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Abstract

Many economists have long held that carbon pricing—either through a carbon tax or cap-and-trade—is the most cost-effective way to decarbonize energy systems, along with subsidies for basic research and development. Meanwhile, green innovation and industrial policies aimed at fostering low-carbon energy technologies have proliferated widely. Most of these predate direct carbon pricing. Low-carbon leaders such as California and the European Union (EU) have followed a distinct policy sequence that helps overcome some of the political challenges facing low-carbon policy by building economic interest groups in support of decarbonization and reducing the cost of technologies required for emissions reductions. However, while politically effective, this policy pathway faces significant challenges to environmental and cost effectiveness, including excess rent capture and lock-in. Here we discuss options for addressing these challenges under political constraints. As countries move toward deeper emissions cuts, combining and sequencing policies will prove critical to avoid environmental, economic, and political dead-ends in decarbonizing energy systems.
PersPective
DOI: 10.1038/s41560-017-0025-8
© 2017 Macmillan Publishers Limited, part of Springer Nature. All rights reserved.
1Department of Environmental Science, Policy, and Management, University of California—Berkeley, Berkeley, CA, USA. 2Department of Economics,
University of Gothenburg, 640, Gothenburg, Sweden. 3John A. Paulson School of Engineering and Applied Sciences, Harvard University,
Cambridge, MA, USA. 4Harvard Kennedy School, 79 John F. Kennedy Street, Cambridge, Massachusetts 02138, USA. *e-mail: meckling@berkeley.edu;
gwagner@fas.harvard.edu
Economists widely agree that carbon pricing is the most cost-
effective strategy for decarbonizing energy systems1. Some also
suggest that subsidies for basic research are part of optimal
policy2. Subsidizing the deployment of low-carbon technologies is
considered a costly second-best policy by many economists, though
not all3,4. Yet policies that support technology deployment are the
most widely adopted form of actual low-carbon policy; politics
favours these policies.
Regulating carbon emissions through direct pricing often faces
major political obstacles. The benefits of carbon pricing are diffuse,
hard to measure, and lie in the future, while their costs are concen-
trated and immediate. Meanwhile, green innovation and industrial
policies promoting both the development and deployment of low-
carbon technologies have proliferated widely. These policies bolster
clean-energy industries and reduce the cost of low-carbon tech-
nologies5, thus building political support for regulatory policy such
as carbon pricing6. In fact, most of these direct deployment sub-
sidies and various other forms of financial support predate direct
carbon pricing. Low-carbon leaders such as California and the EU
developed low-carbon policy suites through a three-stage sequence:
early moves in the form of green innovation and industrial policies;
adding direct carbon pricing; and ratcheting up the policy suite over
time (Fig.1).
This suggests a case for deliberate sequencing of policies to enable
the low-carbon energy transition. Such steps face their own major chal-
lenges, in particular around cost-effectiveness, excessive rent-seeking
by those receiving subsidies, and costly lock-in. In this Perspective, we
integrate economic and political approaches to low-carbon policy and
discuss how policymakers can address the challenges of environmental
and cost effectiveness under political constraints.
Sequencing and the politics of decarbonization
In low-carbon policy mixes, green industrial policy has been
adopted much more widely than carbon pricing and has mostly pre-
dated carbon pricing. In particular, the cases of California and the
EU suggest that policymakers initially supplied benefits to clean-
energy constituencies before imposing costs on polluters.
From benefits to costs in policy sequencing. There is no one
green industrial policy. Instead, such policy often entails a port-
folio of different instruments, including support for research and
development, subsidies, tax rebates, loan guarantees, and direct
mandates for renewable energy7. In terms of economic efficiency,
such policies are often considered second best compared to carbon
pricing8. They also vary considerably in their scope and ambition
across countries9. In the power sector, at least 132 countries and
subnational jurisdictions, such as states and provinces, had enacted
either a feed-in tariff or a renewable portfolio standard by 2014.
In the transport sector, 99 countries and subnational entities had
adopted either mandates for biofuels or incentives for electric
vehicles by 2014.
