The environmental and economic effects of international cooperation on restricting fossil fuel supply

This article addresses the prospects and potential effects of international cooperation to limit fossil fuel supply. It investigates the regional environmental, trade, and macroeconomic effects of this cooperation. The findings illustrate the importance of combining fossil supply restrictions with carbon pricing to meet the Paris goals.   

The article first identifies the countries most likely to participate in an international supply-side coalition. It uses a k-means clustering approach based on a country’s fossil reserves per capita, fossil fuel rents, and existing supply-side policies. This method categorises all countries into four clusters: the ‘Frontrunners’, ‘Followers’, ‘Laggards’, and ‘Reluctants’ in an international coalition of supply-side policies.  

The Frontrunners include countries such as the USA, EU countries, South Africa, and "rest of the world", as they have relatively low per capita reserves of fossil fuels, existing policies and relatively low fossil fuel rents. Followers include countries like Argentina, South Korea, and Japan as they have small per capita reserves, no supply-side policies, and low fossil fuel rents. Laggards consist of Canada, Oceania (Australia and New Zealand), and the “Rest of Europe” (including Norway) because they have larger per capita reserves, have adopted supply-side policies, and relatively low fossil fuel rents. Finally, the Reluctants category comprises Russia, Saudi Arabia, and the “Rest of energy producers”. They are the least likely to join a supply-side coalition due to them having very large per capita reserves, have shown little willingness to restrict fossil fuel production, and fossil fuel rents make up a large part of their economy. 

Drawing on these clusters, the article uses an integrated assessment general equilibrium model, GEM-E3, to compare different scenarios of the evolution of international supply-side coalitions and compare these to a business-as-usual scenario. Comparing these different scenarios indicates that phasing out only oil or coal would have much less impact on emissions reduction than phasing out all fossil fuel production. However, the analysis shows that phasing out all fossil fuel production is still insufficient to reach a carbon budget consistent with well below 2°C, suggesting that net zero cannot be achieved using supply-side measures alone. The result shows fossil fuel production phase-outs should be integrated with global carbon pricing measures to realise climate mitigation efforts.  

Regarding the international coalition’s macroeconomic effects, the model suggests that supply-side policies are less cost-effective than demand-side scenarios, and every supply-side scenario would result in reductions in the global GDP. However, implementing supply-side measures and carbon pricing could reduce fossil fuel demand and alleviate the pressure on supply constraints. Therefore, supply- and demand-side measures are complementary, and combining them would deliver the biggest emissions reduction while minimising mitigation costs. The analysis also shows that there is less need to rely on negative emission technologies (NETs) with increased levels of earlier mitigation. 

The finding also underscores the importance of the substantive coverage of an international supply-side coalition. A coalition solely focused on phasing out coal or oil would be limited in its effectiveness in reducing emissions. Additionally, the size of the coalition also matters. For oil production, the coalition can only have meaningful impacts on emission reduction if members of the Reluctants and Laggards groups, such as Saudi Arabia and Russia, join the coalition, too. While this may seem unrealistic, the model suggests that some major oil producers could stand to gain from restricting fossil fuel production as there are net income gains for these producers (with relatively higher prices despite a shrinking market). Finally, the finding indicates the need for a Just Transition, given that many developing countries that are fossil fuel dependent would stand to lose from restricting fossil fuel supply. Some potential measures to help these parts of the world include financial assistance or expanding the “Just Energy Transition Partnership”.   

This article presents a compelling case for international cooperation in supply-side climate policies. It challenges the prevailing notion that supply-side measures are ineffective or otherwise inappropriate, underscoring the importance of the findings in shaping future policy decisions.