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Cutting with both arms of the scissors: the economic
and political case for restrictive supply-side climate policies
Fergus Green
1
&Richard Denniss
2
Received: 20 April 2017 / Accepted: 16 February 2018 / Published online: 12 March 2018
#The Author(s) 2018
Abstract Proponents of climate change mitigation face difficult choices about which
types of policy instrument(s) to pursue. The literature on the comparative evaluation
of climate policy instruments has focused overwhelmingly on economic analyses of
instruments aimed at restricting demand for greenhouse gas emissions (especially
carbon taxes and cap-and-trade schemes) and, to some extent, on instruments that
support the supply of or demand for substitutes for emissions-intensive goods, such as
renewable energy. Evaluation of instruments aimed at restricting the upstream supply
of commodities or products whose downstream consumption causes greenhouse gas
emissions—such as fossil fuels—has largely been neglected in this literature. More-
over, analyses that compare policy instruments using both economic and political (e.g.
political Bfeasibility^and Bfeedback^) criteria are rare. This article aims to help bridge
both of these gaps. Specifically, the article demonstrates that restrictive supply-side
policy instruments (targeting fossil fuels) have numerous characteristic economic and
political advantages over otherwise similar restrictive demand-side instruments
(targeting greenhouse gases). Economic advantages include low administrative and
transaction costs, higher abatement certainty (due to the relative ease of monitoring,
reporting and verification), comprehensive within-sector coverage, some advantageous
price/efficiency effects, the mitigation of infrastructure Block-in^risks, and mitigation
of the Bgreen paradox^. Political advantages include the superior potential to mobilise
public support for supply-side policies, the conduciveness of supply-side policies to
international policy cooperation, and the potential to bring different segments of the
fossil fuel industry into a coalition supportive of such policies. In light of these attributes,
restrictive supply-side policies squarely belong in the climate policy Btoolkit^.
Climatic Change (2018) 150:73–87
https://doi.org/10.1007/s10584-018-2162-x
This article is part of a Special Issue on ‘Fossil Fuel Supply and Climate Policy’edited by Harro van Asselt and
Michael Lazarus.
*Fergus Green
R.F.Green@lse.ac.uk
1
London School of Economics and Political Science, London, UK
2
The Australia Institute, Canberra, Australia
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We might as reasonably dispute whether it is the upper or the under blade of a pair of
scissors that cuts a piece of paper, as whether value is governed by utility [demand] or
cost of production [supply].
Alfred Marshall, Principles of Economics (1890, bk. III, 28)
1 Introduction
Proponents of climate change mitigation face difficult choices about which policy
instrument(s) to pursue. The climate policy Btoolkit^is large, and many competing
criteria, both normative and political, are relevant to the choice (Goulder and Parry
2008, 152). Economists and policymakers have focused overwhelmingly on compar-
isons among policy instruments that aim to restrict demand for greenhouse gases,
particularly cap-and-trade schemes and carbon taxes, as these are seen to perform
better than alternatives against economists’favoured criteria of Beconomic efficiency^
and its close relative, Bcost-effectiveness^, when tested using simple economic models
(ibid). There has also been considerable scholarly attention paid to policies that
support the supply of or demand for substitutes of energy-intensive or emissions-
intensive goods, such as renewable energy (Somanathan et al. 2014, sec. 15.6) (see
unshaded quadrants of Table 1,below).
But the comparative literature on climate policy instrument choice has been remark-
ably silent on instruments that aim to restrict the supply of commodities and products
whose downstream consumption produces greenhouse gas emissions (Brestrictive supply-
side climate policies^), of which measures to restrict fossil fuel energy supply are the
most relevant (see shaded quadrant of Table 1). For example, in Goulder and Parry’s
Btoolkit of environmental instruments^not one restrictive supply-side policy is men-
tioned (Goulder and Parry 2008, 152). Nor is any mentioned in the chapter on BNational
and Sub-national Policies and Institutions^of the IPCC’s Working Group III
(Somanathan et al. 2014).
1
The seminal work of Sinn on the economics of supply-side
climate policy (Sinn 2008;Sinn2012), and more recent economic analysis of particular
supply-side climate policy proposals (for useful summaries, see Lazarus et al. 2015 and
Collins and Mendelevitch 2015), have not been systematically incorporated into the
climate policy Btoolkit^. Nor have such policies been widely championed by
policymakers: as Lazarus et al. surmise, Bdespite the increased attention, supply-side
climate policies have yet to take hold in most of the world^(Lazarus et al. 2015,3).
