Buying coal? A proposal for supply-side environmental activism

Prior to the signing of the Paris Climate Agreement, Bill Gates along with a number of other billionaire philanthropists announced the creation of the Breakthrough Energy Coalition to fund the research and development of clean energy to address the threat of climate change. The creation of this coalition promises to double global commitments in clean energy R&D to around $10-20 billion by 2020. Given this large investment, I wanted to consider alternative ways in which individuals, organized groups, or governments could take unilateral action to reduce carbon dioxide emissions.

In 2012, Bård Harstad published a paper in the Journal of Political Economy with a very intriguing proposal. The premise of the paper is the following:

Suppose the state of California wishes to reduce carbon emissions. They implement a cap-and-trade system, but cannot get the other states or countries to participate. In this case, California’s efforts to reduce carbon emissions are undercut by a phenomenon called “leakage”. “Leakage” occurs when California implements a cap-and-trade because their reduced demand for gasoline, coal, and natural gas means the price of these fuels falls in the rest of the world. Therefore, consumption rises in the rest of the world, cancelling out some of the emissions benefits from California’s efforts. Harstad proposes that to prevent this leakage California should instead focus their efforts on buying gasoline, coal, and natural gas deposits around the world.

As California buys fossil fuel deposits from other states and countries and refuses to let people extract these fuels, the prices of fossil fuels rise because there are less reserves available.

In order to do this cost-effectively and to prevent leakage from happening California must be strategic about buying the right fossil fuel deposits. These deposits should be “on the margin”, meaning they are deposits that are either barely profitable, such that a slight drop in the oil price would make the owners stop extracting from them, or barely unprofitable, and a slight increase in price would mean their owners would start extracting from them.

When California buys barely profitable deposits, they make fossil fuels more expensive for all consumers. Making fossil fuel more expensive makes it more profitable to extract from previously unprofitable fossil fuels, but California already bought the barely unprofitable ones as well. By buying deposits that are barely profitable or unprofitable California creates a jump in the global fossil fuel supply curve, making fossil fuel more expensive for everyone, while keeping suppliers from increasing production in new places.

 

 

 

 

 

 

 

 

 

Harstad shows that this is the most efficient way to reduce global carbon emissions when it is not possible to come into agreement.

This idea is not new. The conservation movement has embraced the use of easements (payments in exchange for leaving pieces of land pristine) to protect habitats for decades. The REDD system works in a similar way: people in countries with a price on carbon pay individuals or firms in other countries to protect forest in order to keep the carbon stored in that forest from being emitted. In 2007, president Rafael Correa of Ecuador basically proposed this, asking for $3.6 billion in aid. In exchange he would not open the Yasuni rainforest up for extraction by the national oil company. No one took up the offer and extraction of the 920 million barrel reserve started this year.

Buying deposits reduces carbon emissions, but the key to preventing leakage and being cost-effective is to buy the ones that are barely profitable or unprofitable.

Given this insight from Harstad (2012), environmental activist groups could consider how they can make their advocacy as cost-effective as possible to maximize the amount of carbon they keep from being emitted into the atmosphere. Activism focused on increasing the cost of fossil fuel extraction (supply-side activism) would be more effective at reducing emissions than activism focused on reducing demand for these fuels. By encouraging for example the adoption of renewable energy in individual countries, activists are making these fuels cheaper in other countries, eroding the benefits from their investment. Instead, if they focused on keeping fossil fuels that are barely profitable or unprofitable in the ground, they could increase the cost of fossil fuels around the world.

Given this framework we can evaluate how effective activism has been at reducing carbon emissions in certain cases.

Consider the banning of drilling in the Arctic Wildlife Refuge. The cost of extraction in the Arctic is around $75/barrel. This seemed like an attractive target when oil prices were above $100/barrel, but right now this should not be activist’s focus since drilling in the Arctic is far from profitable anyway.

What about making fracking more difficult in the US? There are a wells in the Bakken play where  the cost of extraction is at $30/barrel (close to the current price of oil). These are few and far in between, but there are other wells where the cost of extraction is only slightly higher. Buying these deposits would also be effective supply-side activism if it’s possible to identify these barely unprofitable deposits.

Supply-side activism provides an interesting alternative, given how unlikely a global carbon price is likely to be reached. If environmental groups could become organized and raise significant sums of money, they could be investing it in buying fossil fuel deposits around the world. Similar benefits could be found from buying large forests that are vulnerable to logging. Supply-side political advocates could focus on making the cost of fossil fuel extraction more expensive (stricter permitting, higher safety standards, taxes and royalties on extraction from state or federal lands) and they should focus on the types of extraction that is expensive, but still profitable, hydraulic fracturing, for example. Whether private actors have enough capital to successfully create a jump in the fossil fuel supply curve independently is still an open question, but billionaire philanthropists like Bill Gates and his friends should consider if it’s worth investing more of their fortunes on trying to keep fossil fuels in the ground than on reducing demand for them.

 

Image courtesy of Flickr. Originally published by S&S on December 15, 2016.

Related posts

Top