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Why couldn't our oil deposits be like the ones in the middle east, the kind where you stick your finger in the sand and the stuff just comes gushing out? Whatever your view of the controversial Alberta oil sands, both sides agree that extracting their crude is expensive and produces more greenhouse gases than conventional oil. An economist has a proposed solution that could settle the should-we-or-shouldn't-we debate: just leave the oil there.
Professor Bård Harstad of the Kellogg School of Management in Chicago turns the issue of environmental policy on its head with his paper "Buy Coal! A Case for Supply-Side Environmental Policy," for which he won a major prize awarded by the European Association of Environmental and Resource Economists, and which influential economist and writer Tyler Cowen linked to on Tuesday from his blog. Mr. Harstad's paper notes that trying to ban fossil fuels or penalize producers of especially dirty sources encounters the problem of leakage, namely when countries and/or producers refuse to sign onto treaties and, with their competitors out of the way, simply gain a larger share of the energy market. Cap and trade rules encounter similar problems, exemplified by the fact that the EU's carbon emissions scheme is allowing European importers to buy U.S. coal cheaply.
Mr. Harstad argues that if governments were to buy fossil fuel deposits from producers – beginning with the dirtiest sources, which arguably include oil sands crude – and not exploit them, there would be no leakage. The price of fossil fuels would simply go up as the supply was taken off the market, increasing producers' incentive to find alternative energy sources, and consumers incentive to conserve. Meanwhile, politicians could campagin on making a concrete improvement in reducing emissions, since they'd be taking the dirtiest sources off the market and preventing their extraction.
Governments wouldn't simply have to buy their own fossil fuel deposits, either. In the paper, Mr. Harstad describes a similar scheme by the United Nations, the Reducing Emissions from Deforestation and Forest Degradation (REDD) funds. "If the North would like to preserve tropical forests in the South," he writes, "then boycotting the logged timber may be ineffective since the timber price thereby declines, leading other buyers to increase their consumption. A more effective solution, according to this paper, is to pay developing countries to reduce their deforestation."
Despite the plan's obvious attraction for politicians – to boast of their green credentials – the political cost of spending vast sums to decrease the number of jobs available in the affected areas (at least in the short term) may outweigh its vote-getting appeal. Also, implementing such a scheme on any significant scale would get expensive quickly, though given that the cost of a plan like the Kyoto Protocol was estimated to be in the hundreds of millions, and that a sensible application of the theory could begin with a few smaller purchases of the worst potential polluters, the cost may not be as prohibitive as it appears. And Mr. Harstad's idea is tantalizing, given that it would certainly shift the discussion around the oil sands. What if we didn't have to weigh the economic benefit to Canada against our desire to protect the environment? What if a bunch of idealistic Europeans were willing to pay us to not pull oil out of the ground? It's so crazy, it just might work – and if it means we can get paid for sitting around, even for a while, it's worth a shot.