Bryan Caplan  

The Stockpile Solution

Sports are Life... Dan Klein on Liberalism...
If I were convinced that the fate of mankind hinged on massive reductions in carbon emissions, I would still be pessimistic about unilateral taxes or cap-and-trade.  As I told Yoram:
National emissions regulations can have perverse global effects.  If relatively clean countries switch to clean energy (via command-and-control regulations, cap-and-trade, pollution taxes, or green norms), fossil fuels don't vanish.  Instead, their world price falls - encouraging further consumption in relatively dirty countries.  The net effect?  I was hoping Bauman would tell us, but he didn't even raise the issue.
International tax or cap-and-trade treaties seem almost equally flawed.  Some countries will sign; others won't.  In a world market, won't the fossil fuels the participants stop using just find their way into the hands of the non-participants?  On a homework problem, admittedly, you can solve this problem with punitive carbon tariffs on non-signatories.  In the real world, though, won't this lead recalcitrant countries to sign the treaty, then fail to domestically enforce it?

Yesterday, I hit upon an alternative policy that avoids all these problems: Stockpiling. Instead of taxing or capping pollution, a government could unilaterally buy lots of fossil fuels and sit on them forever.  This would raise the world price of fuel, spurring reduced consumption around the globe.  And since the government only pays for fossil fuels it actually receives, energy producers around the globe have no incentive to thwart the policy.  Indeed, industry has a strong incentive to participate and support the re-imagined war on carbon.

After I proposed this idea, GMU prodigy Nathan Bechhofer quickly showed me that I was reinventing the wheel.  Stockpiling is the heart of Bard Harstad's "Buy Coal! A Case for Supply-Side Environmental Policy" (Journal of Political Economy, 2012).  The original piece is math-heavy, but here's a readable write-up.  Highlights:

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 Harstad solution:

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.

Notice that in Harstad's version of the proposal, the government stockpiles fossil fuel extraction rights rather than fossil fuels themselves.  Given monitoring and commitment costs, though, buying extraction rights is a recipe for corruption.  It's easy to inflate a geological report if the everyone knows the customer will never extract the resources he imagines he's buying.  And after the U.S. acquires and closes a Chinese coal mine, who keeps out the wildcatters - and why won't the watchmen just take bribes to look the other way?  Physical stockpiling preempts all of these problems. 

To repeat, I don't actually favor this policy.  But if a government wants to curb carbon emissions, stockpiling seems like the smart way to do it.  Am I wrong?

COMMENTS (22 to date)
Someone from the other side writes:

So with cap and trade or carbon taxes the government raises revenue whereas when stockpiling it needs to pay. That sounds like a perfectly politically feasible solution, indeed.

Bedarz Iliaci writes:

Why won't the countries that are being stockpiled out have an incentive to take matters in their hands? They are not obliged to merely watch their engine of economic growth being stockpiled away from them.

Sure Americans can buy Chinese mines. But surely the Chinese can nationalize those American-owned mines.

Stockpiled fuel does not sound very safe either. And to stockpile fuel expressly to deprive others,is a valid cause of war. It is practically embargo-ing a nation like India or China.

Joe S writes:

Your concern about corruption in buying extraction rights seems warranted, but what about the additional cost of actual extraction? Shipping, storage, etc? And the amount of energy use that will require.

MrObvious writes:

[Comment removed for supplying false email address. Email the to request restoring your comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Daublin writes:

"In the real world, though, won't this lead recalcitrant countries to sign the treaty, then fail to domestically enforce it?"

That's exactly what happened with the Kyoto Protocol. It's not clear that the Kyoto Protocol made a significant difference on any country's actual policy.

In a curious turn of events, the U.S. actually did meet its target.

Dan W. writes:

The size of your stockpile will be proportional to your stockpile of tanks.

Kenny writes:

One problem with stockpiling is that those that control it will be tempted to sell the stuff, and the temptation will be stronger the more effective stockpiling is.

But stockpiling is probably a good idea in combination with a carbon tax. And the US government already stockpiles crude oil so this shouldn't be hard to implement.

Aaron Zierman writes:

Isn't this the problem that Clean Development Mechanisms are meant to address?

