A key problem with attempting to achieve an international agreement on climate policy if of course the existence of a set of non-complying countries. If a coalition of compliers (a ‘climate coalition’) restricts their use of carbon-based fuels then a general equilibrium effect is to reduce the price of fuels and to encourage extra usage outside the coalition. Effects on import-competing industries inside the coalition can be addressed by coalition countries applying border taxes on those goods they import from countries outside the coalition that reflect the non-internalised carbon taxes. Competitiveness disadvantages among exporters in the coalition countries can be dealt with by handing out free tradable carbon emission quotas. I strongly support such policies since, provided they are implemented honestly, they are not protectionism. They ensure a level playing field in the world’s traded goods sectors, prevent carbon leakages from coalition to non-coalition countries and provide incentives for non-coalition countries to join the coalition – then they collect the carbon taxes rather than the governments of the coalition countries.
But such policies leave unaddressed the types of general equilibrium carbon leakages cited in the first paragraph. Fuels get cheaper when the climate coalition curtails their carbon use and this encourages use outside the coalition. If the coalition alone reduces its supply of carbon-based fuels then non-coalition countries will increase their supply. Non-coalition countries will experience inadequate incentives to invest in renewables and so on. Harstag’s ingenious proposal is simply to allow trade in fossil fuel deposits before climate and trade policies are established. Coalition countries should then buy deposits in non-coalition countries and then not exploit them. The deposits selected should be the ones used which are least profitable since their owner will be willing to sell these cheaply. The coalition can then reduce their supplies marginally without supposing non-coalition countries will increase theirs. Supply side leakages are eliminated. This will tend to equalize carbon prices across countries as well as marginal benefits from consumption. Thus trade distortions are also eliminated. Investments in technology also become efficient. The proposal is a bit like proposals for the North to buy back rainforests from the South – this works better than a timber boycott since this would reduce timber prices creating incentives for increased timber imports. The proposal is also a bit like proposals to buy back emissions permits when agents undertake voluntary actions to reduce their emissions in a closed economy.
There are qualifications to this model that the author acknowledges and this clever paper will be subject to debate. But the basic idea is most interesting. As Science Daily puts it - multinational companies trade extraction rights – so too should members of a climate coalition. (1912)