As the world grapples with the pressing issue of climate change, a new study suggests that a combination of policies targeting both the demand for and supply of fossil fuels can effectively curtail global greenhouse gas emissions. This analysis is set to be a focal point at the Brookings Papers on Economic Activity (BPEA) conference on September 25.
In this paper, the various climate policies are categorized into two primary groups: demand-side and supply-side approaches. The study highlights that reducing emissions in one country, such as the United States, might inadvertently increase emissions elsewhere, a phenomenon needing global consideration.
“Carbon is a global pollutant. It doesn’t matter whether it comes from a smokestack here or in India. Thinking globally about emissions reductions is paramount,” states Ryan Kellogg from the University of Chicago in an interview with the Brookings Institution.
Countries worldwide have adopted diverse strategies. The European Union has implemented a broad carbon emissions pricing program to reduce fossil fuel demand. Conversely, the Biden administration in the United States has aimed to reduce the fossil fuel supply by restricting public land drilling and investment in oil and gas infrastructure, while also providing subsidies for clean energy. Meanwhile, China has utilized industrial policy to lead in the production of solar panels, batteries, and electric vehicles.
Kellogg asserts, “The economics suggests a portfolio of policies rather than a single tool.”
Given the global nature of energy markets, reducing domestic fossil fuel consumption through carbon pricing can lower global prices, potentially increasing consumption elsewhere, a concept known as “leakage.” To counteract this, the study suggests pairing emissions pricing with supply-side carbon extraction pricing, such as taxing the production of coal, oil, and gas, which could elevate global fuel prices. However, current supply-side policies often narrowly focus on specific infrastructure or federal land extraction, falling short of effectively reducing emissions as producers may switch to alternate fuels or transport methods.
The study also points out the challenges within the United States due to barriers in long-distance clean energy transmission, which hinder the success of demand-side carbon pricing and clean energy subsidies. The author calls for reforms in transmission planning and utility governance to prioritize expansive projects over smaller, local ones.
Moreover, federal investments in clean energy research and development are highlighted as crucial for reducing global emissions by promoting clean technology adoption in developing countries.
The distributional impacts of climate policies influence political support or resistance. Domestically, carbon emissions pricing tends to impact current energy users, while carbon extraction pricing affects energy producers and their communities. Globally, emissions mitigation benefits poorer nations facing severe climate challenges. Demand-side policies are advantageous to fossil fuel importers, whereas supply-side policies favor exporters.
The complexities of reducing emissions, addressing market and regulatory issues, and managing distributional impacts mean that there is no clear preference between demand-side and supply-side policies, according to the paper. Instead, it argues that climate policies must balance multiple considerations.
Original Story at www.brookings.edu