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The case for a supply-side climate treaty

G. B. Asheim, T. Faehn, K. Nyborg, M. Greaker, C. Hagem, B. Harstad, M. O. Hoel, D. Lund, K. E. Rosendahl (2019)

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This article advocates for a supply-side treaty to complement the Paris Agreement e.g. where fossil-fuel producing countries announce moratoria on fossil fuel exploration. 

The article recognises the fragility of the Paris Agreement as an international tool, noting that parties could withdraw from it, nationally determined contributions are non-binding, and that we’re not on track to keep temperatures well below 2°C. It also notes the global nature of the market for coal and oil. Because of these factors, certain measures may result in carbon leakage and the Green Paradox (race to extract reserves expected to be stranded in the future). Accordingly, it is cost-efficient to apply both supply and demand-side measures to avoid these perverse outcomes. Specifically, supply-side measures should be included alongside demand-side measures to induce higher prices for fossil fuels, resulting in lower consumption amongst free riders. A supply-side treaty would ensure that these prices remain high, even where demand-side policies fail.  

A supply-side treaty would also help set expectations in the market of high fossil fuel prices, encouraging more investment in low-carbon R&D. It avoids wasteful investments in carbon-intensive technologies, reducing social costs compared with a scenario where supply is not restricted. It suggests a supply-side treaty offers a cost-effective policy option, as resources with the highest social costs of extraction remain in the ground, reducing forgone profits from not extracting those resources. Tradable extraction permits would also render marginally profitable projects unprofitable, when compared to more profitable lower-cost resources. The paper also suggests that using supply-side policies may attract support from producers as demand-side policies can be more harmful to them (e.g. under demand-side policies, producers suffer loss of asset value of their fossil fuel reservoirs whereas supply-side restrictions create scarcity rents, from which producers profit). A supply-side treaty may also be easier to monitor and enforce because it would involve fewer parties than demand-side cooperation. 

The article illustrates the importance of supply-side policies that restrict the extraction of fossil fuels.  

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