This relative neglect by the mainstream climate policy community is prima facie surprising
since, as we show in Section 2, restrictive supply-side policies are sound in economic theory
and widely used in a range of other policy domains. The primary contribution of this article,
however, lies in Sections 3and 4, which demonstrate, respectively, the main economic
(efficiency and effectiveness) and political (feasibility and Bfeedback^) advantages of restric-
tive supply-side climate policies.
While the economic analysis of climate policy instruments has a long pedigree, many
readers may be less familiar with political science concepts and frameworks for analysing
1
Intertemporal leakage is mentioned on page 1163, but only as a factor to be taken into consideration in the
design of carbon pricing.
74 Climatic Change (2018) 150:73–87
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climate policy instruments. Political analysis of generic policy instruments and design
features matters for two reasons. First, not all policy instruments and design features may
be immediately politically feasible to enact in a given context (and those that are feasible
may be far from Boptimal^: Jenkins 2014). Systematic attention to the characteristic
political effects of alternative policy instruments can inform judgements about their
relative feasibility in a particular context. Second, it is not only the case that the feasibility
of a given climate policy instrument and design choice is affected by (past/present)
politics: climate policies themselves, by (re-)allocating resources, creating institutions,
incentivising investments and influencing culture, also affect patterns of politics and
power relations in subtle but crucial ways, in turn shaping what becomes feasible in the
future (Cook 2010); climate policy choices, in other words, create Bfeedback effects^
(Jordan and Matt 2014). Yet, in the comparative literature on climate policy instrument
choice, if political feasibility is considered at all it is often treated in a Bstatic^way that
ignores the potential for relevant instruments to generate such feedback effects
(Urpelainen 2013, 110, 120). A secondary contribution of this article (specifically
Section 4) is the application of a framework developed by the authors for the comparative
evaluation of the political dimensions of climate policy instruments. This framework,
which draws on the extensive literature on the politics of climate policy, can, we suggest,
usefully be employed more generally in comparative climate policy instrument evaluation.
Throughout the discussion, we focus on policies aimed at restricting the supply of
fossil fuels—undoubtedly the most important class of restrictive supply-side policies. A
useful typology of such policies is provided by Lazarus et al. (2015, 10, Table 1), but
our intention is to control for differences between generic instrument types (e.g.
Bcommand and control regulation^,Bmarket mechanism^etc.), focusing instead on the
marginal benefits of (restrictive) instruments that target the supply side relative to those
that target the demand side. The comparison is not intended to show that supply-side
instruments are all things considered superior to demand-side instruments. The economic
attributes of the latter have, as noted earlier, already been extensively established. Rather,
our more modest aim is to establish the distinctive economic and political benefits of
supply-side instruments with a view to these taking their rightful place in the climate policy
toolkit alongside the other kinds of policies listed in Table 1. Our hope is that, with these
benefits in mind, the potential for supply-side instruments to act as economic and political
complements or substitutes for demand-side instruments in a given context can be evaluated
on a case-by-case basis.
Tab le 1 The climate policy toolkit
Supply-side
Demand-side
Restrictive
Restrictive supply-side climate policies
(e.g. FF subsidy reduction; FF supply tax; FF
production quotas; FF supply ban/moratorium)
Restrictive demand-side climate policies
(e.g. carbon tax; carbon cap-and trade; mandatory
CO2emissions standards)
Supportive
(of
substitutes)
Supportive supply-side climate policies
(e.g. direct government provision of low-carbon
infrastructure; R&D subsidies; renewable
energy feed-in-tariffs)
Supportive demand-side climate policies
(e.g. government procurement policies; consumer
subsidies for energy-efficient or low-emitting
substitutes)
Notes: FF = fossil fuels. Shaded area represents the focus of this article; unshaded areas are those typically
analysed in the comparative literature on climate policy instruments.
Climatic Change (2018) 150:73–87 75
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The scope of our analysis is limited in three significant ways. First, in the interests of
simplicity, we consider the economic and political cases separately from one another, and
in isolation from other climate and non-climate policy instruments. Second, we consider
only generic, typical benefits of supply-side policies; the magnitude of the effects we
analyse is likely to vary cross-contextually (e.g. cross-nationally). Third, we mostly
consider the three fossil fuel types (coal, oil and gas) together, abstracting from differ-
ences between them. We consider in Section 5various research directions that could
build upon our analysis to address these limitations.
2 The value and ubiquity of supply-side policies in other domains
A negative externality is said to exist when the production or consumption of a product
imposes costs on a party that is not involved in the sale or purchase of that product. Under
such circumstances, the market price will be lower, and the quantity supplied higher, than
the social optimal levels. To address negative externalities, economists typically recom-
mend a range of policy options drawn from all quadrants of Table 1, and covering
instruments ranging from so-called Bcommand and control^regulation to Bmarket mech-
anisms^to information/behaviour change campaigns. Significantly, many countries rely
on complicated and evolving combinations of these measures, wherein restrictive supply-
side policies play an important role complementing demand-side policies.
