Climate Policies Should Focus on Private-Sector Expectations, New Study Argues
New research in the journal Nature Climate Change suggests that, to be successful, climate policies must shape expectations in the private sector that align with the long-term net-zero goal.
💡 What’s the story?
A growing number of nations have pledged to reduce greenhouse gas emissions to net zero to meet the goals of the 2015 Paris Agreement. But achieving net zero requires credible policy pathways.
New research in the journal Nature Climate Change, published by scholars at Resources for the Future (RFF) and the Potsdam Climate Institute, suggests that, to be successful, policies must shape expectations in the private sector that align with the long-term net-zero goal. To get the private sector on board, the authors conclude that credibility is more relevant than getting prices right to draw forward private investments.
If investors see that climate commitments are credible and ultimately enforceable, they will be more likely to make investments in climate technologies and clean energy, the authors argue. Clear expectations could also lead to long-term cost effectiveness and help avoid policy renegotiations.
“As economists, discussions about cost-effectiveness are our bread and butter. But we’re thinking about this wrong—we should be focusing more on making sure that net-zero policy targets have a credible policy scaffolding to make them a reality. If the scaffolding is disproportionately expensive in the short-term, policymakers shouldn’t immediately take it down; the payoff in private-sector credibility could likely make up for higher upfront costs.”
—Geoffroy Dolphin, project officer at the International Monetary Fund and former postdoctoral fellow at Resources for the Future
🌎️ How can nations consider this approach?
The authors suggest that net-zero policies that prioritize credibility could be achieved by working backward from net zero—an approach they call “backward induction.”
A key aspect of backward induction is that policymakers emphasize the ultimate net-zero goal—that climate commitments can and will be satisfied, and that measures are put in place to achieve the end goal.
For example, in the United States, the Inflation Reduction Act includes provisions for public sector investment that make it easier to pursue clean energy goals and create an energy system that is friendly to private investments in green technology. These large-scale infrastructure investments reinforce expectations about the future and are not subject to reversal, as are some other policy choices such as carbon pricing.
Nations could also create investment incentives and technology standards, which could play an important role in shaping expectations about the energy transformation.
“Credibility is key because private investment in the green energy transformation is instrumental to achieving net zero, and investment will not be unleashed unless investors expect that the targets are achievable and ultimately will be enforced.”
—Dallas Burtraw, RFF senior fellow
⚖️ How is this different than the status quo?
The authors acknowledge the need to balance commitment with cost-effectiveness. But their conclusions deviate from conventional economic advice that mostly emphasizes cost-effectiveness. They argue that an emphasis on getting expectations right about the future of energy use is more practical than near term cost-effectiveness (getting prices right), which has been the emphasis of most economic advice.
📚 Where can I learn more?
For more, read the journal article, “A Net-Zero Target Compels a Backward Induction Approach to Climate Policy,” by Geoffroy Dolphin (RFF and the International Monetary Fund), Michael Pahle (Potsdam Institute for Climate Impact Research), Dallas Burtraw (RFF), and Mirjam Kosch (Potsdam Institute for Climate Impact Research) in Nature Climate Change.
For a quick synopsis of the findings, watch this video of Burtraw explaining the key takeaway.
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.
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