An Economist's Case for Restrictive Supply Side Policy
Ten policies to manage the fossil fuel transition
by Mark Paul and Lina Moe
Until the rise of the Green New Deal, economists’ favored response to the climate crisis was some form of carbon pricing—leveraging the market to produce positive climate outcomes. With the Green New Deal came a more investment-forward strategy, one that has helped usher in a huge expansion of renewable energy and other clean technologies. The recently passed Inflation Reduction Act (IRA) of 2022 invested a massive amount of money into demand-side, investment-forward climate policies. What the IRA lacked was restrictive supply-side climate action to curtail and phase out the supply of fossil fuels. (In fact, parts of the bill expanded fossil fuel extraction.)
Policymakers have been hesitant to employ restrictive supply-side policies—in other words, explicitly phasing out the supply of fossil fuels—on the theory that increasing the demand for clean energy will crowd fossil fuels out of the marketplace. Implicit in the strategy of focusing on clean energy investment is the assumption that fossil fuel firms will voluntarily close their doors as they get pushed out and exit the market in an orderly fashion. They will not. Without discrete restrictive supply-side planning and policy, the end of fossil fuels will be a chaotic collapse where workers, communities, and the environment suffer.
" Without discrete restrictive supply-side planning and policy, the end of fossil fuels will be a chaotic collapse where workers, communities, and the environment suffer. "
In this report, we explain the economic rationale—and climate necessity—of deploying restrictive supply-side policies to actively wind down fossil fuel extraction and provide 10 concrete policies to do so. Levers like bans, restrictions, or phaseouts are not new; in fact, history shows that products can go quickly from commonplace to banned. In the last four decades, the United States has outlawed lead paint, phased out asbestos, and curtailed tobacco marketing and sales. Similar policies can be used for fossil fuels; indeed, comparable policies are in place in other countries and at the state level. Restrictive supply-side interventions can provide crucial support for demand-side policies by:
Guaranteeing Emission Reduction. Whereas the outcomes of demand-side policies are largely uncertain, supply-side policies guarantee that fossil fuels are not extracted and burned, thereby ensuring climate targets are achieved.
Stopping International Carbon Leaks. Given that the US is a net exporter of fossil fuels, increasing domestic US demand for clean energy (and, ipso facto, reducing domestic demand for fossil fuels) either will not affect, or may even increase, exports. In fact, a reduction in domestic demand may lower the price of fossil fuels internationally and incentivize international actors to increase fossil fuel consumption.
Alleviating Carbon Lock-In. Demand-side policies do not prohibit the construction of new fossil fuel infrastructure, creating the potential for stranded infrastructure, workers, and communities. Instituting effective supply-side policies can provide market certainty that fossil fuels cannot be developed.
Economists’ decades-long commitment to the market for climate action is unviable, and any purely demand-side solution to the climate crisis could result in an unmanaged transition that deepens inequality, uncertainty, and environmental exploitation. This is avoidable. By coordinating demand-side investments that bring the future energy system into view with restrictive supply-side action to wind down fossil fuels, the United States can secure rapid decarbonization in a way that protects the health and economic security of those on the frontline of the transition.