Buy Coal! A Case for Supply-Side Environmental Policy

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Free-riding is at the core of environmental problems. If a climate coalition reduces its emissions, world prices change and nonparticipants typically emit more; they may also extract the dirtiest type of fossil fuel and invest too little in green technology. The coalition's second-best policy distorts trade and is not time consistent. However, suppose that the countries can trade the rights to exploit fossil-fuel deposits: As soon as the market clears, the above-mentioned problems vanish and the first-best is implemented. In short, the coalition's best policy is to simply buy foreign deposits and conserve them. The University of Chicago Press

Self-enforcing environmental agreements and trade in fossil energy deposits

“…To our knowledge, the only analytical studies of the deposit purchase policy are Bohm (1993) and Harstad (2012Harstad ( , 2010. Bohm (1993) considers a given sub-global coalition that unilaterally aims to implement a predetermined global emission-reduction goal either by reducing its fuel demand or by a special mix of capping its fuel demand and purchasing deposits.…”

“…Second, we do not adopt Harstad's three-instrument policy design of deposit purchases and caps on the demand and supply of fuel. In addition, in Harstad (2012Harstad ( , 2010 non-coalition members are inactive, i.e. they do not have any climate policy.…”

“…All countries set these policy instruments regardless of whether they are in the coalition or not. Third, while Harstad (2012Harstad ( , 2010 assumes that the damage function is linear, we follow Barrett (1994), Diamantoudi and Sartzetakis (2006) and Rubio and Ulph (2006) and study coalition formation for quadratic damage. Fourth, we assume that the fuel market and deposit market equilibrate simultaneously.…”

Conservation Contracts and Political Regimes

“…fuel reserves, recent theory suggests that the very best climate policy is for the climate coalition to pay nonparticipants to conserve particular reserves (Harstad, 2012).…”

“…13 Harstad (2015) takes a political-economy (and game-theoretic) approach by showing when and why conservation contracts are not o¤ered in equilibrium in a dynamic setting. That mechanism does not appear in the present framework, however.…”