Policies to control tobacco smoking in Australia provide an instructive example.
The policy mix includes prohibitions on producing tobacco without a license, selling
tobacco without a license, selling tobacco to children, tobacco advertising, tobacco
sponsorship, and smoking cigarettes in confined public spaces. It also includes heavy
taxation of tobacco consumption, hard-hitting public information campaigns, Bplain
packaging^laws, mandatory health warnings on cigarette packages, and the
subsidisation of certain substitutes for cigarettes such as nicotine patches. Far from
being derided as an inefficient mire of Bred tape^,Australia’s tobacco regulatory
environment is lauded as a global model of effective public health policy, with the
country seen as an early mover in innovative regulation in the sector (Chapman and
Wak efi el d 2001). The combination of a wide range of policies, rather than an
‘optimal’policy, is, moreover, endorsed in the World Health Organisation Framework
Convention on Tobacco Control, which states that B‘tobacco control’means a range of
supply, demand and harm reduction strategies that aim to improve the health of a
population by eliminating or reducing their consumption of tobacco products and their
exposure to tobacco smoke…^(article 1(d)).
Restrictive supply-side policies have also played an important role in efforts to
reduce negative environmental pollution externalities, including chlorofluorocarbons
(Haas 1992), asbestos (Kameda et al. 2014), and lead in petroleum products
(Needleman 2000).
Given the widespread use of restrictive supply-side policies in other policy do-
mains, their relative neglect in the climate policy domain seems anomalous. In the
following sections, we argue that restrictive supply-side climate policies targeting
fossil fuels (hereaftersimplyreferredtoasBsupply-side policies^) indeed have
distinctive economic and political benefits, in view of which this neglect is
unwarranted.
76 Climatic Change (2018) 150:73–87
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3 The economic benefits of supply-side policies
3.1 Low administrative and transaction costs, higher certainty of abatement
outcomes, and comprehensive within-sector coverage
Policy instruments vary in the administrative and transaction costs they entail. The
administrative and transaction costs of demand-side climate instruments are often
considerable. Both carbon taxes and cap-and-trade schemes require detailed and com-
plex rules, procedures and regulatory institutions for the monitoring, reporting and
verification (MRV) of greenhouse gas emissions at facility/installation level (e.g. power
plants, steel mills), often across hundreds or even thousands of facilities/installations
(Helm 2005,212).
The complexity of facility-level greenhouse gas MRV reduces the efficiency of such
instruments in three ways. First, the imposition of non-trivial transaction and adminis-
trative costs itself reduces efficiency. Second, information about greenhouse gas emis-
sions at facility/installation level is strongly asymmetrical in favour of regulated
entities, making it difficult for policymakers to avoid the deliberate Bgaming^and the
inadvertent underreporting of emissions, both of which can reduce the actual (as
opposed to reported) environmental outcomes of carbon pricing schemes (Bellassen
et al. 2015;Kuch2015). Third, due to administrative and transaction costs, liability in
actual demand-side schemes is inevitably limited to large emitters—thosewhoseemis-
sions exceed a legally-specified threshold—necessarily rendering scheme coverage
incomplete, which further reduces efficiency (Bellassen et al. 2015).
2
Supply-side policies, by contrast, are likely to have relatively low administrative and
transaction costs. First, they target a relatively small number of large, easily identifiable
projects operated by administratively competent firms upstream in the fossil fuel supply
chain. Second, the commodities to be accounted for (especially coal and oil) are not
only much easier to monitor/measure than greenhouse gases, but they are typically
already measured by firms for existing administrative purposes such as resource tax
liability assessment and compliance with local environmental license conditions. For
these reasons, total (and average-per-firm) MRV costs, MRV-related uncertainties in
abatement outcomes, and the degree of information asymmetry are all likely to be
lower than for similar demand-side instruments (Kerr and Duscha 2014,596–99).
Third, supply-side policies automatically achieve very high levels of coverage because
all downstream consumers (subject to any constraints in cost pass-through) face higher
prices for fossil fuel inputs and are thus encouraged to reduce those inputs (ibid, 597).
3.2 Price and efficiency effects
Restricting the supply of a product, all else equal, increases the market price of that product.
Restricting fossil fuel supply will thus raise the absolute and relative price of products that
use fossil fuels as inputs. To the extent that higher prices discourage consumption (the
premise on which restrictive demand-side policies such as carbon pricing is based), the
higher fossil fuel prices will cause a reduction in the quantity consumed.
2
The further significance of these points for the choice of optimal policy instrument is discussed in Section 3.2.
Climatic Change (2018) 150:73–87 77
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In theory, the creation of technology- and pollutant-neutral policy instruments, such as a
cap-and-trade scheme with universal coverage of greenhouse gases, sectors and facilities,
allows for Bleast cost abatement^as profit-maximising agents search for the optimal combi-
nation of supply- and demand-side responses across all abatement channels (e.g. investment in
renewable energy, sequestration in forests, or reduced passenger car use) (Goulder and Parry
2008,154–59). However, in order to reduce the administrative and MRV costs (discussed
above) and overcome political constraints (discussed in Section 4) real-world carbon price
schemes inevitably are not universal in their coverage of sectors and facilities. This reduces the
theoretical efficiency benefits of market-based demand-side schemes because it precludes the
use of particular abatement channels (Denniss 2008). Consequently, the efficiency difference
between a real-world carbon price and a restriction in the supply of fossil fuels will be smaller
in practice than in theory.
In a world where optimal climate policy is not achievable, it would be beneficial to
augment demand-side policies with supply-side policies. The main reason for this is
that when demand-side policies succeed in reducing emissions in one country the
decrease in demand for fossil fuels can result in lower prices being paid for fossil
fuels in other countries (where the relevant market is international). While in a first-best
world of global carbon pricing such an effect would not be possible, no such global
policy is likely to arise anytime soon, and at present the climate and energy policies of
large energy users such as the USA, China and India have significant ability to
influence the world prices for each type of fossil fuel. Price reductions that accompany
a decrease in demand can slow the global pace of industrial transformation toward low-
carbon production. For goods that do not generate negative externalities, the slowing of
industrialtransformationcausedbysuchprice falls is advantageous as it helps maxi-
mise the utilisation of existing capital and labour. But when the objective of demand-
side policy is to accelerate industrial transformation, restrictive supply-side policy has
an important role to play in limiting countervailing price effects. The combination of
supply-side and demand-side policies will thus hasten the industrial transformation
required to meet climate mitigation objectives.
3.3 Avoiding infrastructure lock-in
When production processes require a large, upfront investment in fixed costs, such as
the construction of a port, pipeline or coalmine, future production will take place even
when the market price of the resultant product is lower than the long-run opportunity
cost of production. This is because rational producers will ignore Bsunk costs^and
continue to produce as long as the market price is sufficient to cover the marginal cost
(but not the average cost) of production. This is known as Block-in^(see generally Seto
et al. 2016, 429–30; see Erickson et al. 2015 on lock-in from fossil fuel supply
infrastructure specifically). (Even if the price of the product is sufficiently low as to
prevent the asset owner from repaying debts associated with the fixed costs, the
bankruptcy of the owner will not prevent subsequent owners of the fixed asset from
producing, so long as the market price covers the marginal cost of production.)
When future policy is uncertain, a rational investor might be willing to make a large
upfront investment in fixed production capacity (for example building a new coalmine)
if they assess the short-term value of the profits that can be earned under current policy
settings to be greater than the long-term (risk-adjusted) cost of detrimental policy
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change. However, if a rational investor significantly underestimates the probability of
policy change (such as the timing and extent of a future carbon price), then, even after
the original rational (but mistaken) investor loses their financial capital, the market
price of the relevant fossil fuel would still be lower than would have otherwise been
the case had the investor accurately assessed the probability of policy change. The
temporary inability of an investor to assess future policy risk can thus have a durable
impact on the market.
Under such circumstances, policymakers can use restrictive supply-side policies both to
send a clear signal to investors about the path of future policy and, in turn, to avoid
inefficiently high levels of investment in the production capacity for goods of which
policymakers are determined to reduce consumption in the future.
3.4 Mitigating the ‘green paradox’
The risk of future policy change to the current value of a resource—for example, the risk
of a future carbon price reducing the current value of coal resources—can induce
resource owners to bring forward their extraction of that resource, thereby reducing its
market price, causing an increase in its consumption (a phenomenon dubbed Bthe Green
Paradox^by Sinn 2008,2012).
3
Supply-side policies can be a straightforward means to
mitigate the impact of the Green Paradox (Sinn 2008,2012).
4
4 The political benefits of supply-side policies
4.1 Greater potential to mobilise public support for policy
Choice of policy instrument and associated design features can affect public support for
climate policies (see Drews and van den Bergh 2015). Empirical and experimental
evidence shows that, holding constant non-policy-related factors, public support for
restrictive climate policies depends on (i) the perceived benefits of the policy, (ii) the
perceived personal and public costs of the policy, and (iii) the perceived distributional
fairness of the policy (ibid, 860–63). Perceptions of benefits and costs are also
influenced by people’s perceptions of the effectiveness of the policy, which are in turn
affected by their understanding of the causal mechanisms by which the policy is
supposed to achieve its objectives (ibid).
Scholars have identified various reasons, related to these factors, why people tend to
prefer certain kinds of climate policy instruments over others (e.g. command and control
regulation over market-based instruments) (Jenkins 2014; Karplus 2011;Rabe2010) and,
within a given class of policy instrument, certain design features (e.g. explicit
earmarking of revenue from market-based instruments) (Drews and van den Bergh
2015, 863; Rabe and Borick 2012). What has not been analysed is the effect on public
support resulting from whether the instrument targets the supply side or the demand side
3
The circumstances in which this phenomenon might cause increased emissions are discussed in van der Ploeg
and Withagen (2012) and Edenhofer and Kalkuhl (2011).
4
While Pigouvian taxes are the preferred theoretical solution to this problem and various other market failures,
when the difficulties of designing and implementing optimal tax policies are taken into account, supply-side
policies are likely to be a preferable Bsecond-best^option.
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(controlling for instrument type and relevant design features such as, where applicable,
revenue allocation).
We argue that, on each of the abovementioned three factors, supply-side policies are
generally likely to attract higher public support than demand-side policies, all else equal.
4.1.1 Higher perceived benefits of supply-side policy
The first reason supply-side policies are likely to receive stronger public support is because
they foreground (render salient) benefits that people value more.
Demand-side instruments (e.g. carbon pricing; carbon efficiency standards) typically
focus on greenhouse gas abatement per se. But this is a weakly valued benefit. A
common conclusion from climate-related public opinion research is that climate science
is poorly understood and concern about the problem, though widespread, is shallow, i.e.
it tends to be a low-salience, low-priority concern and individuals have a low
Bwillingness to pay^for solutions (Ansolabehere and Konisky 2014; Guber 2003;
Jenkins 2014,470–72; van der Linden et al. 2015). This is unsurprising: the climate
benefits of mitigation policies are diffused widely across time and space; they dispro-
portionately accrue (and are perceived accrue) to future generations and people in other
countries; and their magnitude is uncertain, meaning they are likely to be strongly
discounted by voters (van der Linden et al. 2015). The weak valuation of climate benefits
may also be linked to the perceived ineffectiveness of unilateral domestic climate
policies in tackling global climate change (Drews and van den Bergh 2015, 860–61).
In any case, insofar as they foreground climate benefits, demand-side instruments face
major challenges in attracting strong public support (Jenkins 2014, 475; Rabe and Borick
2012). This challenge is often magnified in public debates about such policies: in their
public-facing campaigns to discredit such policies, opposing interest groups can easily
exploit the public’s weak valuation of climate benefits and doubts about the policy’s
effectiveness, as exemplified by case studies of carbon pricing debates in Australia
(Chubb 2014), Canada (Harrison 2012) and the US (Skocpol 2013).
By contrast, supply-side instruments typically target fossil fuels per se. Survey
evidence suggests that people more readily link co-costs/co-benefits (environmental,
health, security, social, economic) to specific energy sources than to the more abstract
concepts of Bcarbon^/Bclimate^(e.g., Ansolabehere and Konisky 2014); and fossil
fuels are well-understood commodities that many people more readily associate with a
range of higher-priority, more localised and more immediate negative (non-climate)
impacts, resulting in negative attitudes toward fossil fuels, especially coal (see Green
2018, section 3.1.1 and references there cited). These features give supply-side
policies considerable advantages in attracting public support for climate policy. Rel-
atively high public support for fossil fuel severance (resource extraction) taxes, even
in climate-ambivalent, tax-averse north-American states and provinces (Rabe and
Borick 2012,377–79), provides circumstantial empirical support for these arguments.
The foregrounding of a wider and more valued set of benefits is also likely to make
it easier for proponents of supply-side policies to Bmobilise^the public to participate
actively in (consciously or incidentally) pro-climate-policy political action (Bomberg
2012) because this: enables proposals to be framed in ways that are more resonant with
voters and more resilient to counter-attack by opposing interest groups; facilitates
alliance-building among diverse groups with wide-ranging concerns about fossil fuels;
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and facilitates network-building among groups at different advocacy- and policy-
relevant scales (Green 2018). These are, additionally, positive feedback effects that
increase the likelihood of stronger climate policies in the future (ibid).
4.1.2 Possible higher perceived distributional fairness and lower perceived costs
of supply-side policies
The higher they perceive the costs of a climate policy to be (to themselves and to
society more broadly), the less likely people are to support it, all else equal (Drews and
van den Bergh 2015,861–62). But the perceived fairness of the distribution of those
costs across society also affects voter support for climate policies (ibid, 862). Survey
evidence (Cai et al. 2010) and case studies from carbon pricing attempts in Australia
(Chubb 2014) and Canada (Harrison 2012) suggest that people are more likely to
support a climate policy where they perceive that the incidence of the policy’scosts
will likely lie with polluting industries.
From the case studies just cited, it appears, further, that people tend to perceive
that energy consumers will bear the incidence of costs imposed under carbon pricing
instruments, which contributes to the weak public support for such policies. Undoubt-
edly, part of the perception is attributable to the policy instruments analysed in those
case studies being Bprice^instruments, which foreground the price that consumers
must pay on salient household consumption items like electricity and gasoline, making
them less popular than Bcommand and control^instruments that Bhide the costs^of
regulation (Jenkins 2014; Karplus 2011; Keohane et al. 1998;Rabe2010;Rabeand
Borick 2012). However, we hypothesise that part of the opposition to carbon prices is
explained by the fact that the instruments are demand-side instruments. In a relevant
supply chain, the formal incidence of demand-side instruments generally lies with, or
close to, the end consumers. So too in the case of demand-side climate policies
applicable to the energy sector: the formal incidence, or liability, typically lies with
owners (or operators) of electricity generation facilities and petroleum distributors.
The fact that consumers regularly buy electricity and gasoline, we suggest, makes
consumers more readily perceive that the costs will be passed onto them. If this
hypothesis is correct, it follows that people are more likely to perceive the incidence
of supply-side policies to lie with fossil fuel producers, since the latter are more
remote from consumers in relevant supply chains. Accordingly, we would expect that
people would perceive the costs to themselves of supply-side policies to be lower, or
the distribution of the costs to be fairer, or both—and thus support for such policies
to be higher. The stronger preferences for fossil fuel severance taxes than for demand-
side energy taxes in North America is again consistent with this hypothesis, though
research designed to test this hypothesis is needed, and would be a valuable subject
of future research.
Additionally, insofar as (the public perceives that) the fossil fuels mined or extracted
in the relevant jurisdiction (e.g. country A) will be exported to another jurisdiction (e.g.
country B), the effects of price increases on consumer surplus—which may well be
large—will be felt in country B, not country A. Accordingly, voters in country Aare
likely to perceive that the personal costs of supply-side policies will be low (subject to
concerns about production leakage), implying stronger public support for supply-side
policy in country A(see also Rabe and Borick 2012, 377–79).
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4.2 Different potential to mobilise fossil fuel industry support for policy
A major political barrier to the enactment of (ambitious) restrictive climate policies (Table 1, row 1)
in the energy sector is the political mobilisation of industries that stand to lose from such policies.
Fossil fuel producers are especially politically influential: they are characteristically well organised,
capital-intensive, and own highly specific assets (Hughes and Lipscy 2013, 459); and they often
have deep ties to the states in which they operate (Newell and Paterson 1998). Environmental
nongovernmental organisations and green industries typically form coalitions supportive of climate
policy, but these are typically weak compared with the power of the opposing coalition (Meckling
et al. 2015). The political feasibility of climate policy improves when, all else equal, members of
the opposing coalition are induced to switch from opposition to support.
Policy can be crafted so as to divide otherwise-opposed fossil fuel companies and recruit some
of them to the supporting coalition. Here, two standard policy design features are most relevant.
First, fossil fuel companies can be divided along Btemporal^(incumbent vs new entrant) lines by
using instruments that restrict new entrants. Bans/moratoria are particularly well-suited to this
task, since precluding new entrants is the raison d’etre of such a policy. Second, fossil fuel
companies can be divided along Bsub-industry^(e.g. coal vs. petroleum) lines by applying the
policy only to one or some sub-industries. Rational fossil fuel producers perceiving a risk of a
tightening carbon budget constraint will support policies that require emissions reductions from
other sectors, including other fossil fuel sub-industries, but which exclude their own sector.
While both restrictive demand-side and restrictive supply-side policies can be designed to
have one or both of these features, the relative political feasibility of such demand-side vs
supply-side schemes is likely to vary from case to case. In a given context (e.g. country Aat
time t), the industry structure (e.g. market concentration), industry size, and demand outlook
for the products of (particular kinds of) fossil fuel suppliers relative to (particular kinds of)
industrial fossil fuel consumers may be more conducive to policies targeting suppliers of a
fossil fuel than consumers of that fuel (and these are all likely to vary systematically across fuel
types). In other contexts, of course, the opposite may hold. For example, where some of a
country’s fossil fuel production is exported, fossil fuel producers in that country are likely to
prefer demand-side over supply-side policies, other things equal (cf. Harrison 2015,39).
