For Policies That Target Oil Demand and Supply, You Can Have Your Cake and Eat It Too
Combining equally ambitious policies that target oil demand and supply could reduce emissions and mitigate price impacts, according to a new report.
As Americans grapple with the growing threat of climate change and high prices at the pump, short-term policies to help consumers may be at odds with long-term climate goals. Earlier this month, just as the Intergovernmental Panel on Climate Change released a major report calling for swift climate action, the Biden administration released oil from the Strategic Petroleum Reserve in an effort to reduce fossil fuel prices. Policymakers are at a crossroads—how can they implement policies that rein in emissions while also being cognizant of the role that fossil fuels play in everyday life?
A new report by Brian C. Prest, fellow at Resources for the Future (RFF), addresses this question by diving into economic theory. His paper, out today, analyzes the effects of policies that reduce fossil fuel demand and supply separately but in tandem. He finds that combining policies aimed at reducing oil demand with those targeting supply could reduce emissions effectively without raising prices.
“Supply-side and demand-side policies, pursued in parallel, can fit together like puzzle pieces,” Prest said. “The drawbacks of demand-side policies can be mitigated by supply-side policies and vice versa. Together, they can keep emissions leakage and price impacts at bay.”
When policies that limit oil supply are implemented, oil prices rise, encouraging more production elsewhere—“leakage”— and emissions reductions tend not to be as deep as intended. On the other hand, policies that reduce demand reduce global oil prices, which could also “leak” emissions by increasing foreign consumption of now-cheaper fuel. This study asks what happens when both are put into play.
Prest examined two policies alone and in tandem: a policy reducing oil demand (such as the Biden administration’s recent vehicle fuel economy standards) and one reducing supply (such as the administration’s temporary pause on federal oil and gas leasing). As shown below, combining both types of policies would result in no change in oil prices but would reduce oil consumption by the amount intended—a result that would reduce emissions without generating leakage.
“Reducing supply increases the price of oil, whereas reducing demand drives it back down,” Prest said. “Because both supply and demand fall, less oil is needed—a win for climate goals. But it is important to note that both policies must be equally ambitious. An unbalanced approach will lead to leakage.”
Prest leveraged data from his own past research on federal oil and gas leasing policy and estimates from the Environmental Protection Agency for fuel economy standards’ effects on oil consumption. While the modeling that Prest uses does yield quantitative estimates, this report primarily seeks to explain the theory behind implementing both supply- and demand-side policies and how they interact.
Prest notes that reducing or eliminating leakage through parallel policies could create other benefits: namely, mitigating disruption in market prices, building credibility in international climate negotiations, and improving environmental equity across countries. But there are questions, too, about how to eliminate skewed policymaker incentives over different kinds of climate policies.
For more, read the report, “Partners, Not Rivals: The Power of Parallel Supply-Side and Demand-Side Climate Policy,” and the related blog post, “Partners, Not Rivals: Supply- and Demand-Side Policies Pursued in Parallel Can Mitigate or Eliminate Leakage,” by RFF Fellow Brian C. Prest.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
For more information, please see our media resources page or contact Media Relations and Communications Specialist Annie McDarris.