Carbon-pricing policy has been spreading globally since 2003,
when the EU Emission Trading System (EU ETS) was adopted.
In total, 54 carbon-pricing systems have been implemented or
are scheduled for implementation, making it much less prevalent
than green industrial policies. Prices have been relatively low, with
85% of covered emissions being priced at under US$10per tonne
of CO2-equivalent emissions in 2014 (ref.10). Regulatory climate
policy also includes command-and-control regulation such as effi-
ciency standards and outright bans of carbon-intensive fuels such as
coal. Anecdotal evidence on greenhouse gas standards for vehicles
in the EU and the US suggests a similar policy sequence.
In the electricity sector, green industrial policy precedes carbon
pricing in two-thirds of all cases (Table1). The majority of outliers
fall into two categories: countries that joined the EU after it had
adopted carbon pricing, or Scandinavian countries that adopted
carbon-pricing systems in the early 1990s (ref.6). In the transport
sector, green industrial policy preceded carbon pricing in 58%
of all cases. Only a few countries have started officially to price
carbon emitted from transport fuel use. The majority are
Scandinavian countries that did so in the early 1990s, building on
earlier regulatory efforts related to local air pollution concerns and
in response to the 1973 oil embargo and price shock. These and
many other European countries also had pre-existing, very high
fuel taxes. Out of the countries and states that have started to price
Policy sequencing toward decarbonization
Jonas Meckling 1*, Thomas Sterner2 and Gernot Wagner 3,4
Many economists have long held that carbon pricing—either through a carbon tax or cap-and-trade—is the most cost-effective
way to decarbonize energy systems, along with subsidies for basic research and development. Meanwhile, green innovation
and industrial policies aimed at fostering low-carbon energy technologies have proliferated widely. Most of these predate direct
carbon pricing. Low-carbon leaders such as California and the European Union (EU) have followed a distinct policy sequence
that helps overcome some of the political challenges facing low-carbon policy by building economic interest groups in support
of decarbonization and reducing the cost of technologies required for emissions reductions. However, while politically
effective, this policy pathway faces significant challenges to environmental and cost effectiveness, including excess rent
capture and lock-in. Here we discuss options for addressing these challenges under political constraints. As countries move
toward deeper emissions cuts, combining and sequencing policies will prove critical to avoid environmental, economic, and
political dead-ends in decarbonizing energy systems.
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carbon emissions from transport since 2000, 78% had adopted
green industrial policy previously. It is symptomatic that the world
leader in carbon taxation, Sweden, has no significant fossil resources
or companies that would provide significant lobbying resistance
against such taxes.
The EU offers a prime example of this policy sequence. The EU
adopted rules on promoting renewable energies in 2001, after eight
member states had already implemented renewable-energy sup-
port schemes. This occurred in the context of the liberalization of
electricity markets across Europe. The EU followed up with indus-
trial policy for renewable fuels in the transport sector in 2003.In a
second phase, the EU adopted carbon pricing in 2003, which entered
into force in 2005.In a third phase, the EU’s decarbonization efforts
led to a ratcheting up of all measures in the 2020 Climate and Energy
Package of 2009, the 2030 Climate and Energy Package of 2014, and
the recent EU winter package of 2016. California followed a path
similar to that of the EU11. China is on its way to replicate the policy
path of climate leaders: in the mid-2000s, it adopted supply-side
industrial policy to develop clean-energy industries, followed by
feed-in tariffs that fostered domestic demand for renewable energy,
leading to a domestic carbon pricing system in the energy sector to
be implemented in 2017 (ref.12).
Growing low-carbon interests and reducing technology cost.
Research on low-carbon policy in Europe and California suggests
two drivers for the benefits-to-costs policy sequence in domestic
low-carbon policy. One driver is the growth of low-carbon interests
that support the decarbonization of the economy. Another is declin-
ing technology costs, which can increase the political acceptance of
direct carbon regulation.
