboutclimate change, caused by the evolving and complicated science of climate changeand compounded by some fossil fuel companies’ efforts to encourage public uncer-tainty and inaction on global warming’ (p. 4). On the contrary, in a world where theIPCC has used its monopoly power in the dissemination of climate science tolegitimize intemperate and damaging policy intervention, it seems to me that moreshould be done to communicate the uncertainties that are inescapable in climatemodelling. The reasonableness of rival theories postulating natural forcing mightmore widely understood as climate change tort litigation provokes the publication ofthe testimony of a range of expert witnesses.

This greater openness in scientific debate that climate change tort litigation wouldprovoke would also be conducive to the advancement of climate science. It is likelythat the IPCC, under the force of public scrutiny, would be radically reformed orwould lose its privileged access to policy makers. There is ever chance that theconsensus that the IPCC has artificially constructed and imposed would give way tosomething much closer to the ‘friendly-hostile competition’ of the Popper ideal. Thebipartisan structure of the public debate on climate change, where a unified climatechange establishment presents itself as confronted by a tiny minority of wild deniersand eccentric sceptics, would be transformed to include the full range of reasonablepositions including reasonable scepticism on many aspects of climate change. Such adevelopment could only be advantageous to the advancement of climate science.

5.3 Welfare in the Austrian approach to climate change

The principal aim of this section is to defend the Austrian approach to climate changeagainst the objections made against it by Nentjes (2005) in advocating carbonemissions trading. This obstruction of dynamic efficiency would be regarded asjustified in Post-Austrian terms on the grounds that only ‘a collective effort’ recog-nizes the complexity and public good characteristics of environmental issues. Thepremise on which Nentjes’ (2005) constructs the Post-Austrian framework for climatepolicy is that ‘neo-Austrian’, in his terminology, or what I am presenting as thecanonical Austrian environmental economics, faces insuperable obstacles to itsapplication to climate change. According to Nentjes (2005, p. 354): ‘Climatechange… even [has] a global scale: hundreds of millions of emitters as well asentities suffering damage are involved. It is unthinkable that court action by privateplaintiffs could successfully hold the multitude of tort feasors liable for damage andretract compensation or reduction of emissions. The neo-Austrians have a blind spotfor public good characteristics of modern environmental pollution, which thwartssolution through private law.’ Nentjes is making two distinct claims here: first, thatthere are far too many emitters and victims for litigation to workable and, second, thatthere are public good characteristics of, in this context, climate change. Both of theseclaims are invalid.

The first claim that Nentjes (2005) makes is wide of the mark in arguing thatlitigation would be impracticable, through involving ‘hundreds of millions of emitters

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as well as entities suffering damage’ or ‘a multitude of tort feasors (p. 354)’. Allen(2003) is of the same opinion, suggesting that the ‘prospect of a class-action suit withup to six billion plaintiffs and an equal number of defendants may seem ratherdaunting’ (p. 892). In fact, 122 corporations account for 80% of global carbonemissions (Burges Salmon 2005), confirming Warne’s (2010) view that the numberof significant carbon emitters and hence defendants is manageable.

It might be worth commenting briefly on another reason for believing that tortlitigation might be impracticable. This arises from the fact that an individual firm’scarbon emissions do not cause climate change on their own but may contribute to it incombination with the emissions of many other emitters (Morris 2008, p. 247). Anapparently indivisible harm can be apportioned according to quantities of pollutiondischarged, or in the case of climate change litigation, CO2 emitted (Grossman 2003,pp. 32-3; Allen 2003). There is a precedent in the settlement of litigation concerningdamage caused by herbicides used by US military forces in the Vietnam war (knownas Agent Orange). A formula using market share and dioxin content was used toassess compensation (Hughes et al. 2001, p. 55). A similar formula could be devisedfor CO2 and climate change.

The second claim that Nentjes (2005) makes raises the issue of public goods: ‘Theneo-Austrians have a blind spot for public good characteristics of modern environ-mental pollution, which thwarts solution through private law.’ In fact it is Nentjeswho has a blind spot for the public good characteristics of climate change tortlitigation, in that its benefits are both non-excludable and non-rival. This is of greatsignificance by virtue of a stylized fact about the possible effects of climate change.While industrial production using fossil fuels is concentrated in affluent nations, thepeople most at risk from climate change, if the hypothesis is true, live in low-incomesocieties without the resources to defend their territories and livelihoods against theimpacts of rising temperatures.

Climate change tort litigation is non-rival in that V’s seeking to show that E isstrictly liable for effects x does not entail that there is less litigation ‘left over’ forothers to use. On the contrary there may be bandwagon effects, perhaps as NGOsreact to a successful outcome in a pilot or pioneer case. In the short run, these emitterswould take advantage of the likelihood that a ‘market would emerge in cover againstclimate-related law suits’ (Allen 2003, p. 892). In the long run, firms would have anincentive to invest in low-carbon or carbon-free production technologies. The con-sequent reduction in atmospheric concentrations of CO2 that would occur after atime-lag would benefit all potential victims of the effects of climate change, demon-strating the non-excludability of climate change tort litigation.

Climate change tort litigation is non-excludable. For Nentjes (2005) the non-excludability of the benefits of climate change tort litigation is another obstacle toits feasibility: ‘Parties cannot be excluded from the benefits of lower emissionsbought by one party. Potential buyers will free-ride and a market will not develop’(p. 355). Nentjes (2005) accepts the standard presentation of the free rider problem,which presupposes that the only motive that prompts agents to act is self-interest. Asa general principle, this is false, unless one wishes to denounce all putative cases ofaltruism and virtuous conduct as fraudulent. It is particularly out of place in theclimate change context, where potential plaintiffs include NGOs, such as humanitar-ian and environmental charities, whose motivation is a desire to protect the poor and



powerless among human (and, some would say, non-human) agents. These plaintiffswould be acting for the sake of non-paying beneficiaries.

The beneficiaries of climate change tort litigation, when early cases find thatemitters are, beyond reasonable doubt, causally responsible for the adverse impactsof climate change, are not confined to those in whose name the litigation waslaunched. If carbon emissions are causing dangerous climate change, it does notmatter where they are reduced; wherever the reductions occur, eventually atmospher-ic concentrations of carbon will be reduced. The benefits of lower atmosphericconcentrations of greenhouse gases would avert dangerous climate change, not onlyfor the NGO that took the initial action and its immediate constituency, but forpotential victims of climate change damage all over the world.

6 Conclusion

The negative conclusion of this paper is that conventional climate policyinstruments, taxes and emissions trading, should be abolished, for two reasons.First, there are irremediable weaknesses in the theoretical perspectives used tojustify these policy instruments and, second, climate science cannot provide thereliable knowledge that is needed to justify their use. These arguments againstenvironmental taxes and emissions trading apply to both the neoclassical and‘Post-Austrian’ perspectives that have been used in advocating them. Thepositive conclusion of the paper is that a privatised policy, based on theAustrian framework of thought, is the only way to protect to the greatestdegree possible the liberties of all agents, both users of fossil fuels and peoplewhose livelihoods and territories are at risk if the AGW hypothesis is true.Climate change is a putative interpersonal conflict rather than a market failure.The use of fossil fuels, like any other economic activity, should be subject sideconstraints designed to avoid the infringement of other people’s property rights.Tort litigation would protect these rights, insofar as they need protecting. Byproviding a public arena for the competitive testing of scientific hypothesesconcerning climate change, such litigation would also promote the publicunderstanding of climate science create conditions of greater openness andcompetitiveness in research.

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