Vox - David Roberts
A new paper makes the case for supply-side climate policy.
There is a bias in climate policy shared by analysts,
politicians, and pundits across the political spectrum so common it is
rarely remarked upon. To put it bluntly: Nobody, at least nobody in
power, wants to restrict the supply of fossil fuels.
Policies that choke off fossil fuels at their origin —
shutting down mines and wells; banning new ones; opting against new
pipelines, refineries, and export terminals — have been
embraced by climate activists, picking up steam with the
Keystone pipeline protests and the recent
direct action of the Valve Turners.
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.
Now a pair of economists has offered a
cogent argument
that the activists are onto something — 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.” I have
written the
same thing many times, so I think a climate policy argument that takes politics seriously deserves a close look.
To understand it, it helps to have a framework for classifying climate policies.
The four quadrants of climate policy
Climate policies can apply to the supply side (production
of fossil fuels) or the demand side (consumption of FF), and they can
be restrictive or supportive. That creates a grid with four quadrants:
- Restrictive supply side: policies that cut off FF supply, including declining quotas, supply taxes, and subsidy reductions
- Restrictive demand side: policies that restrict demand for FF, including carbon prices and declining emission caps
- Supportive supply side: policies that support the supply of FF alternatives, like renewable energy subsidies and mandates
- Supportive demand side: policies that support demand for
FF alternatives, like subsidies for purchase of energy-efficiency
appliances or favorable government procurement policies
Here it is as a visual:
As the authors — Fergus Green of the London School of Economics and
Richard Denniss of the Australia Institute — point out, 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.
On its face, this doesn’t make much sense. In other areas
of policy, demand- and supply-side policies are routinely mixed and
considered mutually reinforcing. As an example, Green and Denniss focus
on attempts in Australia to reduce smoking.
Those efforts, which have won acclaim around the world,
are a wide-ranging mix of tactics. Supply is restricted through taxes,
licensing requirements, and prohibitions on advertising and
sponsorships. Demand is restricted through consumption taxes, public
education campaigns, and warnings on packs.
It isn’t a single, clean instrument, an “optimal” policy,
but a portfolio approach. And it isn’t considered a muddle or a
redundant mess, but a sensible way to approach a complex problem. And it
has worked.
In fact, portfolios of demand and supply measures have
worked in plenty of policy areas, including environmental policy (lead
in gas, chlorofluorocarbons, etc.).
So quadrant 1’s absence in climate discussions is, the
authors say, “anomalous.” And they argue that it is impoverishing the
discussion, because restrictive supply-side policies have unique
economic and political benefits.
Let’s start with the economic benefits.
Cutting off fossil fuel supply has unique economic benefits
Green and Denniss list four economic benefits of restrictive supply-side policies.
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.”
All this complicated monitoring and reporting reduces
economic efficiency, creates an informational asymmetry (facilities will
always know more about their emissions than regulators do) and thus
incentive to game the system, and generally restricts such systems to
major emitters, leaving substantial swaths of emissions unregulated.
By contrast, RSS policies target a relatively small
number of sources, rely on data that is already gathered for other
purposes, and by definition cover all downstream consumers. They are
much easier to verify, which makes them politically potent both
domestically and internationally (see below).
2) RSS policies cover the weaknesses in demand-side policies.
Climate wonks and economists are very taken with the fact
that, in theory, the “least cost” way to reduce emissions is to pass
technology-neutral, sector-neutral pricing policies that cover the
entire global economy, allowing distributed, profit-maximizing actors to
find the cheapest ways to cut CO2.
In the real world, considerations like MRV costs and
“leakage” (any jurisdiction that passes a pricing policy threatens to
drive some consumption to neighboring jurisdictions) mean that pricing
policies are never economy-wide or entirely neutral.
