The 2013 Erik Kempe Award has been awarded to Bård HARSTAD for his study:
“Buy Coal! A Case for Supply-Side Environmental Policy” Journal of Political Economy 120, 77-115, 2012.
Bard Harstad delivered his Erik Kempe Lecture at the University of Umea on October 19th.
Abstract: 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.
The Nomination Committee, composed by Thomas Aronsson (chair), Christa Brunnschweiler and Michael Hoel, has awarded this paper for the following motivation:
The global warming caused by the release of carbon dioxide is arguably one of the most challenging policy problems of our time. The traditional approach to addressing this problem (as well as other international environmental problems) has been to focus on the demand side, where taxes, quotas or permits are implemented in an attempt to reduce the consumption of fossil fuels. Yet, it is well known that such policies may lead to an inefficient outcome. One reason is the free-rider problem; another is the carbon leakage that may follow when the reduced demand for fossil fuels by the members of a climate coalition leads to a lower market price for such fuels and, as a consequence, increased demand outside the coalition.
The present paper focuses on the supply side and shows that if a group of countries comprising a climate coalition can participate in a well-functioning market for extraction rights, then all the inefficiencies typically associated with international environmental policy may vanish. To be more specific, the results show that such trade in extraction rights will lead to a first-best resource allocation under certain conditions. The intuition is that a climate coalition may find it beneficial to purchase the rights to exploit the fossil fuel deposits that are most costly to exploit (and which are relatively inexpensive to buy) with the intention of preserving them. A side effect of this trade is also that the selling country’s supply curve for fossil fuels becomes a locally inelastic step function. As such, the coalition can then reduce its own supply without fearing that the non-participants will increase their supply, i.e., this policy avoids leakage. The strong policy message is that purchasing fossil fuel deposits with the intention of preserving them may be the best possible climate policy.
Bård Harstad receives the Erik Kempe Award for his novel and insightful contribution to the study of international environmental policy. At a theoretical level, he has presented mechanisms of relevance for a successful climate policy by exploring the role of a market for extraction rights. In light of the difficulties in forming climate coalitions in practice, and the problems that such coalitions typically face, the paper is also of clear practical policy relevance by pointing at a new approach for solving a very challenging social problem. As such, Harstad has contributed both to the academic literature and to policymaking by providing insights of clear practical relevance for the design of policies to combat the climate change problem.