About a year ago I remember being bored and home-bound and tired of my own cooking. There’s nothing I find as delicious as carbs, and I stumbled onto a site called “The Brot Box”. The concept is quite clever. The company makes loaves of bread in the German style, without enriching the flour or adding sugar as many American breads do. The loaves are partially baked, in Germany, and then shipped to the U.S. in refrigerated packaging. They can be kept in the freezer for many months, and, when you want to eat fresh bread, you simply thaw a loaf, heat your oven, and finish the baking process. When I tried it, I was very impressed by the result; it reminded me of the bread I’d get in a European bakery before a morning hike.
I find myself almost irrationally bothered by waste these days — perhaps a byproduct of living in one of the filthiest cities in the Western world—, and the waste associated with my Brot Box compelled me not to get a second box. The concept seems faintly ridiculous, when you think about it. You are paying for a large box full of several pounds of food to be shipped across an ocean at low enough temperatures that the food doesn’t spoil. This in turn requires even more weight in the form of icepacks and insulation for those icepacks. The makers of The Brot Box have, to their credit, tried to make this as eco-friendly as possible. For example, the plastic packaging material is dissolvable in water and won’t clog up a landfill. But even if the box scores high on biodegradability, it remains a large, and, even worse, completely unnecessary, waste of petroleum and carbon and energy.
In our modern economy, the wastefulness of this process is represented as a cost added to the base cost of the good. The biodegradable, water-soluble plastic packing required some petroleum products and factory time to be manufactured and human hands to be placed into my box. The ice packs had to be bought and frozen. The shipping had to be expedited so that the bread was still cold when it arrived. Each of these steps adds cents or even dollars to my bill, but not an unreasonable number of them. I bought four loaves of bread. The subtotal was $38.96 and shipping was $9.99, which adds up to $48.95 overall, or about $12 per loaf. This is certainly much more than the corresponding cost at my local grocery store, but not so much that an upper middle class or rich person (like me) would be deterred from buying it every couple of months if they liked the product. Cost deters waste, but cost is a relatively weak deterrent, particularly in a society as wealthy as ours, and, moreover, in a society as unequally wealthy as ours. If I were living paycheck-to-paycheck, I would certainly not buy fancy non-GMO German bread, but, since I’m doing financially well, I can afford such pleasures.
Examples abound. I can (but don’t) pay for my pickup and dropoff service for my laundry. This means that someone in their car would drive a few minutes, on both ends, and I will pay for their labor (primarily) and the energy of those trips (secondarily). If I am wealthy enough, I might decide that the time I save by not walking worth more than the money I am paying. But the ultimate result is more waste is put into the world than would have otherwise been.
Similarly, I can order delivery instead of picking up food from the restaurant or, even better, making food myself. Every restaurant order, pickup or delivery, comes with a plastic bag and a non-recyclable plastic container, plastic utensils, and far too many napkins. I invariably feel bad whenever I get open up my bag and see all of the non-food stuff that I got but didn’t need. Usually I just dump it in the trash, but on my more hopeful days, I sometimes save it in a drawer, telling myself that I can use some other day. (That day hasn’t yet come.)
Somewhat perversely, as we get richer as a society, as GDP growth outpaces inflation, as our income exceeds our standard of living (which, to be fair, is not happening for many), the problem of waste becomes only more prevalent. If waste is generated whenever someone values convenience over cost, then waste will wax as cost concerns wane. There seems to be something incompatible between our current economic system and a system that values ecological or environmental concerns. As we become blessed with more abundance (for example, from switching to renewable energy), our waste will become more abundant too. The same is true not just across time but also across space. The rest of the world emits so little waste largely because it cannot afford to. As the global middle class expands, so will its waste footprint.
Suppose we decided as a society that we wanted to reduce waste, but within our current economic system, not some ideal or alternative one. How would we do it? As I understand it, there are two possible market-based solutions, which, when examined more closely, reduce to a single solution. Waste is a negative “externality”. Packaging accumulates in landfills, which are finite; energy for transportation or materials manufacture emits carbon; and some of the processes involved in getting German bread to Brooklyn indirectly cause not just carbon pollution, but also pollution of other sorts. One solution is to quantify the harm of the negative externality and price it accordingly. This is known as a “Pigouvian tax”, named after economist A. C. Pigou. For pollution, there can be a pollution tax; for carbon, there can be a carbon tax. To get a sense of magnitude, proposed taxes on carbon are on the order of $100/ton and possibly as low as $43/ton, according to Yale economist William Nordhaus. In other words, according to Nordhaus’s calculations, each ton of carbon is assumed to cause $43 of economic damage. Therefore, if my box of partially baked bread creates an additional 0.01 tons of carbon (to pick a random number), it would be optimal for society to tack on 43 cents to my final total (assuming that carbon was the only negative externality here, which it isn’t, of course). You might already recognize the problem, but more on that later.
The other classical economics solution to externalities is to assign “property rights”, although this is much clearer in theory than in practice. The intellectual father of this approach is Ronald Coase. PERC, a “free market environmental” think tank, explains it well:
Throughout the 20th century, economists continued to refine how they thought about environmental protection. A classic 1960 essay by Ronald Coase, “The Problem of Social Cost,” further recast how economists thought about addressing pollution. In one famous example, Coase discussed the hypothetical situation of a railroad running beside a farmer’s field. Sparks from the train would sometimes start fires in the crops. How should this external cost—a kind of pollution “externality”—be addressed?
Rather than viewing anti-pollution efforts in terms of how governments should choose which rule to impose, Coase took an altogether different approach. He pointed out that the problem could be rephrased in terms of property rights—in other words, who has what rights? For example, the government could say that the railroad company had a right to emit sparks, in which case the farmer would have to figure out the most cost-effective way of protecting the fields. Alternatively, the government could say that the farmer had a property right not to have sparks land among his crops, in which case the railroad would have to figure out an answer—which might include installing spark arrestors or other technology to prevent fires from occurring, or even just paying the farmer to put up with the annoyance.