5
Given the high political value of strengthening the supportive coalition relative to the
opposing coalition, considerations concerning the potential to win over fossil fuel (sub-)in-
dustries to supporting coalitions should be of great interest to policymakers. In light of the
different coalitional implications they are likely to have in a given context, inclusion of supply-
side policies in the policy toolkit (alongside demand-side policies) will expand the option set
of policymakers confronted by powerful industries.
4.3 Greater potential to induce, sustain and escalate international policy cooperation
over time
So far, we have focused on the effect of instrument choice at the domestic level. But of
course, domestic climate policies both influence and are influenced by actors, institutions
5
This is the converse implication of the point made at the end of Section 4.1.2: supply-side policies affecting the
exports of Country Areduce consumer surplus in the importing Country B, but they reduce producer surplus in
Country A(relative to an equivalent demand-side measure in Country Athat does not affect emissions embodied
in exports).
82 Climatic Change (2018) 150:73–87
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and ideas at the international level, and those emerging from within other countries. One
relevant criterion of instrument choice, then, is the conduciveness of a policy instrument to
international cooperation or transnational policy diffusion (cf. Hepburn 2006,235),which
can be specified as the extent to which a policy instrument can be expected to induce,
sustain or escalate international policy cooperation or transnational policy diffusion.
Serious attempts at strong forms of policy linkage and harmonisation using demand-side carbon
pricing instruments have been all-but-abandoned in the design of the Paris Agreement. Moreover,
the significance of uniform territorial emissions accounting has been much diminished in the move
away from a regulatory regime focused on technical compliance (as with the Kyoto Protocol) to a
facilitative regime focused on mobilising political pressure to raise countries’ambition, along
multiple dimensions, over time (as with the Paris Agreement) (see the Electronic Supplementary
Material in Green 2018). These political realities of the new regime have opened the space for new
forms of instrument-specific international cooperation. There are two features of supply-side policies
that make them potentially more conducive to international cooperation and/or policy diffusion.
First, if price elasticities of demand for a fossil fuel are high relative to supply elasticities for
that fuel, supply-side policies will result in less international carbon leakage than demand-side
policies (Lazarus et al. 2015,14–15). Collier and Venables argue that, at least for coal, long-
run elasticities of demand are likely to exceed those of supply because the many substitution
possibilities available on the demand-side (other fossil fuels, renewables) Bhave no analogue
on the supply side; producing less coal has no technological link to having a greater supply of
oil, gas, or renewables^(Collier and Venables 2015,497–98). Ultimately, determining the
relative supply vs demand elasticities for each fuel type is an empirical matter that lies beyond
the scope of this paper, and for some fuels the relative elasticities may vary from market to
market.
6
But to the extent that supply elasticities are lower than demand elasticities, unilateral
domestic supply-side policies would be more effective at reducing global emissions than their
demand-side equivalents. That effect would be desirable on its own, but it would also help to
build international cooperation: the emergence of international cooperation on fossil fuels is
likely to be contingent on a coalition of early-movers taking unilateral steps to limit or reduce
fossil fuel supply (i.e. Bleading by example^and then persuading or incentivising other states
to adopt similar restrictions: Green 2018); low international leakage rates associated with
supply-side policies would encourage the necessary unilateral action.
The second feature is the relative ease with which supply-side policies can be monitored
and verified (see Section 3.1). Were states to commit internationally to implement supply-side
policies, the ease of MRV would mean third states (and other third-party agents, such as
nongovernmental organisations) could readily verify compliance with those international
commitments (Collier and Venables 2015, 501, 506–7; Kerr and Duscha 2014, 599). This
matters greatly for international cooperation because when states know that compliance can
easily be verified by third parties, they are more likely to comply (Chayes and Chayes 1991,
320–21). Moreover, mutually verified compliance builds trust among states, which encourages
states to escalate their commitments over time as repeated cycles of reciprocal action-and-
verification build their confidence in the integrity of a cooperative regime (Bell et al. 2012;
Victor 2011). This kind of gradual escalation strategy has proved successful in other interna-
tional policy domains where reliable and timely verification was feasible and emphasised (Bell
6
Lazarus et al. (2015, 15), reviewing the empirical literature, find that elasticities of supply usedin studies of coal
markets vary depending on the region, while elasticities of similar magnitudes for demand and supply have been
used in analyses of oil markets.
