The Stockpile Solution
If I were convinced that the fate of mankind hinged on massive reductions in carbon emissions, I would still be pessimistic about unilateral taxes or cap-and-trade. As I told Yoram:
National emissions regulations can have perverse global effects. If
relatively clean countries switch to clean energy (via
command-and-control regulations, cap-and-trade, pollution taxes, or
green norms), fossil fuels don’t vanish. Instead, their world price
falls – encouraging further consumption in relatively dirty countries. The net effect? I was hoping Bauman would tell us, but he didn’t even raise the issue.
International tax or cap-and-trade treaties seem almost equally flawed. Some countries will sign; others won’t. In a world market, won’t the fossil fuels the participants stop using just find their way into the hands of the non-participants? On a homework problem, admittedly, you can solve this problem with punitive carbon tariffs on non-signatories. In the real world, though, won’t this lead recalcitrant countries to sign the treaty, then fail to domestically enforce it?
Yesterday, I hit upon an alternative policy that avoids all these problems: Stockpiling. Instead of taxing or capping pollution, a government could unilaterally buy lots of fossil fuels and sit on them forever. This would raise the world price of fuel, spurring reduced consumption around the globe. And since the government only pays for fossil fuels it actually receives, energy producers around the globe have no incentive to thwart the policy. Indeed, industry has a strong incentive to participate and support the re-imagined war on carbon.
After I proposed this idea, GMU prodigy Nathan Bechhofer quickly showed me that I was reinventing the wheel. Stockpiling is the heart of Bard Harstad’s “Buy Coal! A Case for Supply-Side Environmental Policy” (Journal of Political Economy, 2012). The original piece is math-heavy, but here’s a readable write-up. Highlights:
A fundamental problem with adopting a “demand-side mindset” that
implements policy to reduce fossil fuel consumption is that not everyone
takes part, Harstad argues. An international agreement between
coalition countries to curb oil consumption will initially have the
desired effect of reducing overall demand, but this will lower the price
of oil, giving a strong incentive to countries outside of the agreement
to buy and use more.
On the other hand, Harstad argues, if an international agreement
decides to limit oil extraction and supply, the price will go up, and
countries outside of the agreement are likely to churn out more for
“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,” says Harstad, who is associate professor of
managerial economics & decision sciences at Northwestern
University’s Kellogg School of Management. Carbon leakage describes the
process by which carbon-cutting measures in one location cause knock-on
The Harstad solution:
Harstad’s solution is for coalition countries to buy up extraction
rights in countries outside of such agreements–“third countries,” in his
terminology. And though this has the obvious benefit of preventing
emissions from those fossil fuels, there are rather more far-reaching
Coalition countries will naturally focus on marginal deposits least
profitable for host countries, because these can be had the most
cheaply. After a third country has sold off the rights to its marginal
deposits, Harstad argues that its supply is less sensitive to fluctuations
in global fuel price. Coalition countries are then able to limit their
own supplies without the undesirable effect that third countries will
increase theirs. The price of fuel is equalized universally. Harstad
goes so far as to assert that the equalized price is high enough that
even third countries would be compelled to pursue alternative energy
technology, and sign up to coalition agreements.
Notice that in Harstad’s version of the proposal, the government stockpiles fossil fuel extraction rights rather than fossil fuels themselves. Given monitoring and commitment costs, though, buying extraction rights is a recipe for corruption. It’s easy to inflate a geological report if the everyone knows the customer will never extract the resources he imagines he’s buying. And after the U.S. acquires and closes a Chinese coal mine, who keeps out the wildcatters – and why won’t the watchmen just take bribes to look the other way? Physical stockpiling preempts all of these problems.
To repeat, I don’t actually favor this policy. But if a government wants to curb carbon emissions, stockpiling seems like the smart way to do it. Am I wrong?