Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies

The article sets out the economic and political benefits of supply-side measures to achieve emissions reductions, alongside more traditionally favoured demand-side policies. It suggests that supply-side instruments would complement (and in some cases could substitute) demand-side instruments. 

The economic benefits of supply-side instruments are multiple. They have relatively low administrative and transaction costs, as such policies target a smaller number of more easily identifiable projects upstream in the fossil fuel supply chain. Upstream fossil fuel commodity flows are also easier to measure and monitor than greenhouse emissions. And upstream policies have the potential to achieve high levels of coverage compared with demand-side measures covering many more downstream consumers. Restrictive supply-side policies are also important in limiting countervailing price effects of demand-side measures (demand leakage). Restrictive supply-side measures can also send clear signals to investors about future policy and thus avoid inefficient investments. Finally, supply-side policies can mitigate the green paradox where the risk of future carbon price reductions trigger an increase in current consumption. 

Supply-side policies also offer potential political benefits. They may attract relatively more public support because supply-side policies more readily link policy costs to specific energy sources, consistent with people’s understandings of climate change. Certain supply-side policies (e.g. restrictions on new production) can also garner support from incumbent fossil fuel firms. Finally, supply-side policies may be more conducive to international cooperation and policy diffusion because of the potential for such polices to result in less international carbon leakage than demand-side policies; the efficacy of unilateral domestic supply-side measures at emissions reductions, helping early-movers taking unilateral action pressure other actors; and due to the relative ease of monitoring and verifying supply-side policies, again assisting with ‘naming and shaming’ other states into taking similar action.  

The article is useful in demonstrating the benefits of restrictive supply-side policies.