Brad Harstad argues that buying and holding extraction rights to fossil fuels is a more effective means of curbing their use than legislating to reduce demand.

Harstad, who is associate professor of managerial economics & decision sciences at Northwestern University’s Kellogg School of Management, said, “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.”  Carbon leakage describes the process by which carbon-cutting measures in one location cause a bump up of emissions elsewhere. The term is defined by the International Panel on Climate Change as “the increase in CO2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries.”

Harstad claims those leakages are in the order of 5 to 25%, but they can be higher when small coalitions of special interests execute ambitious policies over longer timeframes. Though some leakage may be mitigated by trade tariffs, that only limits and distorts trade further.  Harstad asserts the answers lay on the supply side.

Harstad’s study, “Buy Coal! A Case for Supply-Side Environmental Policy”, has been published in the latest edition of the Journal of Political Economy.  The idea fits those with a desire to see a reduction of greenhouse gas emissions from fossil fuels.

It seems like a new, albeit obvious, notion.  Fossil fuels like coal, oil and gas left in the ground cannot emit greenhouse gases into the atmosphere, so the more you buy and leave there, the more emissions are prevented.  The current administration and others are actually practicing the idea now with limiting reserve exploration and development, lease revocations, and other subtle actions to take resources out of the market.

Harstad’s explanation is a tempting and plausible concept, but the effect is more damaging because it influences fuel markets and need not be done in a large way to drive markets to higher process.
The environmentalist’s fundamental problem from adopting a “demand-side mindset” that implements policy to reduce fossil fuel consumption is that not everyone takes part. An international agreement between coalition countries to curb oil consumption would 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, if an international agreement decides to limit oil extraction and supply, the price will go up, and the countries outside of the agreement would just produce more for export.

Harstads’ answer for the predicament is to buy up production rights in countries outside of such agreements.  Now the economics get tricky, having sold its rights to produce Harstad believes supplies would be less sensitive to price for those countries, enabling the countries limiting demand to proceed without the concern others would increase demand.  That would get to the “universal price and demand equalization”.   “The analysis shows that progress on international climate policy is best achieved by simply utilizing the existing market for extraction rights,” said Harstad.

Obviously, the idea would be wildly expensive, at risk for production rights being revoked, and for the most part impractical, as much of the world isn’t using the developed world’s property rights principles.

But that’s not to say the extremists won’t try it and achieve some success.  For consumers its not the disappearance of some reserves that matter on a production basis, it’s the production of the last few barrels each day that decide if supplies are adequate or not.  The reserves the extremists would buy up would only be replaced by other more expensive ones.

Yet the capacity of extremists to conjure up viable scenarios with theoretical public benefits and affect policy, regulations and legislation is notorious.  Their lobbying success and election influence is unassailable.

Consumers worldwide are in danger from another idea out there to drive costs higher and further stall economic development.


1 Comment so far

  1. Matt Musson on May 1, 2012 7:04 AM

    Color me skeptical. This sounds like a way for a Greenie to get stiking rich buying energy resources and holding them until the price goes up.

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