Bottom‐up world climate policies: Preserving fossil fuel deposits vs. capping fuel consumption

Abstract

The policy of purchasing fossil fuel deposits for preservation is an alternative to the demand-side climate policies that predominate in practice and in professional studies. This paper analyzes the deposit purchase approach and compares it to the standard demand-side policy in a model with international trade and non-cooperative governments that account for the effects of their policies on equilibrium prices. We investigate how the two regimes differ with respect to their equilibrium allocations and, in particular, with respect to the countries' mitigation effort and welfare. If countries are symmetric, mitigation is stronger in the demand-side than in the supply-side regime and the transition from the latter to the former is welfare enhancing for all countries. If countries have different endowments of deposits in a two-country economy, the country with higher extraction costs does not purchase deposits for preservation, and the country with lower extraction costs is better off with the supply-side than with the demand-side policy. Finally, we consider the case of combined policies and find surprisingly that no equilibrium in pure strategies exists, when heterogeneous countries apply both policy instruments.