Climatic Change (2018) 150:73–87 83
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et al. 2012;Victor2011). Since the Paris Agreement’s success is predicated on states’gradual
escalation of their commitments over time, commitments to implement supply-side policies
offer major advantages as a Bcurrency^of international climate cooperation (e.g. as key
measures in countries’Nationally Determined Contributions
7
). By contrast, attempts to build
international cooperation using demand-side instruments are beset by seemingly interminable,
trust-sapping arguments about accounting rules and verification mechanisms for greenhouse
gas emissions (see, e.g., Kuch 2015).
5 Conclusion
To our knowledge, this article is the first attempt to integrate and synthesise the economic and
political attributes of restrictive supply-side climate policies. The article has argued that such
policies (i) can overcome a number of climate-related economic inefficiencies that are
unaddressed, or caused, by demand-side policies; and (ii) have a number of political advan-
tages over demand-side policies. In view of their potential economic and political benefits, we
conclude that the neglect of restrictive supply-side climate policies in policy discussions and in
the comparative academic literature on policy instrument choice is unwarranted.
This article has also contributed to that literature by applying a framework for evaluating
the political attributes of generic policy instruments and design features. In doing so, the article
also responds to the loudening call (e.g. Fahey and Pralle 2016;Jenkins2014,469)for
politically pragmatic climate mitigation policy advice that eschews the depoliticised and
Bfirst-best^economic methodology adopted in much of the literature on climate policy
instruments. This article’s insights about the political attributes of restrictive supply-side
policies relative to demand-side policies can usefully be combined with existing findings
about the political attributes of different instrument-types (market-based mechanisms vs.
Bcommand and control^regulation; price vs. quantity instruments) and design features (e.g.
revenue allocation strategies, where applicable). Such a combination, for example, suggests an
especially strong political case for using quantity-based Bcommand and control^regulation to
ban or restrict the supply of coal by new entrants, i.e. a ban/moratorium on new coalmines. It
also suggests that supply-side market mechanisms have some distinctive political advantages
over similar demand-side instruments.
Future work could fruitfully extend our analysis in three directions.
First, we have been largely silent on the ways in which, and degrees to which, the generic
political benefits of supply-side climate policies might vary across different contexts (e.g.
cross-nationally). Future research on the prospects for supply-side policies in specific coun-
tries/regions, and comparative analysis, would be valuable.
Second, we have only minimally discussed the extent to which the relative strengths of
supply-side policies vary among fossil fuel-types. Some of the benefits discussed are likely to
apply especially strongly to coal, though may apply less strongly to oil and gas. Future research
could valuably explore the relative significance of our arguments for the different fossil fuel types.
Third, we have not considered interactions between climate policy instruments. At the very
least, future economic analysis of instrument interaction should take into account the efficiency
considerations raised in Section 3of this article. Even more useful, however, is the emerging
7
For details on how countries could include supply-side policies in their Nationally Determined Contributions,
seePiggotetal(2017).
84 Climatic Change (2018) 150:73–87
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literature on policy instrument interactions that Bendogenises^political constraints. An insight
from recent literature on policy feedback effects is that overcoming political constraints to
ambitious climate mitigation is best done by sequencing policies in such a way as to engineer
feedback effects that expand the politically feasible set of climate policies over time (see esp.
Jordan and Matt 2014;Mecklingetal.2015;Urpelainen2013). Our analysis suggests that
supply-side policies are likely to have considerable positive feedback effects, such as the
potential to mobilise supportive political constituencies domestically and to foster cooperation
internationally (see Section 4). If this is correct, then supply-side policies would be prime
candidates to be adopted relatively early in the sequence of policies in a country’s
decarbonisation pathway. Further examination of these issues would be of great value.
While we hope that policymakers and reformers take these insights about sequencing
seriously, we recognise that climate politics is contested, messy and fluid; making progress
will require creativity, agility and pragmatic opportunism whenever, and wherever, a Bpolicy
window^(Kingdon 2014) opens. Some windows will be more amenable to one type of
instrument than to another. Politically successful reformers and interest groups recognise the
variety of instruments that can contribute, in different ways, to their desired long-term goal;
they draw from the policy toolkit the tool that best suits the political circumstances. The public
health/anti-tobacco movement, discussed in Section 2, offers an instructive model in this
regard. In our experience, the climate policy community has for too long been excessively
narrow in its preference for certain kinds of policy instruments (carbon taxes, cap-and trade),
largely ignoring the characteristics of such instruments that affect their political feasibility and
feedback effects. At the very least, then, we hope we have shown that supply-side policies
should be in the toolkit, ready to be wielded when circumstances favour.
Better, we think, to cut with both arms of the scissors.
Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International
License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and repro-
duction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a
link to the Creative Commons license, and indicate if changes were made.
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