Actions aimed at slowing the expansion of oil supplies could, barrel for barrel, be as effective at reducing CO2 emissions as policies to limit oil consumption.
LAST month, U.S. Interior Secretary Sally Jewell announced that two potential Arctic offshore drilling lease sales would be canceled. She did not mention climate concerns, instead citing “current market conditions and low industry interest” — most notably Shell’s decision to withdraw from Arctic oil exploration.
Yet even if the climate were not on Jewell’s mind, by choosing not to award new leases for Arctic drilling she and President Obama are in fact conducting a very important climate policy experiment. They are providing a real-life test of what we call “supply-side” climate policy.
Supply-side climate policy is a potentially potent complement to efforts to reduce the use of fossil fuels, and one that policymakers are only beginning to grasp. The idea is to limit fossil-fuel supplies — by removing financial incentives, or as in this case, avoiding new drilling — to help reach climate goals.
Some may argue that leaving oil and coal in the ground that would have otherwise been exploited makes little difference for the climate. The Earth’s stores of fossil fuels are vast, and the forgone supply from any one canceled project, in the Arctic or elsewhere, can easily be made up somewhere else. In that view, canceling new oil leases would have no effect on global oil supply and related CO2 emissions.
However, there are good reasons to question that conclusion. Is it always true that restricting fuel supply in one place would be met with an equivalent increase in drilling elsewhere, an unavoidable game of whack-a-mole? Economic logic would suggest that canceling new oil projects should decrease competition among suppliers, leading to somewhat higher prices overall. Consumers, in turn, see rising gasoline prices and drive a little less or buy a smaller or more efficient car at their next trip to the auto showroom.
Both suppliers and consumers are price sensitive and the dynamic between them determines the impact of the reduction of supply, such as the loss of Arctic oil drilling. If producers and consumers are roughly equally sensitive to price (as several studies have suggested), then they essentially meet in the middle. For each barrel of oil supply canceled, suppliers would make up about half a barrel by adding new supply elsewhere, and consumers would drop consumption by about half a barrel.
The exact split between increased production and reduced consumption will, of course, depend on many factors. For example, if the Organization of the Petroleum Exporting Countries (OPEC) were able to compel its members to increase production enough to keep global oil prices steady, then consumption might be unchanged. But such an outcome is unlikely, as OPEC’s influence has waned in recent years.
This roughly half-and-half split has a rather startling implication. Actions aimed at slowing the expansion of oil supplies could, barrel for barrel, be as effective at reducing CO2 emissions as policies to limit oil consumption. Of course, that doesn’t necessarily make such actions good policy, as many other factors, including cost, would need to be considered. Still, given the urgent need to reduce global CO2 emissions dramatically, relatively simple steps, such as restricting future fossil fuel leases or ending subsidies for oil exploration and extraction, should be part of any nation’s policy considerations.
The challenge of global climate change requires many more policy tools than have so far been put on the table.”
The challenge of global climate change requires many more policy tools than have so far been put on the table. We cannot know whether President Obama and Secretary Jewell had CO2 emissions in mind when they decided to cancel Arctic oil-lease sales. As things stand, Jewell’s stated rationale leaves the door open for a future administration to resume leases when oil prices rise again.
If they want to achieve lasting benefits for the climate, they should consider putting the area permanently off-limits.