Why Don’t Governments Limit Oil Production to Meet Climate Targets?

The climate change component of Canada’s oil pipeline debate largely revolves around two big questions: should our country restrict the production of fossil fuels? And, if it does, does that mean other jurisdictions will just produce more and fill the gap?

This argument to restrict production is often called “supply side environmentalism” and it’s been pretty unpopular with economists and pundits who warn against restrictive supply-side policies as inefficient and overly moralistic.

But climate policy experts Fergus Green (of the London School of Economics) and Richard Denniss (of the Australia Institute) are questioning that.

In their new paper for the journal Climatic Change the pair contend that policies such as supply bans, production quotas, supply taxes and subsidy reductions for fossil fuels should most certainly be part of the policy picture.

Here’s a breakdown of some of the key points in their piece, “Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies.”

Uh, what’s up with the scissors?

The paper’s title references a passage from legendary economist Alfred Marshall’s 1890 tome Principles of Economics. In short, it emphasizes both supply and demand as creating value, similar to a pair of scissors using both blades to cut paper.

In this context, the implication is that only focusing on demand is going to leave you with some pretty funny looking pieces of paper. Green and Denniss realized that there’s a huge gap in climate policies that look at demand.

“We thought that was quite anomalous because supply-side policies are used in a whole range of other areas, from regulation of smoking, to ozone gases, to whaling, to asbestos,” Green said in an interview with DeSmog Canada.

For instance, policies enacted in Australia to reduce tobacco use include everything from banning the production or selling of tobacco without a licence, restrictions on advertising and sponsorships, heavy taxation on consumption, limitations on where you can actually smoke and plain packaging laws. While clearly different than fossil fuel production, such a policy mix attempts to curb use by attacking both supply and demand.

So what would these “supply demand-side policies” look like?

Pretty simple: banning new fossil fuel projects and/or limiting existing production with tools like an emissions cap (like a more stringent version of Alberta’s not so hard cap on oilsands), production taxes, subsidy phase-out and more.

Doesn’t sound too hard, right?

Such policies often get slammed by economists for being extremely costly and inefficient options. Interestingly, Green and Denniss actually make the case that limiting fossil fuel production is far simpler and cheaper from an administrative point of view than something like carbon pricing.

That’s because fossil fuels tend to be produced at giant facilities like oilsands mines.

In such situations, it’s actual physical commodities that are being measured — not greenhouse gases — which the authors argue makes it far easier to monitor and verify.

Supply-side policies are used in a whole range of other areas, from regulation of smoking, to ozone gases, to whaling, to asbestos. But not fossil fuels. Hm. https://t.co/qokv2oHeot

— DeSmog Canada (@DeSmogCanada) March 31, 2018

But wouldn’t this just lead to other countries producing more fossil fuels?

Ah, the Pandora’s box of climate policy.

“Emissions leakage” or “carbon leakage” is a real thing. There’s no way around it. Cutting supply of anything from one jurisdiction will likely lead to another producing it.

It’s arguably the biggest obstacle to any seriously radical shift away from fossil fuels.

In short: everyone else is doing it, so why shouldn’t we? Especially when there are billions of dollars in potential resource revenue and thousands of jobs on the line?

Green and Denniss didn’t attempt to solve this issue, per se. As Green put it, the question is an explicitly empirical one and will vary depending on fuel and market. It’s why in their research Geen and Denniss don’t prescribe any policies — and rather make the case that restrictive supply-side options should be seriously considered.

They also provide a fascinating intervention into the very concept of emissions leakage: in short, that demand-side measures (things like carbon pricing and a clean fuel standard) can also create its own form of leakage in which fossil fuels no longer consumed within a certain jurisdiction are made cheaper for other jurisdictions to use if supply isn’t also reduced.

For example, if Manitoba suddenly electrified all of its transportation overnight, that would result in millions of litres of gasoline not being sold, requiring producers to sell it for cheaper elsewhere.

But wouldn’t producers just stop producing as much fossil fuels until prices rebound?

Sure. This is, of course, a hypothetical and there’s also a chance that producers could simply cut production.

But this is where the “Green Paradox” — another concept deployed in the paper — comes in. Fossil fuel producers are well aware that future climate policies may limit their ability to profitably develop their resources. So, in response, there’s a strong case to be made that it’s in their interests to liquidate their reserves as quickly as possible, even if it means getting less than ideal returns.

This isn’t a universal law. The situation will vary depending on whether we’re talking about coal, natural gas or oil, as well as where the production is happening. But it sure seems worth thinking about.

Won’t restricting fossil fuel production just piss people off?

Not if it’s done right!

Economists often talk about “political feasibility.” But that tends to be viewed as a pretty static and unchangeable concept, at least in the short term. Green doesn’t buy that.

“What might be feasible today will certainly constrain what you can do today, but the policy that you implement today will change patterns of interest, it will change the institutional context, it will incentivize certain actions,” he said. “And that will change what’s possible tomorrow.”

The argument is that you have to “sequence” policies in intelligent ways. While it may be the most economically efficient, carbon pricing is often unpopular among constituents.

As a result, Green suggests it might be more sensible for a politician to start with policies like renewable energy portfolio standards and subsidies for energy efficiency: while they’re a bit more costly upfront, they’re politically far easier to sell.

That builds a “constituency of supporters” and a thriving renewable industry, at which point grassroots pressures might emerge for carbon pricing and other similar policies.

And wouldn’t you know it? Restricting new fossil fuel projects can actually be really popular with a constituency if sold right.

“It tends to excite the imagination of political constituents more than carbon reductions, which tend to be more abstract and the climate benefits are seen as global, long-term and diffuse,” Green said.

“When you move to a fossil fuel frame, and talk about fossil fuel infrastructure — and some of this applies to demand-side as well, like new power stations — you tap into a much broader potential coalition of people who are willing to support those policies.”

This is something that David Roberts of Vox has written about extensively and intelligently.

As he argues, the thing that many climate policy wonks miss (or condescendingly dismiss) is the actual challenge of building viable social movements around abstract goals like emissions reductions. Fossil fuel infrastructure presents excellent points of mobilization, as well as an opportunity to challenge the “presumptive social warrant” that fossil fuels currently have.

It might not fit perfectly into economic models. But most of real life doesn’t.

Sure sure, sounds nice, but what about all the other countries in the world? Won’t they just take advantage of our niceness?!

That’s one of the major problems that Green and Denniss tried to confront with this paper.

“When you have international negotiations, most countries don’t trust one another,” Green said. “They worry that some countries are going to free ride on their commitment.”

Greenhouse gases are odourless and colourless, under the control of private entities. They require very sophisticated systems to measure, monitor and verify. That means it’s very easy to “game” the system, which leads to a massive undermining of trust between countries.

And that’s the benefit of restricting fossil fuel production, instead of just usage. It’s way easier to verify.

That gives more confidence to other countries that are going to make similar commitments. And that builds a platform of trust and cooperation, allowing for an escalation of emissions reductions over time (as required in the Paris agreement).

“The main message is that restrictive supply-side policies need to be in the toolkit and we need to be cutting with both arms of the scissors: both demand side and supply side,” Green concluded.