A pair of economists, Fergus Green of the London School of Economics, and Richard Denniss of the Australia Institute have published an interesting paper that attempts to integrate and synthesize the economic and political attributes of restrictive supply-side climate policies.
The paper, “Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies,” is a long read and at the same time, advocates the need for a universal climate policy “toolkit,” one that goes beyond focusing on restricting greenhouse gas (GHG) emissions.
And according to David Roberts, writing for Vox, the two economists may be onto something that climate activists have long been campaigning for – shutting down mines and wells; banning new ones; opting against new pipelines, refineries, and export terminals.
Roberts writes, “But they are looked upon with some disdain by the climate intelligentsia, who are united in their belief that such strategies are economically suboptimal and politically counterproductive.”
And in 2015, Roberts wrote that the climate intelligentsia, what he calls “Climate Wonks” believe that as long as demand for fossil fuels remains, shutting down supply projects is an endless game of whack-a-mole. Knock one down, another pops up.
Restrictive supply-side (RSS) climate policies
The economists argue that restrictive supply-side (RSS) climate policies have unique economic and political benefits and deserve a place alongside carbon prices and renewable energy supports in the climate policy toolkit.
“In our experience,” the authors write, “the climate policy community has for too long been excessively narrow in its preference for certain kinds of policy instruments (carbon taxes, cap-and-trade), largely ignoring the characteristics of such instruments that affect their political feasibility and feedback effects.”
To better understand what the authors are writing about, it helps to have a framework for classifying climate policies. Basically, climate policies encompass the supply side (production of fossil fuels) or the demand side (consumption of FF). They can also be restrictive or supportive, and this creates a grid with four quadrants.
Note: FF means fossil fuels. The shaded area is the fucuc of the paper.
The four quadrants of climate policy
In looking at the climate policy toolkit, we will take it section by section.
1. Restrictive supply side: These are policies that cut off fossil fuel supplies, including lowered quotas, supply reductions and lowering of subsidies.
2. Restrictive demand side: These policies restrict demand for FF, including carbon prices and declining emission caps.
3. Supportive supply side: These are policies that support alternatives to fossil fuels, like renewable energy subsidies and mandates.
4. Supportive demand side: These are policies that support the demand for FF alternatives, like subsidies for the purchase of energy-efficient appliances or favorable government procurement policies.
In looking at the toolbox, Roberts points out, the authors say that “virtually all climate policy discussion and analysis has focused on quadrants 2 through 4. In surveys of the toolkit available to climate policymakers, quadrant 1 is almost always omitted entirely.”
The authors use Australia’s campaign to cut smoking in the country as an excellent example of using what the refer to as a “portfolio” of policies, similar to the climate change toolkit. Supply of cigarettes is restricted through supply tactics, like taxes and the banning of advertising.
Demand is restricted through consumption taxes, public education campaigns, and warnings on packs. As the authors say, it isn’t one policy in particular but a mix of policies that provide a reasonable approach to a complicated problem.
This same “portfolio” approach has worked in dealing with other issues, like lead in gasoline, the banning of harmful chlorofluorocarbons, and other environmental policies. And Green and Deniss say that omitting quadrant 1 from discussions of climate policies has kept the global community from coming up with a workable climate change policy that is fair to everyone.
Four economic benefits of restrictive supply-side policies
Yes, cutting off the supply of fossil fuels does have unique economic benefits, at least, according to the authors.
1. RSS policies are easier to administer. “Both carbon taxes and cap-and-trade schemes,” they write, “require detailed and complex rules, procedures and regulatory institutions for the monitoring, reporting and verification (MRV) of greenhouse gas emissions at facility/installation level (e.g. power plants, steel mills), often across hundreds or even thousands of facilities/installations.”
Basically, the way things are set up now, there is a lot of unnecessary regulation and paperwork that restricts such systems to major emitters, leaving substantial swaths of emissions unregulated. On the other hand, RSS policies would involve a small number of sources, making use of data already collected and cover all down-stream consumers.
2. RSS policies cover the weaknesses in demand-side policies Bottom line? In the real world, says Roberts, “any jurisdiction that passes a pricing policy threatens to drive some consumption to neighboring jurisdictions. This means that pricing policies are never economy-wide or entirely neutral.
The authors suggest that pricing policies are not universal. “A restrictive supply-side policy has an important role to play in limiting countervailing price effects” from non-universal pricing policies, the authors write. “The combination of supply-side and demand-side policies will thus hasten the industrial transformation required to meet climate mitigation objectives.”
3. RSS policies can avoid infrastructure lock-in: The authors explain lock-in: “When production processes require a large, upfront investment in fixed costs, such as the construction of a port, pipeline or coal mine, future production will take place even when the market price of the resultant product is lower than the long-run opportunity cost of production. This is because rational producers will ignore “sunk costs” and continue to produce as long as the market price is sufficient to cover the marginal cost (but not the average cost) of production. This is known as “lock-in.”
Because of the danger presents with lock-ins, RSS policies send a message to investors to “avoid inefficiently high levels of investment in the production capacity for goods of which policymakers are determined to reduce consumption in the future.”
4. RSS policies can short-circuit the dreaded “green paradox” The threat of present-day policies, like carbon taxes, growing more stringent could very well force FF producers to move up production schedules, and this could suppress prices, boosting short-term production. But RSS policies could help smooth out and avoid these so-called Green Paradoxes.
And as Roberts wrote in 2015, “Restricting fossil fuel supply also serves to restrict the political power of fossil fuel industries.”
Green and Denniss add that supply-side campaigning “enables proposals to be framed in ways that are more resonant with voters and more resilient to counter-attack by opposing interest groups; facilitates alliance-building among diverse groups with wide-ranging concerns about fossil fuels; and facilitates network-building among groups at different advocacy- and policy-relevant scales,” all of which “build political strength for future battles.”
