Can Supply-Side Economics Solve Global Pollution Problems?

Michael Crumbliss for

An alternate solution for managing fossil fuel emissions and climate change was released this week by Bard Harstad of Northwestern University´s Kellogg School of Management. The study, titled “Buy Coal, A Case for Supply-Side Environmental Policy,” proposes that known but unexploited fossil fuel deposits can be bought by climate coalition (first-world) countries and kept out of the market. The unused deposits in question are those in third-world countries that often are extracted and consumed with little or no regard for global effects.

This has long been a problem with efforts to control climate change. When climate coalition countries reduce demand and the price of fossil fuels go down, the third world countries that were exporting find the lower price an incentive to keep the fuel at home and increase their own use and emissions. This effectively nullifies any improvement from the climate coalition efforts.

In the long view it may be globally counter-productive to reduce demand in the first world and raise it in the third, because during these times of low prices third world economies create higher patterns of use and increase their own dependence. These changes continue at least to some degree after the price goes up again and could become permanent.

Harstad suggests that the market could be modified from the supply side as well as the demand side:

In my analysis, I show that by letting coalition countries buy extraction rights in third countries — and preserve rather than exploit the fuel deposits — climate coalitions can circumvent the traditional problems of a demand-side policy, the most intuitive benefit from this policy is that emission is reduced if one buys and conserves deposits. Furthermore, the coalition finds it cheapest to buy the marginal deposits (ie, deposits that are not very profitable to exploit, but still quite polluting when consumed).”

By targeting cheaper marginal deposits that are difficult to extract, and which require the most extreme and destructive mining and drilling techniques, costs of buying reserves are kept down and benefit is multiplied. Not only is the fuel kept out of the market, strip-mining and other high-energy and high-emission extraction is avoided. World prices are equalized and third world countries are encouraged to invest in renewable energy, effecting social change as well as environmental progress. In effect the countries that are not participating in the climate coalition become part of the larger effort.

This supply-side system resembles the long standing policies of subsidizing agriculture in the Western world. These governmental subsidies are paid to both small farmers and large agribusiness companies to manage the supply of agricultural commodities like wheat, corn, cotton, sugar, milk, fish, beef, soybeans, etc. In doing so governments regulate the price of these commodities, protect the income of producers and manage supply.

Due to their longevity and history, agricultural subsidies serve as an example of supply side market management. The subsidies are effective in controlling price, but are expensive. Europe is perhaps the best example as the European Union spans the commodity use and economies of many countries, as is suggested in Harstad´s supply-side management of fossil fuels. In 2010 the European Union spent 39 billion euros on subsidies, approximately 40% of the EU budget. In the opinion of some these agricultural subsidies are a crushing burden on the government. It is likely that agricultural subsidies will be cut back in the near future in the US and around the world.

The global market for fossil fuels is much larger and presumably more difficult to manage from the supply side, at least until the fuel runs out, thus accomplishing the same goal with likely catastrophic consequences. The problem raised by Harstad is not new, and it is a large question whether it is possible to effect the fossil fuel production or consumption of these countries in any significant way. The market inertia may be simply too great and expensive a hurdle.

For example, the people of Nigeria came near to revolt last month when the subsidies that keep their fuel prices artificially low were revoked. In the simplest terms it seems that they are going to increase use no matter what we do. Harstad´s theory looks good on paper and is well-intentioned, but may not be possible to practically apply.

Fossil fuel use is increasing all over the world; and third-world countries that have reserves and possibly little else are not going to stop producing and selling these resources. Don Blankenship, CEO of Massey Coal confirms that “predicted coal use will increase by 81 percent in ’emerging’ countries and 1 percent in developed countries by 2035. Brazil, Russia, India and China, which make up 43 percent of the world’s population, will account for much of that growth,” he said.

It is likely that third world countries will continue to gladly provide the coal and oil for this demand. Harstad´s supply side premise for controlling the fossil fuel reserves and consumption of third world countries holds some promise, and is a possible tool that should be examined.  But without an effectively unlimited amount of capital from first world countries it is unlikely that it can be put into practice at a scale that would change current markets.