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Complementary Climate Policies for Supply and Demand

Author

Listed:
  • Geir B. Asheim
  • Bård Harstad

Abstract

The traditional approach to climate policy is to regulate the demand side, for example through an emissions fee. Supply-side regulation has received less attention. The two instruments are perfect substitutes in the first best but we show that they are complements in a second-best setting with free-riding incentives. Demand-side policies alone lower the market price of fossil fuels and raise the gains from trade for a country that defects. For a treaty to be maximally robust, strong, and self-enforcing, it must properly balance supply- and demand-side instruments. The results hold with homogeneous countries and are strengthened by heterogeneity.

Suggested Citation

  • Geir B. Asheim & Bård Harstad, 2026. "Complementary Climate Policies for Supply and Demand," NBER Working Papers 35128, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35128
    Note: EEE POL
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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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