First, government support for the deployment of low-carbon
energy technologies provides economic rents to low-carbon energy
providers13. This creates economic constituencies that support the
expansion of low-carbon policy, including carbon pricing. In par-
ticular, high-leverage policy measures such as feed-in tariffs that
result in capital investments in clean-energy infrastructure create
new interest groups14. Economic rents through government support
for new technologies then help to create and grow a clean-energy
industrial complex15. Germany, for example, leveraged its existing
industrial technology base to develop renewable energy industries
that supported the country’s energy transition16. The emergence of
clean-energy interests is supported by the liberalization of electric-
ity markets, which often goes hand-in-hand with the adoption of
renewable energy policies17. Liberalization can enable new indepen-
dent power producers, often younger companies focused on clean
energy, to enter the market18. Creating such a counterweight helps
to resist the lobbying pressure of vested interests locking the energy
system into high-carbon technologies19.
Second, early investments in renewable energy technologies—
supported by government incentives—can help technologies travel
up the learning curve and down the cost curve, as in the case
of solar photovoltaic modules, whose prices have declined by
over 80% since 2008 (refs 5,20,21). Thus, green innovation and indus-
trial policy help reduce the cost of emissions cuts20. Importantly,
while investments in research and development are crucial to
achieve technological innovation and cost reductions, large-scale
deployment has been shown to contribute significantly to bringing
down costs of renewable energy technologies through economies
of scale and active learning-by-doing processes22,23. Californias
solar initiative subsidizing solar photovoltaic deployment was a
success precisely because it helped capture the positive learning-
by-doing externality, and it was phased down quickly in line with
economic theory23.
Reduced abatement costs may then lower the barrier for policy-
makers to adopt regulatory policies. In particular, lower mitigation
costs may reduce the opposition to carbon policy from energy con-
sumers such as households and energy-intensive manufacturers24.
Competitiveness in energy-intensive manufacturing has tradition-
ally been one of the largest political hurdles to passing carbon poli-
cies, as costs are concentrated among a few industries25. Renewable
energy support policy also shifts some compliance costs outside
the emissions trading scheme26. This, in turn, may have helped
limit opposition to emissions trading from regulated entities in
the EU.
If a benefits-to-costs policy sequence can help overcome major
political hurdles in decarbonization given the experience of the EU
and California, how can we then address environmental effective-
ness and cost-effectiveness within these political constraints?
Green innovation and industrial policy
Initial government support for low-carbon energy technologies
faces two enduring challenges: avoiding the lock-in of sub-optimal
low-carbon technologies, and maintaining the support for govern-
ment investment in low-carbon technologies.
First, technology-specific industrial policy creates constitu-
encies that lobby for continuous support, potentially resulting in
costly political lock-in that mirrors the lock-in now endemic with
fossil fuels27. Consider corn ethanol markets: US biofuel mandates
have created a market for corn-based biofuels, while the environ-
mental benefits of current biofuel supply chains remain doubtful.
Yet vested interests ensure that costly and ineffective subsidies
remain in place.
We identify three ways to tie deployment-focused industrial
policy to emissions reductions. A first option is to embed any cli-
mate policy measures in long-term decarbonization plans, as,
for instance, developed by the Deep Decarbonization Pathways
Project28. These roadmaps provide an outlook on what kinds of
technologies we know about today that could lead to deep emissions
reductions. A second possibility is to tie government incentives for
low-carbon technologies to efficiency improvements or outright
Green industrial
policy Adding pricing
policy Ratcheting up
policy mix
1 2 3
• Most of the world • China • European Union
• RGGI States (US)
• California
Coalition
Cost
Coalition
Cost
Policy Driver Increase Decrease
Fig. 1 | California and the EU havemoved through three stages in developing low-carbon policies. First, theyhaveadopted green innovation and
industrial policies. Most of the world is currently at this stage. These initial policieshavehelped grow political support coalitions and reduce the cost of
low-carbon technologies (green arrows indicate growth, red arrows indicate decline). Second, theyhave developedcarbon-pricing policies. China, for
example, is currently at this stage of low-carbon policy development. Third, California and the EU havereformed their pricing policieswith an eye toward
increasingtheir environmental effectiveness, responding to growing political support andcontinuing drops in thecost of low-carbon technologies. Regional
Greenhouse Gas Initiative (RGGI) states have also gone through this third stage of ratcheting up.
