Economic activity should be governed within the earth’s biophysical limits, and markets should no longer treat the use of ecological capacity as if it were unlimited and free.
Replacement of “externalities” by “Planetary Boundaries”
From a microeconomic perspective, I do not think the two concepts are substitutes. They address different analytical questions and would be more powerful if presented as complementary.
The concept of an externality explains why decentralised private decisions can diverge from the social optimum. A firm or consumer generally considers private marginal benefits and costs, while part of the damage is imposed on other people, jurisdictions, ecosystems or future generations. The resulting market price therefore fails to reflect the full social opportunity cost of the activity.
“Planetary Boundaries” and “externalities” address a different question
While the first seek to identify the level of pressure that critical earth-system processes can absorb before humanity enters a zone of increasing systemic risk, the second is an economic side effect that imposes costs or provides benefits to an unrelated third party without being reflected in market prices. In economic terms, “Planetary Boundaries” can provide biophysical constraints for the social optimisation problem, but they do not replace the theory explaining why private actors fail to respect those constraints.
Rather than moving “from externalities to planetary boundaries”1, we could move “from unpriced externalities to the governance of scarce planetary-boundary capacity”. “Planetary Boundaries” would then specify the ecological constraint, while externality theory would explain the price distortion and the need for intervention.
This distinction matters for policy design
Under conventional Pigouvian reasoning2 (cf. “Pigouvian tax“), policymakers estimate the marginal external damage and impose a corresponding tax. Under a “planetary-boundary approach”, however, uncertainty, non-linearity, irreversibility and possible tipping behaviour may justify defining a quantitative limit first. A cap-and-trade system could then allow the market to reveal the marginal cost of remaining within that limit. The market would not determine the “Planetary Boundary” – science, legitimate political institutions and democratic decision-making processes would determine the cap, while the market would facilitate cost-effective allocation within it.
Furthermore, I want to mind the distinction between “externalities”, “global public goods”, also referred as “global commons” (GPGs) and “common-pool resources“.
For example, climate stability is a global public good, because actors benefit from mitigation regardless of whether they contribute. The remaining capacity of the atmosphere to absorb emissions can also be conceptualised as a scarce “common-pool resource”, because one actor’s use reduces the space available to others. “Planetary Boundaries”, meanwhile, define ecological risk thresholds. These concepts overlap, but they are not interchangeable.
This distinction is consistent with Elinor Ostrom’s work3 on the governance of “common-pool resources”. Her research demonstrates that shared resources are not governed effectively by markets or central governments alone, but through combinations of clear rules, monitoring, sanctions, participation and polycentric institutions. Applied to IDGR’s proposal, a global market would therefore require a prior governance architecture defining the cap, allocating rights, monitoring use, enforcing compliance and resolving distributional conflicts.
Ronald Coase’s analysis4 leads to a similar conclusion. Markets in environmental rights do not emerge spontaneously. They depend on an initial legal definition of rights and on institutions capable of reducing transaction costs. At the planetary scale, transaction costs are exceptionally high, affected parties number in the billions, future generations cannot bargain, and enforcement is fragmented across sovereign jurisdictions. Therefore, creating a market is not a substitute for political authority – it presupposes it.
“Planetary Boundaries” and “externalities”: complementary frameworks
“Planetary Boundaries” explain and determine the biophysical constraints5 – the so call “corridor of life”6 – within which politics has to govern “externalities”, “global public goods” (GPGs) and “common-pool resources”, to develop a healthy and thus sustainable global society and economy.
This connects “Earth system science” with established microeconomic theory7, while making the case for global binding institutions more rigorous and introducing global binding markets for GPGs – including “Planetary Bounadry” resources – as a necessary and key new pillar.
References
- cf. Baumann, K. (2026): “From ‘externalities’ to global binding markets for ‘Planetary Boundary’ resources“, IDGR.org. ↩︎
- cf. e.g., Pigou, A. C. (1920): The economics of welfare, Macmillan. ↩︎
- cf. e.g., Ostrom, E. (1990): Governing the commons: The evolution of institutions for collective action, Cambridge University Press. ↩︎
- cf. e.g., Coase, R. H. (1960): The problem of social cost, The Journal of Law and Economics, 3, 1–44. ↩︎
- cf. e.g., Richardson, K., Steffen, W., Lucht, W., et al. (2023): Earth beyond six of nine planetary boundaries, Science Advances, 9(37), eadh2458. ↩︎
- cf. Rockström, J., Steffen, W., Noone, K., et al. (2009): A safe operating space for humanity, Nature, 461, 472–475. ↩︎
- cf. e.g., Weitzman, M. L. (1974): Prices vs. quantities, The Review of Economic Studies, 41(4), 477–491. ↩︎
picture shows painting (c) Johannes Vermeer: “The Geographer“, 1669;
Städel Museum, Frankfurt am Main.
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