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Closing coal: economic and moral incentives

Paul Collier and Anthony J. Venables (2014)

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The article argues that climate mitigation efforts should focus on supply-side policies rather than demand-side policies on economic and moral grounds. The paper suggests that such supply-side policies should focus on ending the extraction and use of coal, as coal dominates flow usage and proven reserves, has higher emissions per unit of energy, and lower economic rents than other fossil fuels.  

The paper considers the risks of international and inter-temporal leakage between demand and supply-side policies. The paper draws on literature on price elasticities to note that leakage from demand-side policies will be larger where demand is more price elastic when compared to supply, and that leakage from supply-side policies will be larger where supply is more price elastic than demand. In doing so, the paper shows that the risk of leakage may be less severe using supply-side policies rather than demand-side policies in the context of coal. The paper considers the risk of inter-temporal leakage to be more of an issue with coal rather than oil, reinforcing the need for supply policies that implement a phased reduction of coal to complement demand policies. 

The paper canvasses other advantages to using supply-side policies to end coal, such as a more limited number of parties targeted (compared to more diffuse demand-side consumers); clearer direction for appropriate action (i.e. an end to mines); and more readily observable consequences to action.  

Importantly, the paper considers the critical importance of moral pressure in bringing about emissions reductions needed worldwide. It recognises advances in social psychology indicating that moral pressure is complex and sensitive to design choices. Accordingly, the paper offers a model of action to generate moral pressure towards ending coal.  

The paper considers first the “decision externality”, where a free rider does not take into account the effect of their decision to free ride on the decisions of others. In a sequential collective-action problem, each decision creates two types of decision externalities: an economic incentive to free-ride and the moral incentive. Early compliers need to create a sense that non-compliance by later parties would be unfair, generating moral decision externalities. Successful collective action will only occur if the parties agree on a sequence of compliance that has moral force and seems fair. The paper proposes a scheme whereby coal producers agree to sequence closure, with high-income countries starting first. A limit on the extraction of all fossil fuels could then be imposed, creating a market whereby oil producers in high-income countries would buy permits from coal producers. 

The paper is useful in its support of supply-side policies, particularly in relation to ending coal. Critically, the paper’s recognition of the important role moral pressure plays in climate action is helpful to demonstrate the potential impact ending fossil fuel projects can have by contributing to the moral pressure to end fossil fuel extraction world-wide. The case is particularly strong for projects in high-income countries as the paper considers them to be the appropriate early adopters of such supply-side policies.

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