Those with a desire to see a reduction of greenhouse gas emissions from fossil fuels could do worse than to buy up reserves, according to a paper published this month. Researcher Bard Harstad argues that buying and holding extraction rights to fossil fuels is a more effective means of curbing their use than legislating to reduce demand.

At first glance it looks like a novel approach, though perhaps an obvious one when you think of it. For example, coal left in the ground cannot emit greenhouse gases into the atmosphere, so the more you buy and leave there, the more emissions are prevented. But tempting as it is to present the research in these terms, Harstad's argument is actually rather more subtle, and involves influencing fossil fuel markets—and not necessarily by buying in bulk.

The problem with demand- and supply-side policy

A fundamental problem with adopting a "demand-side mindset" that implements policy to reduce fossil fuel consumption is that not everyone takes part, Harstad argues. An international agreement between coalition countries to curb oil consumption will initially have the desired effect of reducing overall demand, but this will lower the price of oil, giving a strong incentive to countries outside of the agreement to buy and use more.

On the other hand, Harstad argues, if an international agreement decides to limit oil extraction and supply, the price will go up, and countries outside of the agreement are likely to churn out more for export.

"Both on the demand-side and the supply-side the result is carbon leakage, which is an increase in pollution abroad relative to the emission-reduction at home," says Harstad, who is associate professor of managerial economics & decision sciences at Northwestern University's Kellogg School of Management. Carbon leakage describes the process by which carbon-cutting measures in one location cause knock-on emissions elsewhere. The term is defined by the International Panel on Climate Change as "the increase in CO 2 emissions outside the countries taking domestic mitigation action divided by the reduction in the emissions of these countries."

Harstad claims these leakages are in the order of 5 to 25 percent, but that they can be higher when small coalitions execute ambitious policies over longer timeframes. Though some leakage may be mitigated by trade tariffs, this only limits and distorts trade further, he argues. But it's on the supply side that the answer lies, he argues.

An equalizing effect

Harstad's solution is for coalition countries to buy up extraction rights in countries outside of such agreements—"third countries," in his terminology. And though this has the obvious benefit of preventing emissions from those fossil fuels, there are rather more far-reaching implications.

Coalition countries will naturally focus on marginal deposits least profitable for host countries, because these can be had the most cheaply. After a third country has sold off the rights to its marginal deposits, Harstad argues that its supply is less sensitive to fluctuations in global fuel price. Coalition countries are then able to limit their own supplies without the undesirable effect that third countries will increase theirs. The price of fuel is equalized universally. Harstad goes so far as to assert that the equalized price is high enough that even third countries would be compelled to pursue alternative energy technology, and sign up to coalition agreements.

"The analysis shows that progress on international climate policy is best achieved by simply utilizing the existing market for extraction rights," Harstad concludes.

Back in the real world...

But Harstad's paper contains no real-world examples of how the system might work, the scale of reserves required, and therefore the costs associated with snapping up the rights. And as such it has been criticized for a lack of practicality.

Environment & Energy Publishing quotes National Mining Association Luke Popovich as crediting Harstad's approach as imaginative, while also describing it as "a thoroughly preposterous and utterly impractical idea." With fossil fuel demand set to increase, and be met largely by developing nations "reliant" on fossil fuel revenue, Popovich calls this, perhaps not unjustifiably (if not wholly objectively), "an extremely difficult hill to climb." Silver bullet it may not be, but that's not to say Harstad's theory is entirely useless either. It remains to be seen if policy-makers will prove willing to give his ideas a try.

Harstad's study, Buy Coal! A Case for Supply-Side Environmental Policy, was published in the latest edition of the Journal of Political Economy.

Journal of Political Economy, 2012. DOI: 10.1086/665405 (About DOIs).