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emissions reductions. Japan’s ‘Top Runner’ policy, which subsidizes
clean technologies by creating automatic market share for the best
technology in any particular area, employs this strategy29. Policy
instruments such as bonus malus—an approach involving subsidies
for the environmentally preferred technology and fees for the infe-
rior one—can be designed to have similar effects. A final option is
to incentivize diversity and experimentation in technological trajec-
tories to mitigate uncertainty in technology development30. Tesla’s
large-scale investment in lithium-ion batteries may help reduce the
cost of storage significantly, but could potentially crowd out more
advanced competitor technologies. Government procurement
policies that require specific niche technologies could create pro-
tected markets that would allow for the continued existence of
competing—and potentially more advanced—technologies31.
Second, while in many instances governments expanded renew-
able energy policy32, government subsidies run the risk of prema-
ture cutbacks or outright reversals, as occurred, for instance, in
Australia, Spain, and several US states. The economically optimal
approach to technology support is to offer early high subsidies that
can be pulled back almost immediately2,4. In practice, the timing of
that cutback matters. Pulling back subsidies when no longer justi-
fied by learning-by-doing externalities is welcome, while pullbacks
for solely political reasons are not.
Consumer and industry backlash may drive policy cutbacks. For
consumers, green industrial policy can result in rising electricity
costs. The cutbacks in Spain’s feed-in tariff are largely a result of
cost-related consumer pushback, exacerbated by a fiscal and public
debt crisis33. Incumbent industries may resist low-carbon policies
that include regulatory costs and loss of market share, as electric
utilities in some US states did when they blocked or reversed expan-
sion of renewable portfolio standards and net metering systems.
Countering politically motivated cutbacks requires communi-
cation of the benefits of clean energy, lobbying through political
action committees, reform of utility regulators, and progressive
electricity payment structures34. Cost-effective policy designs are
also important. If clean-energy subsidies provide excessive rents to
firms, taxpayers bearing the costs may reasonably vote against them.
Cost-effective designs of green innovation and industrial policies
vary widely across geography and time and across low-carbon tech-
nologies35,36. European countries, for instance, adjusted their early
feed-in tariff systems to provide more flexibility and lower costs via
features such as auctioning. Such adjustments may be critical for the
political sustainability of clean-energy support schemes.
As renewables expand, maintaining political support needs
to extend from subsidies to policies that increase the flexibility
of energy systems. The intermittent and decentralized nature of
renewable energy requires policy support for new flexibility options,
including energy storage, grid interconnection, and demand
side response37.
Adding pricing policies
Policies such as feed-in tariffs and other clean-energy support
instruments tend to require high initial costs. Furthermore, they
offer little guarantee of emissions cuts3,38. Adding pricing policies
can improve the environmental and cost-effectiveness of low-carbon
policy mixes. This requires managing potential costly and, in part,
counterproductive interaction effects with existing subsidies39,40.
Politically, carbon pricing is a tall order. Failed attempts
abound41,42. History suggests that early adopters of carbon pricing
were countries that introduced high fuel taxes. In those countries,
political actors from producers to consumers to treasuries have
become accustomed to pricing instruments43. Moreover, the balance
of power between economic winners and losers plays a particular
role. Governments that have introduced carbon-pricing systems
promoted green industries prior to pricing carbon, thus fostering
a supportive economic constituency44. In California, progressive
tightening of environmental regulation and early climate policy
nurtured a powerful constituency of sunrise industries that success-
fully opposed Proposition23in 2010, a referendum that attempted
to suspend the state’s landmark Global Warming Solutions Act11,45.
In fact, while the US federal Waxman–Markey, a proposal for a
federal cap-and-trade system, featured fossil-fuel interests that
outspent environmental interests by a ratio of 7-to-1 (ref. 46),
Californian environmental interests outspent fossil fuel interests by
3-to-1 (ref.47) in battling Proposition23.
