Buy Coal! A Case for Supply-Side Environmental Policy
Journal of Political Economy, Vol. 120, No. 1 (February 2012), pp. 77-115
Posted: 24 Apr 2017
Date Written: February 1, 2012
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.
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