Floccina writes:

So the only remaining solutions are:
1. Geoengineering were the direct costs are less that the direct benefit for the country that does the Geoengineering.
2. Finding some use for CO2 extracted from the air like maybe biochar if that pans out.
3. Adaptation.

Josiah writes:

Around 90% of proven oil reserves are owned by governments, so that's a non-starter.

Maybe you could buy up coal, but that strikes me as being cost prohibitive. You have to pay for all the costs of extraction, transportation, and storage, plus paying companies for the coal, plus the costs that come from having to rely on other more expensive sources of energy.

Mark Bahner writes:
So the only remaining solutions are:

1. Geoengineering where the direct costs are less that the direct benefit for the country that does the Geoengineering.

2. Finding some use for CO2 extracted from the air like maybe biochar if that pans out.

I find it mildly amusing that some people who argue most ardently that AGW is a huge problem also seem to argue against possible solutions such as mentioned.

I'm thinking specifically of removing CO2 from the air via iron fertilization of the oceans:

Wonderful Wikipedia on iron fertilization

Removes CO2 from the air? --> Yes.
Improves ocean productivity --> Seems to.
Cost effective --> Maybe.

But all those potential advantages turn to disadvantages if the goal is exclusively to limit CO2 emissions.

Ryan Murphy writes:

Does the small country assumption really apply if Europe and the US cut their consumption significantly?

Mr. Econotarian writes:

Not that I am necessarily for it, but I guess the other option to unilateral carbon emission tax is a unilateral carbon fuel production tax - make it more expensive to take out of the ground, thus marginally reducing global supply.

Josiah writes:

I'm thinking specifically of removing CO2 from the air via iron fertilization of the oceans

Yeah, I don't get the stridency of opposition to this either.

Pajser writes:

[Comment removed for rudeness.--Econlib Ed.]

sourcreamus writes:

The problem is that while most anti global warming schemes seek to curb demand and thus affect supply, this increases demand. Over the short run this will hike the price and lower demand. But in the longer run producers may find ways to respond to the higher demand with more supply.

ThomasH writes:

Stockpiling might be better than a lot of ad hoc regulations but not better than a carbon tax because a) physical costs of storage, b)it would give an incentive to produce more carbon containing fuels (this might be somewhat offset by uncertainty about whether the stockpiled fuels would indeed never be released) and c) it would produce no revenue with which to offset the somewhat regressive effects of higher fuel costs and would require higher rates of other distorting taxes whereas a carbon tax revenue could be used to reduce corporate income and payroll taxes.

Cheating on enforcement of carbon taxes in other countries would of course be a problem in the same way non-subsidy squabbles between Airbus and Boeing are or, perversely, "intellectual property."

Silas Barta writes:

Wait, what? I'm surprised no one else has said it:

This would just incentivize further development of untapped fossil fuel resources *outside* the stockpilers' control.

It fails for the same reason as proposals to end modern-day enslavement by buying slaves' freedom.

John Ray (@jonjayray) writes:

This is just the gambler's fallacy of doubling all losing bets
Eventually it becomes too costly

AS writes:

This is a beautiful application of the Coase theorem. All parties are made better off via free trade.

Scott Gustafson writes:

Your biggest fossil fuels and coal, crude oil, and natural gas. Once mined, storing coal isn't all that easy. Sure you can just put it in a big pile, but talk to any utility that burns coal (or anyone that mines it for that matter) and you will find significant costs associated with storage. If you want to store coal, the best way is not to mine it in the first place.

Crude oil we know how to store - see the US Strategic Petroleum Reserve.

Natural gas is another problem. Some of it can be stored in caverns, but not a lot.

Your economics might make sense, but the engineering implementation is non-trivial.

Wes writes:

Fun idea, but if you artificially raise the price on fossil fuels, won't that encourage the more investment in environmentally damaging, low-energy-return methods of extraction like fracking and deep-sea drilling? Seems like it would bite you in the ass.

Now, you could periodically buy up and release fossil fuels to destabilize the market. Let the companies invest in high-risk ventures and then put them out of business after the infrastructure is there. But no government bureaucracy could ever pull that off.

Comments for this entry have been closed
Return to top