In addition to supporting low-carbon energy constituencies,
policymakers have accommodated the demands of emitters to over-
come opposition to carbon pricing48. Emitters are often large and
concentrated players that have the political influence to block regu-
latory action49. Policymakers take various approaches to compen-
sating potential losers, including free allocation of allowances and
re-allocation of allowance auction or tax revenue50. Free allocation
of allowances can be targeted to transfer economic rents to particu-
lar industries, while a full auctioning of allowances would reward
cleaner sectors. Free allocation, thus, has been a key strategy for
mitigating political opposition in the EU and California systems42,51.
The allowance allocation design of Waxman–Markey reflected a
similar influence of emitters24. Free allocation shifts interest-group
politics from opposition to the policy to a competition over the
valuable allowances52.
Carbon taxes, too, can be designed to accommodate business
interests otherwise hostile toward carbon pricing. The revenue neu-
trality of the British Columbia carbon tax led to a net tax reduction,
with reductions in corporate and income taxes for specific sectors53.
Similarly, the Swedish carbon tax, which has been the highest in the
world since its inception in 1991, was coupled with fundamental tax
reform and significant reductions in income, wealth, property, and
inheritance taxes. The overall tax burden was reduced, and the suite
of reforms arguably managed to increase economic efficiency while
proving palatable to a majority of the electorate.
Ratcheting up the policy mix
With the prominent exceptions of a few Scandinavian carbon taxes
and some EU fuel taxes, most early carbon pricing systems had a
limited effect in reducing emissions or inducing innovation54,55.
They served mainly as backstop measures to avoid a sliding back
of emissions reductions earned through clean-energy policies or
market forces. The EU ETS, the Regional Greenhouse Gas Initiative
(RGGI), and California’s emissions trading system (CA ETS) have
gone through major internal reforms leading to increased efforts to
reduce emissions54,56 (Fig.1). How do we ensure that policy suites
will lead to greater ambition for carbon mitigation over time?
While cultivating green economic constituencies is politically
crucial to strategically tightening regulations, these industries may
prefer the continuation and expansion of subsidies over carbon
pricing. Subsidies provide more direct and concentrated benefits
Table 1 | Policy sequencing in power and transport sectors
(numbers of jurisdictions)
Green industrial
policy Carbon pricing Green industrial
policy preceding
carbon pricinga
Power 132 52 65–86%
Transport 99 12 58–95%
Green industrial policy: in the power sector, this includes renewable portfolio standards or feed-in
tariffs; in the transport sector, this includes biofuel mandates or electric vehicle incentives. In
terms of carbon pricing, this includes carbon tax or cap-and-trade systems. Data: authors own.
aLower bound of range calculates ratio based on existing carbon-pricing systems; upper bound
accounts for potential of carbon pricing to appear in jurisdictions that currently have adopted
green industrial policies.
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to low-carbon firms than does carbon pricing. The challenge for
smart policy design is, then, to tie the demand of low-carbon energy
firms for more subsidies to the expansion of carbon pricing systems.
Tying green subsidies to revenues from a carbon tax or auctions in
cap-and-trade systems gives low-carbon energy firms direct incen-
tive to support a tightening of carbon prices41,57,58. In fact, RGGI’s
first 23 auctions raised US$1.66billion, which was largely given out
as grants for renewable energy and efficiency measures. This con-
tributed to tightening of the emissions cap and successful reform of
the trading system41.
Institutional strategies also help to lock in a progressive dynamic
in tightening emission caps59. For instance, institutionalizing a for-
mula that prescribes into carbon-pricing legislation an automatic
tightening of the emissions cap or increases in the tax rate could
support a ratcheting-up dynamic60. Such institutionalization could
occur through the inclusion of a formula in the rule-making process
or it could be delegated to an independent agency like the California
Air Resources Board.
The Paris Agreement and sequencing
A decentralized international climate architecture like the Paris
Agreement provides a framework for continuously progressive
emissions cuts as governments agreed to five-year review periods.
This creates a case for governments to develop policy sequences that
allow for continued decarbonization in future rounds of policy com-
mitments and helps avoid political, economic, and environmental
dead ends. The three-stage policy sequence of California and the
EU offers a heuristic to policymakers (Fig.1). Here, we highlight
key next steps for decarbonization in leaders and followers.
Leverage low-carbon interests for sectoral broadening. In cli-
mate leaders such as California and the EU, the three-stage policy
sequence has primarily played out in the electricity sector. As these
jurisdictions set their eye on deeper emissions cuts, further cuts in
the electricity sector and efforts to broaden policies to the transport
and other sectors are crucial.
Policy baselines for decarbonization efforts in the transport
sector differ significantly across countries. Japan and some coun-
tries in Europe have high general fuel taxes that date back half a
century or more. Carbon emissions would have been much higher
in their absence61. Recent efforts to price carbon in the transport
sector have been limited. The CA ETS is the only major pricing
system that includes transport fuels. However, California failed
to implement an emissions reduction target for transportation as
part of its 2015 climate legislation. Effective regulatory policy in the
transport sector in the future will require stronger political support
to embrace target-setting and pricing policies.
Decarbonization in the transport sector typically hinges on
electrification62. A key political challenge is to leverage low-carbon
constituencies, such as electric utilities, that have emerged in the
power sector to help drive low-carbon policy in the transport sector.
The support of electric utilities would strengthen policymakers as
they face opposition from oil and auto companies in moving ahead
with emissions cuts in the transport sector. At the same time, trans-
port sector electrification needs to be tied to an expansion of low-
carbon sources of power generation to ensure overall emissions
cuts. This poses the dual challenge to policymakers of increasing
regulatory pressure on power producers to ensure deeper emissions
cuts in the electricity sector, while leveraging their support to drive
the electrification of the transport sector.
Leverage clean technology for more stringent carbon pricing.
The large majority of jurisdictions that have made commitments in
the Paris Agreement are followers—they have moved through the
first stage of the policy sequence and are considering the second.
This includes many emerging economies such as China and Brazil,
as well as most US states. Of the 162 Nationally Determined
Contributions submitted for the Paris Agreement, more than 90
include proposals for carbon-pricing systems63. This suggests a
potential wave of new pricing systems in the future. In moving to
pricing carbon, followers can reap the benefits from cost reduc-
tions of low-carbon technologies. This could enable policymakers
in follower jurisdictions to start pricing carbon earlier and at higher
levels than they would have done otherwise. In countries like the
US, this is particularly important to avoid locking in lower carbon-
emitting fuels such as natural gas that must eventually be made
obsolete but have long investment cycles. In emerging economies,
it is similarly critical to avoid locking in fossil-based infrastructure
in the first place.
At the same time, carbon-pricing systems are likely to remain
backstop measures for emissions reductions largely achieved
through other, more direct means. This suggests that followers
need to continue to expand the support for research, development,
and deployment of low-carbon technologies. Existing green inno-
vation and industrial policies remain insufficient9. This applies in
particular to industrialized and emerging economies, as develop-
ing countries face broader challenges in deploying green industrial
strategies given different institutional and economic capabilities64.
The International Energy Agency models expanding annual renew-
ables subsidies from US$112billion in 2014 to US$172billion in
2040in its New Policies Scenario65.
In this Perspective, we propose that careful policy sequencing
can help facilitate the progressive decarbonization of energy sys-
tems under political constraints, as California and the EU dem-
onstrate. An excessive focus on the need for efficient pricing alone
often ignores these constraints. A better integration of economic
and political perspectives should help point the way forward on
low-carbon policymaking.
Received: 11 January 2017; Accepted: 22 September 2017;
Published: xx xx xxxx
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Acknowledgements
We thank E. Barbier, D. Burtraw, O. Edenhofer, B. Keohane, C. Mitchell, L. Stokes
and participants in the climate policy workshop at the University of Pittsburgh for
discussions and feedback. We are grateful for research assistance from D. Willis.
Thomas Sterner thanks Mistra Carbon Exit for funding.
Competing interests
The authors declare no competing financial interests.
Additional information
Reprints and permissions information is available at www.nature.com/reprints.
Correspondence and requests for materials should be addressed to J.M.
Publisher’s note: Springer Nature remains neutral with regard to jurisdictional claims in
published maps and institutional affiliations.
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