RIP Ronald Coase; father of the economic theory that created carbon trading; a much-needed moment of reflection for climate policy makers
We are sad to learn that our “spiritual father” – economist giant and Nobel-Prize winner Ronald Coase – has passed away at the grand age of 102 last Monday.
In his paper “The Problem of Social Cost” he introduced the notion that assigning clear property rights of pollution to polluters and letting affected parties negotiate the production and reduction of pollution could produce more efficient results than a simple “polluter-pays” principle. This notion created the conceptual basis for GHG emissions trading.
In his later years, Coase himself warned against the abuse of what had become known as the “Coase Theorem” by those who used it to justify a hands-off approach to regulation, pointing to the importance of considering the existence of positive transaction cost when negotiating the transaction of assigned ownership rights.
Coase himself pointed out that government is needed to regulate allocation and modalities of transaction of pollution rights in the market. He also pointed out that government should regulate, thrive to make transaction costs as low as possible and then get out of the way.
Looking at the state of climate negotiations, especially in relation to market mechanisms today, policy-makers should spend a moment of silence and reflect on the work of Ronald Coase.