Buy coal! A case for supply-side environmental policy

Buy coal! A case for supply-side environmental policy / Bård Harstad. ellogg School of Management at Northwestern University, Feb. 2012, 34 p. (forthcoming in the Journal of Political Economy)

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 it is not time-consistent. However, suppose the countries can trade the rights to exploit fossil fuel deposits: As soon as the market clears, the above-mentioned problems vanish and the …rst-best is implemented. In short, the coalition’s best climate policy is to simply buy foreign deposits and conserve them.

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