Free-riding is at the core of environmental problems. If a climate coalition reduces its emissions, world prices change and nonparticipants typically emit more; they may also extract the dirtiest type of fossil fuel and invest too little in green technology. The coalition’s second-best policy distorts trade and is not time consistent. However, suppose that the countries can trade the rights to exploit fossil-fuel deposits: As soon as the market clears, the above-mentioned problems vanish and the ﬁrst-best is implemented. In short, the coalition’s best policy is to simply buy foreign deposits and conserve them.
I found this argument particularly interesting because my friend Matt Frost had a very similar idea a while back, which he’s just written up for his blog. I’m very pleased to see this line of thinking draw attention, as it strikes me as the most plausible, and least risky, carbon mitigation strategy that can be pursued unilaterally. The following is from Matt:
The ideal solution to carbon pollution is a zero-carbon energy source cheaper than fossil fuels. In the absence of such a technology, the developed economies have tried to price CO2-related externalities into the market cost of coal, oil, and natural gas, in hopes that alternatives would become less expensive in comparison. Because coal is more carbon-intensive than natural gas or petroleum, it is the fuel source most sensitive to the imposition of carbon-based penalties, and offers the greatest potential for single-source carbon reduction. None of the various attempts to reduce CO2 emissions, such as a carbon tax or a credit trading market, have been successful, in part because advocates have shifted their efforts among several strategies, allowing their opportunistic opponents to shoot down each weakly-defended idea one at a time. The U.S. carbon abatement community lacks a clear focal point toward which its policy efforts can be coherently directed.
So, as my gift to America’s environmental policy entrepreneurs, here’s a proposal that focuses on the fuel source and sector with the greatest potential for incremental carbon abatement, could reduce emissions by about 40 percent of the reduction that a full switch to low-carbon resources would accomplish, uses currently available technology, does not require unrealistic levels of international cooperation, does not create artificial markets in ephemeral government-enforced carbon credits, and can be financed with federal debt spending, rather than by a distributed tax on energy consumers. Its only major counterfactual assumption is the political will to pay for averting carbon emissions with an enormous lump of debt spending, but I’m going to assume that particular can opener for the sake of argument. A preference for carbon reduction is concentrated among the political elite, so the least-impossible solution would be one that exploits the tools available to the US’s permanent government (regulation and deficit spending), rather than one that assume popular acceptance of higher energy costs.
Funding research devoted to cheap zero-carbon energy is probably an easier political sell than using debt financing to buy coal deposits that will never be used. But the latter strategy is essentially a sure bet while the former is not.