In Coase’s approach, the question of how to respond to problems of pollution such as unwelcome railroad sparks did not need to be delegated to a government vote or board of experts. Nor did the problem of pollution, in Coase’s view, need to be solved by regulators imposing a Pigouvian tax to account for the “externality” imposed. After all, governments or any outside groups will inevitably possess much less detailed and hands-on information about the range of possible options—and how those options might be tweaked or combined—than railroads and farmers. Moreover, any choice of specific government regulations will be affected by politics and lobbying. Instead, Coase argued that once property rights were clearly defined, then one party or the other would have an incentive to seek out the most cost-effective way of reducing this form of “pollution.”
Of course, it is not readily apparent how to take this example with two parties—a railroad and a farmer—and transfer the key insights into, say, environmental problems involving air pollution emitted by many companies and affecting the broader public. As Coase acknowledged, the workability of this solution hinges on whether the costs of negotiating these pollution-reducing transactions are sufficiently low. Also, as Coase pointed out, although either party would have an incentive to seek out a cost-effective solution, how the property right was assigned would determine who paid the costs; in this example, it would determine whether the railroad or the farmer ended up paying.
Coase’s central insight was that, in a world in which “transaction costs” (the costs of negotiating) are sufficiently low, property rights enable “externalities” to be internalized. A railroad company is free to damage a farmer’s farm as long as they compensate the farmer for that harm. They would be discouraged from doing harm only if the calculus of costs and benefits—the one that previously excluded the farmer but now includes him—turns up a negative result.
Although this differs in the details from the Pigouvian approach, the upshot is the same: you can be wasteful or cause harm as long as you are willing to pay the cost. Economists might say that these costs should be higher than they are now (in other words, the cost I pay for shipping my German bread is less than what I should pay, according to the harm I’m causing to the environment), but they would still advocate for a cost-based deterrent to waste rather than a regulation-based one (like an outright ban).
There is a whole host of problems associated with this subtle and knotty issue of transaction costs, which PERC mentions in passing but basically elides. But suppose we imagine those away. In my view, there are still two main problems with using cost to prevent harmful or wasteful conduct. The first is if the cost is too low. The second is if it is too high.
Let’s start with the first. I have mentioned the essential idea already, but, to recap, if the cost of harm is low, then the primary group of people impacted are those who are making “marginal” decisions. Adding 43 cents to the cost of a Brot Box will dissuade people at the margins from buying the box, but that amount is so insignificant to the rich consumer that their behavior will be almost entirely unaffected. I would argue that cost-based solutions only really work in a society in which costs matter roughly the same to everyone. I am reminded of the Scandinavian solution to speeding, which is to assess a fine as a percentage of income, rather than a flat fee. It arises from the commonsense notion that there is something unfair about a system which subjects poor people to a large economic harm but rich people to a mere slap on the wrist. Rich Americans have carbon emission and waste footprints that far exceed their poorer compatriots. The reason is that cost is the only tool we have for discouraging negative externalities, and it matters almost not at all to the rich.
The second problem is if the cost is too high. Suppose we could set the Pigouvian tax high enough to allow the U.S. to meet its obligations under a 2 degree Celsius framework. It seems likely that this tax would be at least many dollars per gallon of gasoline. (Using Nordhaus’s number, which many experts believe is too low, and the fact that a gallon of gasoline emits ~0.001 tons of carbon, I get ~43 cents.) That likely translates into tens of dollars more per airplane flight, dollars tacked on to the cost of food items, particularly energy-intensive ones like milk and meat, and sharp increases to costs of packaging and shipping. It would manifest itself as markedly higher prices — in other words, inflation, but of a significantly higher magnitude than what we are experiencing now. These large cost increases will likely matter to the rich. But if they matter to the rich, then they will be crippling to the poor and middle class. I am certainly not an expert, but it seems that a Pigouvian tax large enough to make a dent in our climate crisis is so large as to cause a dramatic drop in the standard of living for most Americans. And I think this result makes sense. Imagine how high we’d need to set the tax on delivery, or laundry pickup/dropoff, or German bread boxes, in order to substantially curb their usage. By the time you’ve gone that far, you’ve probably gone too far.
It’s worth noting that Pigouvian taxes or assignation of property rights do not guarantee that any level of pollution. They alter the inputs (the cost) rather than the outputs (the level of pollution). (This is the impetus behind cap-and-trade schemes.) So, pollution still happens as long as the marginal benefit exceeds the marginal cost, even if this marginal benefit is illusory. To take one topical example, if Bitcoin continues to appreciate by orders of magnitude (its growth rate over the last 10 years), there is virtually no level of a Pigouvian tax that would shutter bitcoin mining without also shuttering the entire U.S. economy. It is easy to make the case, as a bitcoin miner, for paying $43/ton of carbon if the “benefits” are in the thousands of dollars.
This is an incredibly disturbing conclusion to market-based logic, and perhaps an underappreciated one. If energy and carbon should be allocated to activities that produce more revenue than they cost, then, in our somewhat ludicrous, Ponzi-like financial system, it is perfectly rational to devote entire power plants or huge swathes of a carbon cap and trade program to crypto, at least while it is in its “pump” phase rather than its “dump” one.
To close, I would like to see an end to waste: to people taking unnecessary car rides, or dumping gobs of junk in the garbage, or spewing carbon into the atmosphere, or destroying our ecosystems and ourselves with microplastics and other chemicals. But trusting the economists and relying on cost is not good enough, and, in my view, it was never even close.