Pricing policy that
isn’t universal — like
all current and foreseeable pricing policies
— threatens, by lowering demand for fossil fuels, to also suppress FF
prices and thus increase consumption outside policy barriers. Areas that
aren’t covered by pricing policy will use more fossil fuels and the
industrial shift to clean energy will be slowed.
“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.”
 |
Keep it in the ground.
Photo by Mario Tama/Getty Images |
3) RSS policies can avoid infrastructure lock-in.
I will let 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 coalmine, 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.”
Basically, once a big piece of fossil fuel production
infrastructure is built, it keeps producing in perpetuity (or until it
runs dry), even if subsequent developments render the original
investment foolish. Even if the original owner goes bankrupt, someone
will buy the fixed asset and use it to produce “so long as the market
price covers the marginal cost of production.”
That means every build-or-don’t-build decision for a
piece of FF infrastructure is an inflection point, a “lump” of future FF
supply that becomes almost guaranteed even in the face of substantial
reduction in demand.
Given the danger of lock-in, complementary RSS policies
send a signal 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 policy growing more stringent over time (as
in a rising carbon tax) is that it will push producers to move up their
production schedules — to get while the getting’s good — which could
suppress prices and boost short-term consumption. Restrictive
supply-side policies passed now can help avoid this so-called “green
paradox.”
Cutting off fossil fuel supply has unique political benefits
While economic arguments are familiar in climate policy
circles, analyses that grapple with politics — the political economy in
which policies are generated, supported, and implemented — are quite
rare. (I have
lamented this before.)
That seems to be changing a bit lately, though. Green and
Denniss commend “the emerging literature on policy instrument
interactions that ‘endogenizes’ political constraints.” In
non-nerd-speak, “endogenizing” political constraints means making them
internal to the analysis, recognizing that political constraints affect
policies — and, crucially, that policies can in turn affect political
constraints. (Policies that drive down the price of renewable energy,
for instance, make higher renewable energy targets more palatable.)
One thing that recent political science has highlighted
is that “overcoming political constraints to ambitious climate
mitigation is best done by
sequencing policies in such a way as
to engineer feedback effects that expand the politically feasible set
of climate policies over time.”
Rather than jumping straight to, say, an economy-wide
carbon tax, it might be better to use more targeted policies to build
the case against fossil fuels, improve the economics of key
technologies, get the public more familiar with alternatives, and thus
prepare the ground for more ambition. (I wrote a
post about that too.)
Green and Denniss argue that RSS policies have some
unique political benefits that should earn them a place early in that
sequence. They cover three.
1) It is easier to organize public support around RSS policies.
This is the key argument. As the authors acknowledge, a
great deal of recent study has gone into what kinds of features the
public prefers in climate policies, but there’s not been much analysis
of public preferences regarding “whether the instrument targets the
supply side or the demand side.”
Attempting to fill that gap, the authors argue that
supply-side policies will often be more conducive to building public
support.
Political science has traced support for climate policies
to, roughly speaking: “(i) the perceived benefits of the policy, (ii)
the perceived personal and public costs of the policy, and (iii) the
perceived distributional fairness of the policy.”
On all three scores, they say, RSS policies do well.
First, where demand-side policies typically foreground carbon
reductions, the benefits of which are widely spread in time and space,
RSS policies target fossil fuel reductions, with a wider range of
benefits — air and water pollution reductions, health improvements, and
punishment for big fossil fuel companies, which are politically
unpopular.
This broader portfolio of benefits is more likely to
mobilize public support. It “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 those effects build political strength for future battles.
(I’ve
written about this too.)
 |
Protestors marching against the Dakota Access Pipeline, in March 2017.
Photo by Justin Sullivan/Getty Images
|
Second, where demand-side policies tend to place the costs visibly on
consumers, the perceived costs of RSS policies fall on fossil fuel
companies themselves. Of course, those costs are at least partially
passed downstream to consumers eventually, but they are relatively more
“hidden” that way, and thus more politically palatable. “Accordingly,”
Green and Denniss write, “we would expect that people would perceive the
costs to themselves of supply-side policies to be lower, or the
distribution of the costs to be fairer, or both — and thus support for
such policies to be higher.”
