Environmental activists should buy coal!

My ECONS101 class is on a teaching recess at the moment. Just before the recess though, we covered supply and demand. So, it's timely for me to consider a little bit of supply and demand here. I really liked this recent Marginal Revolution post by Alex Tabarrok:

Since climate change and what to do about it are in the news it’s time to re-up an underrated idea, buy coal! Carbon taxes increase the price of carbon and induce economic and technological substitution towards lower-carbon sources of fuel in the countries that adopt them. As carbon-tax countries reduce fuel use, however, non carbon-tax countries see the price of their fuel decline. Thus, unless all countries join the tax-coalition, there is leakage. Supply-side policies are an alternative to demand supply policies. The United States, for example, could buy out and close coal mines, including giving the workers substantial retirement/reallocation bonuses, thus reducing the world supply of coal which is still the largest source of C02 emissions.

I'm going to take things in a slightly different direction though. Let's consider the actions of environmental activist groups (or activist governments, if you like), and how they impact the market for coal. [*] The standard approach has been to try to convince consumers (or shame them) to reduce their use of coal. To the extent that the approach is effective, it reduces the demand for coal. In the diagram below, the coal market is initially in equilibrium, with a price of P0, and Q0 coal is traded. When demand decreases (from D0 to D1), the price of coal falls (from P0 to P1), and the quantity of coal that is traded (and consumed) falls from Q0 to Q1. Less coal is consumed. Job done! The environmental activists can pack up and go home for a well-earned kombucha.

Not so fast. As Tabarrok notes, the lower price of coal may encourage other countries to use more coal. Perhaps they build more coal-fired power plants to take advantage of the lower-price energy. Demand for coal increases, and we end up back where we started.

An alternative, strange as it may seem, may be for the activist groups to use their funds to buy coal mines, and shut them down. Provided the groups' property rights over the mines are secure, they can be sure production will not start up again. That has the effect of decreasing supply, as shown in the diagram below. Supply decreases (from S0 to S2), which pushes the price of coal up (from P0 to P2), and decreases the quantity of coal that is traded (and consumed) from Q0 to Q2. This approach has the added benefit that it reduces the incentives for other countries to turn around and consume more coal, because coal is now more expensive than before. Of course, this approach may be more expensive than simply trying to convince consumers to consume less, but if it is more effective in the long run, then why not try it? [**]

For completeness though, what if the environmental activists did both (convincing consumers to consume less, while simultaneously buying up and closing down coal mines). Then we have the situation below, where demand has decreased (from D0 to D1) and supply has decreased (from S0 to S2). The quantity of coal traded (and consumed) falls much further (from Q0 to Q3), but the effect on price is not easy to determine. In the diagram below, the price falls (from P0 to P3). However, that is only because the decrease in demand is drawn as being larger than the decrease in supply. If the decrease in supply were larger, the price of coal would have increased. There is also an unlikely possibility that the two changes exactly offset and the price of coal stays the same. So, in this situation we can say for sure that the quantity of coal will decrease, but the change in the price of coal is ambiguous (and so is the change in incentives for other countries to use coal).

Overall though, at the least I think there is a case for activist groups to explore this possibility. As Tabarrok concludes:

A program to leave coal in the ground could easily pay for itself in lives saved and climate stabilized.

*****

[*] For simplicity, the market diagrams I've drawn in this post ignore the fact that coal generates an externality (an uncompensated impact on those who are neither the supplier nor consumer of coal). However, drawing them with the externalities would make no difference to the underlying story in terms of the change in prices or quantities, and would simply make the diagrams more complicated. Let's keep things simple!

[**] Of course, an economist would point out that the reason 'why not' could be that the added costs of this higher-cost approach outweigh the benefits. But that requires more analysis than we have space to do here, and is a job for the environmental groups (or their pet economists).