Unilateral Climate Policy and Oil Extraction

Scarcity rent concept: present value of price minus marginal cost today equals present value of price minus marginal cost tomorrow. Mathematically:
$(P1 - MC1) = \frac{P2 - MC2}{1 + r}$
$\text{where } r \text{ is the interest rate}.$
Under a future ban on oil sales in period 2, the margin in period 2 is zero: $P2 - MC2 = 0.$
Thus, to satisfy the scarcity rent condition, the first-period margin must be zero: $P1 = MC1.$
Example (two-period model): stock = 20, demand price $P = 8 - 0.4 q$, marginal cost $MC = 2$, $r = 0.1$.
Solve $8 - 0.4 q1 = 2 \Rightarrow q1 = 15.$ Then $P_1 = 2.$
Outcome: total extraction is reduced; some oil is left in the ground due to the future ban.
Green Paradox intuition: pre-announcing a future ban can accelerate extraction in the present (policy announcement prompts faster pull of oil before the ban).
- In the example, pre-ban extraction rises from about 10.2 to 15 in period 1; period 2 remains zero due to the ban.
Policy takeaway: timing and strategic responses matter; design policies with anticipated pre-ban adjustments in mind.

Recent social cost of carbon (Biden administration context): around 200\$\/\text{ton}.
Carbon tax example: a global tax of $200\$\ /\ ton$ would reduce oil consumption by roughly $5\%$ , under assumptions including a high backstop cost.
Backstop technology cost in the referenced analysis: $250\$ / barrel$ .
- If backstop is expensive, even a 200\$/\ton tax may not shift much to the backstop technology.
Policy implications: to drive oil out of the market, you can either raise the extraction cost (carbon tax) or lower the cost of the backstop technology (subsidies/RD).
Policy tools to reduce backstop reliance:
- Direct consumer subsidies for electric vehicles (EVs).
- Government subsidies for R&D to improve/cheapen the backstop technology (e.g., better EV batteries).
Biden-era actions vs. Trump-era changes:
- Inflation Reduction Act: substantial subsidies for clean tech (EVs, solar, wind).
- Under the latest changes, some EV subsidies were phased out; current policy can affect near-term backstop costs but long-run tech progress continues (batteries: cost fell from $1,500$ to below $300$ per cell between 2010 and now).

Examples: California aiming to phase out sale of new gas cars by 2035; EU pursuing similar long-run bans.
Rationale: make future emissions reductions politically palatable by waiting for technology to get cheaper, while signaling a path to zero-emission transport.
Policy takeaway: future bans change incentives for oil extraction; producers anticipate bans and may adjust current production. Design should account for pre-ban responses (the “green paradox”).

Problem: climate policy is global; unilateral action has limited effectiveness due to shared atmosphere and cross-border oil markets.
Common energy market means price changes from one country’s policy can affect others (spillovers).
Bart Harstad’s unilateral oil-purchase proposal (Norwegian economist, later at Stanford): buy oil reserves and hold them off the market to reduce global supply and emissions, when you cannot secure international cooperation.
Setup: two identical countries (e.g., US and Brazil) with a single global oil market. No gains from trade due to identical demand/supply.

Baseline: identical countries, no gains from trade; externality illustrates social vs private marginal cost.
Scenario A: Country 1 caps consumption (e.g., cap-and-trade) but leaves producers unrestricted.
- Result: producers export the restricted oil to the other country; supply in the global market shifts outward for the upper part of the supply curve; quantity in Country 2 rises; Country 1’s consumption falls.
Scenario B: Country 1 caps production but imposes no restrictions on consumers.
- Result: demand shifts toward imports; Country 2’s market absorbs more oil; global price and quantities adjust with increased foreign demand.
Scenario C: Cap on both production and consumption in Country 1.
- Result: no cross-border movement; Country 2 may still emit above socially optimal levels, so global welfare not fully achieved.
Key insight: unilateral measures can create leakage (spillovers) and may fail to reach the global social optimum without coordination.

Idea: Country 1 purchases a subset of the oil supply (the high-cost portion) and takes it off the market.
Effect on supply: the remaining supply is limited to lower-cost reserves; the global supply curve effectively contracts to a smaller, lower-quantity equilibrium.
Outcome: moves the world toward the socially optimal extraction level Q*; Country 1 reduces Country 2’s reserves in the market.
Practical challenges: high upfront cost, political feasibility, legal hurdles, governance of multi-national oil rights, enforcement, and repayment/credit considerations.

The timing of policy matters: pre-announced future restrictions can trigger green paradox effects unless designed with forward-looking behavior in mind.
Policies to curb oil use can be implemented via either price mechanisms (carbon taxes) or by making clean alternatives cheaper (RD subsidies, EV subsidies), but backstop costs and technology progress are crucial.
In a global oil market, unilateral policies can cause spillovers; effectiveness depends on cross-border responses and the degree of coordination among countries.
The idea of unilateral buyouts (Harstad) offers a bold tool to reduce emissions, but faces real-world feasibility barriers.
Equations to remember:
- Scarcity rent relation: $(P1 - MC1) = \frac{P2 - MC2}{1 + r}$
- With a future ban ( $P2 - MC2 = 0$ ): $P1 = MC1$ , e.g., in the example $8 - 0.4 q1 = 2 \Rightarrow q1 = 15.$
Key numbers cited:
- Social cost of carbon: $\$200\text{ per ton}$ (context-dependent).
- Backstop price: $\$250\text{ per barrel}$ .
- EV tax credit (current): $\$7,500\$. läuft out in coming months; battery costs dropping dramatically (from$ 1{,}500\$\text{ to }<300\$ per cell in a decade).