Stop CO2, Buy Coal?

I stumbled across an interesting proposal by aptly-named resource-management specialist Matt Frost to stave off global warming; the basic approach is to cut carbon dioxide (CO2) emissions by – wait for it – buying coal.

The basic logic of the proposal is that by buying coal, wealthy philanthropists concerned by the prospect of global warming could control its supply.  As we know from basic economics, monopolists tend to raise prices and reduce production.  By restricting the supply of coal – the most carbon-intensive fuel around – such philanthropists could force the world to switch to renewable energy by making this conventional fuel economically infeasible.  They could even carry the approach to the point of keeping coal in the ground, sequestering (that is, burying) carbon in its densest, cheapest, and most elegant form.

In contrast, the typical strategy favored by most policymakers is to heavily subsidize alternative energy, or else tax/regulate fossil fuels to death.  This has come in the form of massive subsidies for solar and wind, which have in some cases driven the wholesale price of electricity to negative numbers – a clear case of inefficient capital allocation.  But we can also see it in things like the EPA’s recent emissions regulations, which effectively make burning coal illegal by setting maximum CO2 emissions thresholds for power plants to a level below the content of the fuel.  Such regulations act as a de facto ban on coal by necessitating the use of horrifically inefficient carbon-capture technologies that make it impractical.  Philanthropists and entrepreneurs, meanwhile, are looking to fill this government-created market for inherently wasteful technology to sequester the carbon dioxide that inevitably results from burning coal.

The problem with all these approaches is that global warming is, well, global.  Unless a policy or technology applies universally, it’s no good: countries that don’t burn coal just free up supply for the countries that do.  Large-yet-developing nations like China and India can use that coal to satisfy their expanding energy demands and grow their economies.  In essence, the current policy regime turns the US and other wealthy nations into exporters of coal to developing nations, at the expense of domestic value-added industries.  There’s a transfer of both wealth and pollution from rich countries to poor ones, but the global impact is largely the same: the CO2 content of the coal gets put into the atmosphere.  Indeed, it may be worse, because developing nations do not have the technical ability, capital, or legal requirements to control emissions.  The result is that the nations that most aggressively curb their emissions are the most viciously punished for their altruism, losing the incredible economic benefits of cheap energy while continuing to bear any costs of climate change.

The solution to this dilemma is to make the effects of policy global; the trouble is that nations have conflicting interests and may not agree to, or enforce, treaties that tend to suppress economic growth.  For the billions of people living in grinding poverty today, global warming is a distant and minor threat compared to the immediate and pressing threat of material scarcity.  Cheap energy means medicine, food, housing, clothing, and education, and warnings like “we have a greater-than-50%-certainty that global mean temperatures will rise by up to 0.8 degrees over 100 years” are a tough sell with that kind of tradeoff.

But there is one form of international governance that requires no consent, no enforcement, and no oversight: markets.  According to Frost’s proposal, the current owners of coal mineral rights – that is, the US government – would sell those rights to people who pledge never to extract the coal.  Not only would carbon never enter the atmosphere, it would increase the global price of fossil-based energy, thereby driving other nations’ industries away from coal rather than rewarding them for doubling down on it.  Third-world agreement about first-world priorities is irrelevant – there simply won’t be any coal to buy.  Their choices will be limited to expensive, low-carbon energy, or simply going without.  (Is it just for the developed world to impose that choice by fiat?  The exercise is left to the reader.)

The US Federal government is uniquely implicated for two main reasons.  The first is that the US has the majority of the world’s coal deposits, so policy changes here represent fairly low-hanging fruit.  The second is that the US is one of few countries with some private mineral rights; in most countries, mineral rights are claimed by the State itself.  (The State then generally uses that mineral wealth to subsidize generous welfare systems a la Denmark, or finance cronyism and corruption, a la Venezuela.)  Under Frost’s proposal, billionaires could start buying up certain coal deposits, like those in Appalachia, without government permission, and then take it off the market.

Two factors stand in the way.  The trouble is that coal is a valuable resource, and ownership creates tax liability.  A climate-concerned billionaire couldn’t just sit on a coal deposit under current law, because the IRS would slowly bleed him dry for holding economic assets.  Furthermore, for deposits west of the Mississippi (which the Feds do control), the Bureau of Land Management is under a statutory obligation to sell the mineral rights at fair prices to buyers who have a credible plan to exploit them.  To make Frost’s vision reality, we’d need to tweak US law to eliminate taxation of untapped resources, and to eliminate the requirement that buyers of mineral rights actually intend to exercise those rights.  Doing so would allow the wealthy to sidestep political gridlock to reduce international coal use.

It’s an interesting proposal, to be sure, but there are at least a few problems that leap out:

First, even if the concept might work, at its face it’s horrendously inefficient from an economic perspective.  Generally, when a good conveys positive externalities – benefits to people other than the buyer – private individuals bear the costs while society at large reaps the benefits.  Since individuals don’t get the full benefit from their actions, they do less than would be optimal. Healthy adults don’t necessarily keep up with vaccinations, though their doing so can mean the difference between life and death for the very young and very old.  Typically, policymakers attempt to correct this so-called market failure by granting subsidies for these quasi-public services.  By reducing the cost, more people are willing to act.  But according to this logic, the government should be subsidizing groups that want to buy its coal, or, equivalently, giving a substantial discount to anyone who promises to buy it but not use it.  But that seems like a very silly approach: the government isn’t trying to nudge market participants, it is a market participant.  Rather than sell mineral rights to people who wouldn’t use them, a more elegant (and more subtle) solution is for the State simply not to sell the rights to anyone – that is, to declare coal mining off-limits or establish an annual limit on its extraction.  And if the Federal government was truly committed to the idea of restricting the coal supply, it could extend the policy to buying and holding the rights to coal internationally.  This mirrors Norwegian economist Bard Harstad’s proposal to establish a coalition of nations to collectively buy and lock up the coal reserves of other nations.

Second, as creative as the plan is, it’s is completely indistinguishable from the investment strategy of going long on coal.  Someone who believed coal power will be a persistent part of the nation’s energy mix would find it profitable to buy up hard-to-reach coal now so that when coal does become scarce and expensive, they control the supply.  In other words, the price of those deposits already internalizes the beliefs of sophisticated market actors about the future of energy.  The very low cost of coal reflects, in part, experts’ belief that coal will not be a dominant player in tomorrow’s energy mix.  The people who are most invested in energy issues seem to be putting their money on things like solar energy and energy storage.  What this means is that any coal that billionaires buy now is very unlikely to be at risk of exploitation by industry.  And any raw material that isn’t ever going to be extracted may as well not exist, from the perspective of the market.  For the scheme to be sensible, the present price of coal would need to be relatively high, reflecting a belief in long-term energy scarcity, pessimism about alternatives, etc.  But were that the case, the value of every dollar spent locking up coal would be very low, and philanthropists and entrepreneurs would find it more advantageous to make alternative energy more competitive.  (Sure, it would betting against the market – usually a losing proposition – but from the perspective of a “socially-responsible” entrepreneur, such a venture is a win either way: being wrong means high prices and low demand for coal, and being right means clean energy and tidy profits.)

Third, the expense necessary to lock up any appreciable amount of coal would be astronomical.  Current US reserves are estimated at over 400 years’ worth of consumption.  To meaningfully restrict the supply would entail massive transfers of wealth from philanthropists and environmental groups to current rights-holders (that is, mining outfits, coal companies, power plants, and other “anti-environment” heavy industries), for the decidedly uninspiring benefit of…doing nothing.  Few people would be wealthy enough and committed enough to execute the plan to the extent required to be effective, and much like an anti-biotic, it doesn’t work unless the treatment goes to completion.

There remain a few more inter-related legal and philosophical objections:

First, the scheme would set a troubling precedent about the practical relationship between resources and taxation.  To be viable as a plan for reducing CO2 emissions, owners of coal must not be taxed.  But where do we draw the line?  If one set of economic assets is untaxed, why not another?  And if the decisive criterion is whether the asset is being used, we’ve created an economic incentive for people to buy up resources simply for the sake of not using them so as to drive up profit margins and collect rents – a quintessential monopolistic practice.  Even if the policy made sense for coal, the legal system doesn’t operate on a case-by-case basis: it has to work with policies, rules, and principles.  Applying the principles that make this proposal work would ripple negatively into more areas than we can even begin to predict.  The unique case of today becomes the precedent of tomorrow.  Future cases will undoubtedly draw on that precedent to fuel all manner of injustice – just look at the good intentions behind civil forfeiture, broken windows policing, or eminent domain.  We cannot see exactly where that path will lead, but a cursory glance isn’t encouraging.

Furthermore, there’s something fundamentally wrong about the concept of holding assets merely to deny others access to them.  As I wrote in another post, “the key feature of adverse possession is that the owner is not using the contested property.  Leaving property fallow, holding without using, constitutes using position to deny others significant benefits.  Property claims only go as far as use claims.  If someone steals something and you never even notice, it’s not properly yours.  The law surrounding adverse possession is merely a system of objective rules for courts to distinguish between theft and trespass on one hand, and legitimate (though uncompensated) transfers on the other.”

Burning coal may produce significant negative externalities.  But it is also an economic resource, and holding onto coal for the sake of preventing its use is no different from buying all the land surrounding someone’s house and then charging him with trespass when he ventures out for food.  Without a use claim, there is no property claim; mineral rights that are not exploited are not valid.  Indeed, this principle is implicitly underlying both BLM’s and IRS’ current practice on resource allocation and taxation.  To change those practices is to weaken the legal and moral principles underpinning property law and adverse possession.

The principle that property claims rely on use claims even extends to the injustice current mineral rights regime: the Federal government does not (according to this theory of property) have any legitimate property claim on minerals.  This is because it does not have any use claim, and cannot have a use claim without an economic interest.  It cannot have an economic interest because such things are the province of individuals.

(It is not completely inconceivable that governments have defensible economic interests.  Like a corporation, the State can be thought of as a collection of individuals.  However, unlike a corporation, those individuals do not share unity of purpose; simply put, the constituents of a government are generally too many and too diverse to have discernible, non-conflicting economic interests.  While some nations can argue that they possess specific economic interests and use claims owing to their State-owned industries, they cannot argue that they have interests in the general economy.  Moreover, the United States does not have such a State-industrial regime in place; even if it did, its economic interest regarding e.g. coal would still exist only to the extent that coal was actually being used, and so the existence of State-owned industries does not alter the broader point that the Federal government cannot assert mineral rights simply for the purpose of denying those rights to private citizens.)

One of the foremost lessons of governance economics is that seemingly-inefficient practices often have unseen merits.  They are, after all, the result of a ruthless process of evolution which tends to cull those institutions, ideas, and methods which do not adequately account for all relevant circumstances. Too often, would-be reformers break the systems they’re trying to fix because they don’t see all of the trade-offs each institution represents.  In this respect, Frost is correct in seeing the value of markets over direct political action; the difficulty of reaching a consensus among nations with mutually-exclusive interests is possibly insurmountable.  But at the same time, the markets Frost proposes to use toward his ends rely on their own sets of rules, and those rules represent society’s present best attempt to resolve innumerable organizational problems in a relatively simple and coherent way.  To dispose of them in order to enable a unique solution to a unique problem is foolhardy.

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