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A fresh solution to the haze

Instead of 'polluter pays' policy, look to economist Ronald Coase and his market-based 'rights and liabilities' approach

Although the haze problem has received a great deal of attention in recent years, The Straits Times pointed out last year that it is at least 40 years old.

The problem - which almost everyone agrees is sparked mainly by forest fires in Indonesia - is clearly an extremely difficult one. Trans-border pollution problems are always tough, but this one - involving multiple actors in several countries at different levels of economic development - seems especially so.

The fact that the regulatory regime associated with Asean is relatively weak does not help either, further impeding efforts to solve or even to frame the problem.

We propose an alternative to a standard regulatory approach - instead, the economic efficiency approach associated with Professor Ronald Coase, the winner of the 1991 Nobel Prize in economics.

In economic terms, the haze is considered a negative externality that affects parties (individuals, countries, and so on) without their consent. Until Prof Coase, polluted water, dirty air, excessive noise and the like were addressed through governmental intervention, as they still are today in many cases. Rules were set that restrained A from inflicting harm on B.

Prof Coase's great insight was to perceive that the "polluter pays" principle often grossly oversimplifies very complex problems regarding externalities.

The Singapore skyline shrouded in haze in October last year. The possibilities of the Coasean approach would seem especially promising if Singapore and Singaporeans could somehow overcome understandable concerns that "natural justice" requires that t
The Singapore skyline shrouded in haze in October last year. The possibilities of the Coasean approach would seem especially promising if Singapore and Singaporeans could somehow overcome understandable concerns that "natural justice" requires that the polluter pays. ST FILE PHOTO

Instead of asking who did what to whom, Prof Coase argues that such problems are better viewed in reciprocal terms, and need to be reframed so as to ask, as he put it in 1960, "Should A be allowed to harm B or should B be allowed to harm A?"

The goal, according to Prof Coase, should be "to avoid the more serious harm". For him, efficient harm avoidance, via the assignment of rights and liabilities to the parties involved, generally works best in a consensual market context rather than when assigned via governmental regulation.

The problem is not a simple one in which business concerns and farmers in Indonesia inflict harm on Singaporeans and Malaysians - not to mention other Indonesians - by setting fire to forests and peatlands, but one in which all of these parties have rights that need to be identified and valued. Liability can then be calibrated and assigned via contract through negotiations by the parties involved.

HOW THIS APPROACH COULD WORK

A look at two similar problems to the haze may shed some light. Professor David D. Friedman, Nobel laureate Milton Friedman's son, used the hypothetical case involving airplane noise interfering with the sleep of people living near an airport. One solution would be to regulate the amount of noise airplanes can make, but, according to Prof Friedman, it may not be the most efficient one.

When considered as a Coasean question of contested property rights, alternative solutions might prove more efficient, such as charging airlines for the right to make noise, soundproofing homes near the airport, or even buying out nearby home owners. It all depends.

Another example comes from a group of economists at Boise State University in the United States who, in 2014, demonstrated how the assignment of property rights and subsequent bargaining could produce an economically efficient and environmentally acceptable outcome in settling a water pollution case.

The New York City Watershed Memorandum of Agreement came about after the US Environmental Protection Agency (EPA) sided with upstream "development" interests and ordered New York City to remove contaminants in its water that flowed downstream from watersheds into the city.

It was told to build a new filtration plant. However, the cost of building a plant was prohibitive.

In a Coasean sense, property rights had been established, and so officials representing the city - the "loser" and thus the responsible party for initiating any negotiating - proposed other, less costly solutions. These eventually proved acceptable to a wide range of interests: private property holders upstate, the state of New York, various environmental groups and the EPA.

Basically, instead of building a multibillion-dollar filtration plant, the city proposed to: buy land upstate that was contributing to run-off and watershed degradation and rectify the problems; compensate landowners for new watershed restrictions and for implementing new protections; incentivise farmers to employ less harmful practices; and work with government and NGOs on monitoring water quality. This agreement was still cheaper than building the filtration plant.

Although not without problems, the agreement, almost 20 years later, is generally deemed a success and an excellent example of using the Coasean framework in addressing externalities in a complex multi-party scenario.

THE HAZE, AND 'PROPERTY' RIGHTS

Now back to Singapore and Indonesia. The fires producing the haze presumably are sources of economic value to various Indonesian interests, and the haze obviously inflicts short-term discomfort and likely long-term harm to the health of Singaporeans (among others).

The haze also adversely affects the Singaporean economy, especially in its impact on tourism. The question of whose "property" rights are paramount is an empirical one: Does the overall social benefit of haze outweigh its social cost or vice versa? By how much?

Once such questions are answered, we can determine how best to assign rights and liabilities. Should Indonesia (and Indonesian interests) pay Singaporeans to accept haze or at least some haze, or, on the other hand, should Singapore (or Singaporeans) pay Indonesia (and Indonesians) to stop setting the fires or at least reduce their incidence?

Transnational pollution cases are always tricky, and accurately assessing the costs of haze will be difficult, particularly because of the number and diversity of parties involved. Depending on how many - and which - parties are given formal status, transaction costs - which is the economic cost of negotiating an economic exchange, in this case, the exchange of rights - may be high.

To be sure, one can take alternative routes, whether by taking the high road and pleading cooperative protection of the regional commons, or the low road of zealous competing sovereigns. One could also go the torts route and try to sue polluters (at least the big conglomerate polluters), but enforcing decisions outside of Singapore's jurisdiction would be tough.

Framing the haze problem as one of reciprocal property rights that need clarification might be the way to go. It certainly has the potential to reduce the level of tension and discord surrounding the haze.

The possibilities of the Coasean approach would seem especially promising if Singapore and Singaporeans could somehow overcome understandable concerns that "natural justice" requires that the polluter pays.

As a rich, developed country dealing with a problem caused at least in part by poor neighbouring farmers, Singapore could, in so doing, get a jump on a solution to the haze problem and demonstrate its regional and global leadership by going the counter-intuitive reciprocity route.

Last year Indonesian Vice-President Jusuf Kalla raised hackles in the region by suggesting that Indonesia's neighbours shouldn't complain about one month of haze annually, but rather thank Indonesia for the good air quality in the region during the other 11 months of the year. However insensitive this remark may be, in conceiving of the haze issue in reciprocal terms, it provides in embryonic form an opportunity for a new approach and a fresh start.

•Peter A. Coclanis is Albert R. Newsome Distinguished Professor of History and director of the Global Research Institute at the University of North Carolina, Chapel Hill. In 2005, he was Raffles Professor of History at the National University of Singapore. Tilak K. Doshi was previously chief economist with the Energy Studies Institute at NUS and is now an energy analyst in the Middle East.

A version of this article appeared in the print edition of The Straits Times on June 14, 2016, with the headline 'A fresh solution to the haze'. Print Edition | Subscribe