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Is there any point in trying to restrict fossil fuel supplies? A new paper says yes.

Not so fast, giant coal shovel!
Not so fast, giant coal shovel!

There's long been a tension between climate activists and climate wonks.

Activists have found that their greatest successes — in terms of the people they can organize, funds they can attract, and media attention they can generate — come from supply-side battles, attempts to block or shut down fossil fuel extraction and transportation projects. These battles have key features that lend them to organizing: clear villains, diverse constituencies (because of the local land, water, and air damage such projects do), and unambiguous metrics of victory.

Climate wonks, however, tend to believe that supply-side battles are pointless, and that demand-side policy — reducing demand for fossil fuels through subsidies for alternative energy, carbon pricing systems, pollution regulations, energy efficiency standards, and the like — is the only kind that makes a difference in the long term. As long as demand for fossil fuels remains, they reason, shutting down supply projects is an endless game of whack-a-mole. Knock one down, another pops up.

Fossil fuel reserves vastly exceed what's necessary to push the climate into chaos, so there will never be a shortage of moles to whack. There's simply too much potential supply to block it all. In short, say wonks, supply-side victories can push emissions around (geographically and temporally), but they can't reduce emissions, not as long as demand remains steady.

That's the conventional wisdom. And that's why wonks and pundits often react to supply-side campaigns like the one against Keystone XL with condescension or scorn.

Now a trio of researchers at the Stockholm Environment Institute has released a new paper that sets out to challenge that conventional wisdom. It argues that the demand-side policies overwhelmingly favored for the past several decades have not done the job. Nor does the new round of commitments (INDCs) from countries headed to the Paris climate talks yet add up to enough to avoid 2 degrees of warming. So it's time to take another look at supply-side policy, they say — not as alternative to demand-side policy, but as a complement.

I'm not sure I'm 100 percent convinced, but it's an interesting argument. Let's walk through it.

(Quick note on terminology: "Supply-side" here refers to any project that explores for, extracts, or transports fossil fuels, including mines, wells, pipelines, and export terminals. "Demand-side" refers to any project or practice that consumes fossil fuels, which includes not only the obvious, like driving or running a factory, but also, somewhat counterintuitively, coal and natural gas power plants, which consume fossil fuels in order to generate electricity.)

oil wells
Supply, supply, supply, faster!

The three reasons supply-side policy has been out of favor

The authors attribute the lack of attention to supply-side policy to three factors.

  1. "[T]he greater political attractiveness of demand as compared with supply measures." Subsidizing clean energy is nice for politicians. Most people support it; industries are grateful for it; cutting the ribbon on a new wind farm is a pleasing photo op. By contrast, going after fossil fuel supply rouses the intensely focused rage of some very powerful status quo players, which is not so nice for politicians.
  2. "[S]tandard GHG accounting rules that undervalue supply-side relative to demand-side measures." For the purposes of most national policy and all international negotiations, a country is responsible for the fossil fuels burned, and emissions generated, within its territorial boundaries. This demand-based "territorial accounting" means that, by definition, countries get no credit for supply-side policies.
  3. "[C]ommon perceptions of the nature of fuel markets ... i.e. that restricting coal, oil or gas production would only result in shifting where, and not how much, fossil fuel is ultimately produced, an outcome known as 'leakage.'"

They argue that these are not good reasons, or at least not sufficient. For one thing, demand-side policies in isolation can have unanticipated effects. Producers might just turn more to exports (like Powder River Basin coal is trying to do), or they might accelerate production in anticipation of impending demand constraints. Such policies can be made more cost-effective and predictable when complemented by supply-side policies.

On the third issue, they acknowledge that there is some leakage with supply-side policy, but counter that there's also leakage with demand-side policy — determining which is greater in a given circumstance requires empirical market analysis, not just theory.

Potential benefits of supply-side policies

Our bias against supply-side policies, the authors claim, has led us to overlook two important benefits they offer.

First, they say, a combination of demand and supply policies may offer more emission reduction at a given marginal cost — more emission bang for the investment buck.

As support, they cite this paper by economist Taran Faehn and colleagues. It focuses on Norway, which has a large and growing oil and gas sector alongside relatively low domestic emissions. That means further demand-side policies, reducing domestic consumption, are difficult and expensive, while restrictions on supply (i.e., reducing oil and gas investment) are relatively easy to come by. That has led to some discussion of how Norway might integrate supply-side policies into its portfolio.

Faehn et al. adjusted both types of policy for leakage and then plotted them along MAC (marginal abatement cost) curves. What they found is that a mix of 75 percent supply-side and 25 percent demand-side policy could achieve global emission reductions the same size as the domestic emission reductions targeted by current Norwegian policy, at just one-third the cost.

