shovels laying on coal field
Put the shovels down and leave the coal alone.

I concluded my last post with a slogan: “Keep the damn coal in the ground.” Lo and behold, along comes a new paper in the Journal of Political Economy that sketches what that strategy might look like: “Buy Coal! A Case for Supply-Side Environmental Policy.” It’s fascinating.

Climate change is an enormous collective action problem. Typically the focus has been on demand-side policies — reducing fossil fuel consumption through taxes or mandates. Any “climate coalition” that adopts this strategy, however, has to worry about free riders that don’t. Author Bård Harstad of Northwestern University summarizes:

One of the biggest challenges for multi-national climate agreements is the role of non-participating countries. If a climate coalition reduces demand for fossil fuel, the world price of oil goes down and non-participating countries find it profitable to consume and pollute more. Similarly, if the coalition seeks to reduce the supply or extraction of fossil fuels, the world price increases and these countries find it optimal to supply more. Thus, both on the demand-side and the supply-side, the result is carbon leakage, which is an increase in pollution abroad relative to the emission-reduction at home.

In other words, global fossil-fuel markets are like a big balloon. If one set of countries squeezes consumption or extraction, the balloon just puffs up somewhere else. We consume less, they consume more. We extract less, they extract more. Carbon-intensive industries migrate to carbon-unconstrained countries (which, in practice, is how most Kyoto participants have reduced their emissions).