Economics of Demand-Side and Supply-Side Climate Policies

Should a jurisdiction seeking to cut greenhouse gas emissions use demand-side climate policies that target fossil fuel consumption? Or should it introduce supply-side policies that target extraction? My analysis points to a policy portfolio rather than an either/or choice. ``Leakage'' of emissions to unregulated jurisdictions can be mitigated by combining standard demand-side carbon emissions pricing with supply-side pricing of carbon extraction. Emissions pricing drives leakage by lowering fossil fuel prices abroad; extraction pricing counteracts this effect. Supply-side climate policies in practice, however, do not broadly price extraction but instead narrowly foreclose investments in fossil fuel infrastructure and are thus inefficient. To reduce carbon demand, an alternative to emissions pricing is support for clean energy. I emphasize reforms to transmission planning and utility governance as crucial for unlocking clean energy resources' potential, and I highlight the case for publicly supporting clean energy R&D, including green industrial policy, to reduce carbon emissions not just at home but also abroad. I close by discussing distributional consequences. Domestically, carbon pricing and clean energy subsidies have sharply different distributional profiles. Globally, carbon extraction pricing would harm low-income countries that are also fossil fuel importers, though there also exist low-income fossil fuel exporters that would benefit.