2) RSS can divide fossil fuel companies against one another.
As a sector, fossil fuels are well-organized and
well-funded. United, they will almost always overpower civil society
groups and politicians.
But they can be turned against one another. RSS policies
can divide them along temporal lines — set incumbents against new
entrants, for instance, with a ban on new extraction — or by
“sub-industry” lines, say, coal from natural gas. “Rational fossil fuel
producers perceiving a risk of a tightening carbon budget constraint,”
they write, “will support policies that require emissions reductions
from other sectors, including other fossil fuel sub-industries, but
which exclude their own sector.”
As climate policy becomes more stringent, fossil fuel
companies will adopt the philosophy of the campers attacked by a bear —
you don’t have to be faster than the bear, just faster than the other
campers.
Given the difficulty of building a winning coalition
behind climate policies, the potential to win over FF sub-industries is a
mark in RSS policies’ favor.
3) RSS policies can aid international cooperation.
The globally harmonized, independently verified, legally
binding climate policy framework that climate activists have been
dreaming about for decades has never materialized, and the Paris climate
agreement marks the
death of that aspiration.
The Paris framework makes very little attempt to harmonize demand-side
policies across countries, and most verification is done via
self-reporting. That creates a different kind of policy environment and a
different set of challenges for international cooperation. Green and
Denniss argue that RSS policies are well-suited to the task.
First, economics tells us that if the “price elasticity”
of a fossil fuel — the ability of consumers to find alternatives if
prices rise — is higher than the “supply elasticity,” then demand-side
policies would produce more “leakage” than supply-side policies. In
those circumstances, “unilateral domestic supply-side policies would be
more effective at reducing global emissions than their demand-side
equivalents.” (Coal arguably fits this bill.)
“The emergence of international cooperation on fossil
fuels is likely to be contingent on a coalition of early-movers taking
unilateral steps to limit or reduce fossil fuel supply,” Green and
Denniss write. “Low international leakage rates associated with
supply-side policies would encourage the necessary unilateral action.”
The second feature that encourages international
cooperation is the relative ease of measuring and verifying RSS policies
relative to demand-side policies (as described above in the economics
section). Transparency builds trust and makes further cooperation
easier.
“Since the Paris Agreement’s success is predicated on
states’ gradual escalation of their commitments over time,” they write,
“commitments to implement supply-side policies offer major advantages as
a ‘currency’ of international climate cooperation.”
It’s time to apologize to activists and make FF supply restrictions part of the climate policy toolkit
As Green and Denniss say over and over, no one is arguing that RSS policies are
better than demand-side policies, or a
substitute
for them. The exact economic and political effects of any set of
policies will always depend on context-dependent factors; different
portfolios will be appropriate for different times and places.
But RSS policies are an excellent
complement to
demand-side policies, with economic and political strengths that help
fill in the gaps. They are simple, transparent, easy for the public to
grasp, and unmistakable signs of good faith in international climate
negotiations.
It’s easy enough to understand why the political
establishments of most countries are leery of RSS policies, given the
ubiquitous influence of the fossil fuel industry. But it’s time for
climate analysts and wonks to get past the sneering attitude they’ve
traditionally had toward such policies and the activists who support
them.
Yes, at this point, everyone gets it: An economy-wide,
steadily rising, fuel- and technology-agnostic price on carbon is the
optimal policy. But we don’t live in an optimal world, so yacking on
about it isn’t much help. We live in this world, where a variety of
political constraints means that no such policy has passed or seems
likely to pass anytime soon. In this world, limited (thus suboptimal)
demand-side policies need supplementing.
In this world, it makes sense to draw on all four
quadrants — to use the portfolio approach taken for granted in so many
other areas of policy. Climate change is a big problem. We can’t afford
to leave any tools in the toolbox.
Links
