When it comes to climate policy, is it more important to promote clean energy abundance or keep fossil fuels in the ground? Actually, the two approaches complement each other argues Ryan Kellogg, Energy Policy Institute at the University of Chicago (EPIC) Scholar and Ralph and Mary Otis Isham Professor and Deputy Dean for Academic Programs at the Harris School of Public Policy, in a Brookings Papers on Economic Activity.
“Carbon is a global pollutant,” Kellogg says. “It doesn’t matter whether it comes from a smokestack here or in India. Thinking globally about emissions reductions is paramount.”
That’s why we need both demand and supply-side policies, as well as clean energy support. Demand-side policies, like emissions pricing and clean energy subsidies, reduce the demand for fossil fuels. Supply-side policies, like extraction pricing or prohibitions on pipeline construction, reduce extraction.
A policy portfolio for leakage mitigation
Each policy type has tradeoffs, but using both reduces “leakage,” or the increase of carbon emissions abroad due to domestic policies that impact global fossil fuel prices and, therefore, global consumption. For example, an emissions tax in the U.S. decreases domestic consumption of fossil fuels, which lowers the global prices of oil, gas, and coal, increasing consumption elsewhere. Similarly, an extraction tax on its own would decrease supply, increasing global prices and driving increased extraction and net exports of fossil fuels by other nations.
Using both types of policy together strategically can reduce emissions leakage by avoiding large swings in global fossil fuel prices. Essentially, the decrease in prices induced by emissions pricing can be counter-balanced by the increase in prices induced by extraction pricing.
Global distributional impacts from carbon pricing
Low-income countries are disproportionately harmed by climate impacts while simultaneously being less responsible for historical emissions. The choice of carbon policy can address this injustice.
Supply-side policies raise global prices and therefore harm importers of fossil fuels, while demand-side policies lower global prices, benefitting importers. Overall, Kellogg found that countries who are either lower-income or disproportionately affected by climate impacts weren’t more likely to be net importers of fossil fuels.
This would suggest that supply-side carbon pricing that raises global fossil fuel prices will not disproportionately harm poor countries on average. Still, he points out that some low-income countries, such as Pakistan, are substantial net fossil fuel importers and would be harmed by supply-side policies enacted by the U.S. or the EU. In addition, within-country differences in income would likely favor demand-side over supply-side policies.
U.S. policy in practice
U.S. supply side climate policy in practice has not broadly priced fossil fuel extraction but instead narrowly targeted hydrocarbon transportation infrastructure or extraction only on federal lands. These approaches are often ineffective due to substitution. Kellogg discusses how blocking pipeline construction results in movement of oil and gas through other means, such as rail, rather than keeping fossil fuels in the ground. For example, he considers the impact on fossil fuel extraction in North Dakota if the Dakota Access Pipeline hadn’t been constructed. He finds that more than 80 percent of oil from North Dakota would have simply been moved by rail instead. And local emissions would have increased due to transport via diesel locomotive.
Kellogg also discusses the value of long-distance transmission for unlocking the U.S.’s abundant wind and solar resources. He stresses that transmission investment is currently stymied by not just permitting difficulties but also by the absence of inter-regional planning and by incentives for utilities to build local projects rather than long-distance lines. Reforms to transmission planning and governance will be needed to stimulate a U.S. transmission build-out.
Clean energy support from research to implementation
Clean energy subsidies are a major demand-side climate policy option that can figure in an effective and equitable climate policy portfolio. Because retail electricity in the U.S. is often over-priced relative to the cost of generation, clean electricity subsidies can better align retail prices with costs. Rate reform that shifts retail pricing from volumetric to fixed distribution charges is another option.
Beyond broad clean energy subsidies, Kellogg argues that support for clean energy technology development and deployment is needed. Supporting clean energy research and development drives down the cost of energy, allowing emerging economies to afford and adopt these technologies. It also reduces the burden of carbon taxation on consumers and political resistance to carbon pricing policy.
And as the example of China shows, going beyond basic research and development investment can also pay off. Supporting clean energy technology all the way through deployment can potentially achieve not only climate benefits but economic gains. Kellogg points to recent research showing that in China, public support for clean energy manufacturing helped address coordination and incentive problems in manufacturing supply chains, leading to economic gains even without accounting for climate benefits. Green industrial policy therefore holds promise, though Kellogg cautions that failures, such as the U.S. experience with cellulosic ethanol, remain possible.
While all climate policies ultimately create winners and losers, Kellogg argues for a mix of demand and supply-side carbon policies, along with robust public support for clean energy research, development, and deployment. A portfolio of policies employing complementary strategies can effectively and equitably reduce carbon emissions on a global scale.