To put this a different way: If Norway wants to reduce emissions generated in Norway, it's going to require some fairly expensive demand-side policy; if it wants to reduce global emissions, it can do so relatively cheaply by reducing its fossil fuel extraction. Given that global emissions are what really matter, it seems sensible to favor supply-side policy in Norway.

The second potential benefit of supply-side policy is that it can avert the possibility of fossil fuel overproduction, which can drive down the price of fossil fuels and lead to emissions "lock in," long-term contracts and infrastructure projects premised on cheap fuel. Avoiding lock-in, they say, can "a) lower future mitigation costs, as over-production would otherwise make fossil fuels cheaper and harder to compete with; b) reduce stranded-asset risks and the consequent market and economic inefficiencies; c) and reduce carbon entanglement and the socio-political influence of fossil fuel interests."

That last bit is important. "Carbon entanglement" is a fancy way of referring to the way carbon-intensive industries rig politics and law to their advantage. Restricting fossil fuel supply also serves to restrict the political power of fossil fuel industries.

climate protest
Climate protests often focus on supply.

When supply-side policy is appropriate

The authors go on to offer an extensive catalogue of supply-side policy options and show how they can be categorized in ways roughly analogous to their demand-side counterparts — there are market-based instruments, regulatory restrictions, government investments, etc.

They scrutinize three in particular: reforming fossil fuel production subsidies, paying countries with fossil fuel reserves not to develop them, and instituting a cap-and-trade system for production rights (this would effectively tax oil to pay for shutting down coal mines, but it's too complicated to get into here).

They also offer a framework to evaluate such policies, which includes environmental effectiveness, cost effectiveness, and "distributional incidence and feasibility," i.e., who pays and how they can be made to pay.

I'll skip over most of that, except to mention one result on the subject of environmental effectiveness, which is mainly about the aforementioned "leakage." It turns out that which type of policy experiences more leakage in a given circumstance depends on the relative balance of supply elasticity and demand elasticity. ("Elasticity" refers to how responsive supply/demand is to changes in price. We say that demand for gasoline, for instance, is relatively inelastic, because it stays high even when prices go up.)

Of course there's a graph:

supply vs demand elasticity (Stockholm Environment Institute)

Those little dots plotted in various places are supply-side projects. Here's the basic finding:

Where demand is more elastic than supply (top left), leakage will be greater for demand-side than for supply-side measures. Conversely, to the extent that supply elasticity exceeds demand elasticity (bottom right), demand reduction becomes less prone to leakage, and supply reduction more so.

In other words, if you use policy to push on the elastic side, the market just absorbs your efforts without much net change. Instead, you want to use policy push on the inelastic side, so the market doesn't just substitute in response. That's pretty interesting!

Relationship status: It's complicated

So is all this convincing? Should wonks abandon their disdain for supply-side climate policies?

I'd say I'm cautiously open to it. I have defended supply-side activist campaigns like the one against Keystone XL before, on the grounds that they are powerful organizing tools and instruments of social and moral persuasion. And I've defended the fossil fuel divestment movement on the same grounds. It is targeted at removing the social license of the fossil fuel industry, at revising our collective moral assessment.

But I guess in the back of my mind I always envisioned these campaigns as tools to create political pressure, which would then be brought to bear on the important task of passing demand-side policies. I hadn't given a ton of thought to supply-side policies as ends in themselves. But the authors make a convincing case that they have a role to play.

Where I remain skeptical is in regard to the political viability of supply-side policy. Constricting fossil fuel supply tends to come at proximate economic or political cost to everyone involved: Fossil fuel companies and their employees lose business, politicians lose tax revenue, and consumers get a short-term bump in prices. It may be that the long-term climate benefits outweigh all that, but it's still an incredibly difficult political case to make.

And just how enthusiastic are developed countries going to be to pay every emerging economy that's sitting on fossil fuel reserves not to exploit them? That bill could get very large, very fast (and potentially gum up international negotiations).

Then there's the difficulty in finding a common, agreed-upon method of accounting for supply-side emission reductions. Tracing a causal connection between a constriction in supply and lower emissions is tricky at best, involving many subjective judgments. And there's enormous incentive to game such calculations. Without a fair, transparent way for countries to get credit for supply constrictions, they will never happen — there's literally no other incentive to pursue them, except perhaps for public pressure.

Finally, I'm not sure I buy that leakage is an equal problem for both types of policy. I get that demand-side policies leak, too, but outside of somewhat unique situations like Norway (where demand-side policies are expensive and supply-side policies fairly cheap), they don't leak nearly as much. There's a role for supply-side policies, in other words, but perhaps not a very big one.

Either way, I do think there's more to be said for supply-side activism and policy than is generally acknowledged by the VSPs of the energy world. Attacking fossil fuel supply deserves more than airy, theory-based dismissal. I hope this paper sparks a somewhat richer discussion.