What is wrong with traditional climate policies? Negotiations past and present focus on regulating consumers or emitters, whether through quotas, carbon taxes or cap-and-trade systems – such as the EU scheme its parliament yesterday voted to prop up. The problem is that whenever some countries opt out of a global climate coalition such as the Kyoto protocol, the result is “carbon leakage”. If co-operating countries decide to cut back fossil fuel consumption, the world price declines and other nations can afford to buy more. Estimates of the magnitude of such leakage vary from 20 per cent to 25 per cent.
Not only does such carbon leakage weaken any coalition’s impact on the climate; the percentages are also used by advocates of the status quo.
Is there an alternative? You bet. Economists postulate that demand equals supply. So rather than regulating consumption, we can regulate supply – the quantity of fuels extracted from the ground.