Supply-side climate policy: the road less taken

The research paper argues that climate policy has historically over-emphasized demand-side measures, such as carbon pricing and energy efficiency, while neglecting the supply side of the fossil fuel economy. The authors identify three primary barriers to supply-side action: political opposition from powerful fossil fuel interests, territorial GHG accounting rules that under-credit supply-side reductions, and a common perception that restricting production merely causes 'leakage' to other regions. The paper proposes a typology of supply-side policies, including producer subsidy reform, conservation payments for leaving reserves undeveloped, and ring-fenced cap-and-trade systems for production rights. It suggests that integrating supply-side measures can widen the mitigation cost curve, reducing the cost of achieving emission targets and mitigating 'carbon lock-in' and 'stranded-asset' risks. The authors highlight the case of Norway, where a combined supply-demand strategy could potentially achieve global emission reductions at one-third the cost of a demand-only approach.

• Traditional demand-side climate policies have failed to put fossil fuel use on a trajectory consistent with keeping global warming below 2°C.
• Three main factors explain the lack of focus on supply-side policies: the political attractiveness of demand-side solutions, territorial GHG accounting rules that undervalue supply-side measures, and perceptions that production restrictions lead to market leakage.
• Territorial emissions accounting, as established by the UNFCCC, creates a barrier to supply-side action because it attributes emission reductions to the consumer rather than the supplier, meaning a jurisdiction may claim less credit for supply-side actions than for demand-side ones.
• Supply-side policies can increase the scale of emission reductions available at a given marginal cost, effectively widening the mitigation cost curve.
• Supply-side measures can reduce 'carbon lock-in' by slowing investment in production and trade infrastructure, which lowers future mitigation costs and reduces the risk of stranded assets.
• The paper identifies several categories of supply-side policies: price-based economic instruments (e.g., resource production taxes), quantity-based instruments (e.g., cap-and-trade for production rights), regulatory approaches (e.g., prohibiting development of certain resources), government provision of funds (e.g., compensating owners to leave reserves undeveloped), and information/voluntary actions (e.g., divestment).
• The Yasuní-ITT Initiative in Ecuador attempted to use a conservation and compensation model to keep nearly a billion barrels of oil in the ground, but it failed because funding did not materialize and donors were concerned about market leakage and permanence.
• A proposed 'ring-fenced' cap-and-trade system could use rents from oil production to compensate the coal industry for closing mines, leveraging the fact that oil generates significantly higher rents per unit of energy than coal.
• Analysis of Norway suggests that a combined supply- and demand-side strategy could achieve the same global emission reductions as a domestic-only plan at only one-third of the cost.
• The risk of leakage depends on the relative price elasticity of supply and demand; where demand is more elastic than supply, leakage is greater for demand-side measures, and where supply is more elastic, leakage is greater for supply-side measures.

APA

Lazarus, M., Erickson, P., & Tempest, K. (2015). Supply-side climate policy: the road less taken. Stockholm Environment Institute. https://www.sei.org/mediamanager/documents/Publications/Climate/SEI-WP-2015-13-Supply-side-climate-policy.pdf

Chicago

Lazarus, Michael, Peter Erickson, and Kevin Tempest. Supply-side climate policy: the road less taken. Stockholm Environment Institute, 2015. https://www.sei.org/mediamanager/documents/Publications/Climate/SEI-WP-2015-13-Supply-side-climate-policy.pdf.

Wikipedia

{{cite report |last1=Lazarus |first1=Michael |last2=Erickson |first2=Peter |last3=Tempest |first3=Kevin |title=Supply-side climate policy: the road less taken |publisher=Stockholm Environment Institute |date=October 2015 |url=https://www.sei.org/mediamanager/documents/Publications/Climate/SEI-WP-2015-13-Supply-side-climate-policy.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{lazarus2015supplyside, author = {Lazarus, Michael and Erickson, Peter and Tempest, Kevin}, title = {{Supply-side climate policy: the road less taken}}, institution = {Stockholm Environment Institute}, year = {2015}, month = oct, url = {https://www.sei.org/mediamanager/documents/Publications/Climate/SEI-WP-2015-13-Supply-side-climate-policy.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }