New publication explores energy market policy complementarity and the paradox of carbon pricing

Three decades on from the first economic contributions to climate change policy debates, we are far from the ‘classical’ framework long favoured by many economists, in which carbon pricing is assumed as the primary and best instrument to address climate change and deliver an optimal level of global greenhouse emissions. The present reality is a mix of targets with varied and often hybrid pricing systems and innumerable other measures. Policy analysis of climate change has too long suffered from disciplinary divisions, with economics often emphasising focus on markets and carbon pricing in ways that have proved problematic.

The new paper published in Oxford Review of Economic Policy develops the economic case for policy mixes in depth, and details why any effective transition strategy requires at least three complementary 'pillars of policy': strategic investment; markets and pricing; and minimum standards with behavioural engagement to accelerate diffusion of established technologies.

The research deepens the arguments of the book 'Planetary Economics', grounding the analysis in three domains of decision-making which are related to different dimensions of long-standing economic theory, and tackles questions of 'government failure' which are often used to argue the superiority of market mechanisms.

The work Illustrates how some of the major policy failures in energy, for example the failure of UK energy efficiency policy, can be traced to domain 'category errors'; and how most of the major advances in decarbonisation to date have stemmed from complementary policy packages, often including the leading role of strategic investment.

This body of research complements another paper also published this month, which draws upon evidence in the IPCC Mitigation report, reviewing the practical impact of climate mitigation policies to date, estimating that the policies to date have reduced global emissions by 2-7 GtCO2/yr, which estimated other impacts as well associated with the wide range of policies adopted in practice. Co-author Michael Grubb noted:

“To deliver stronger climate action, we need to learn from history. Some governments embarked on the effort to decarbonise decades ago. Those efforts have delivered significant progress, in some areas – driven emission reductions, and huge technological advances. As we move to scale up such efforts, we must learnt that what has worked has involved a combination of policies to support emerging technologies at scale, to utilise competition with appropriate pricing, and to accelerate adoption with enhanced efficiency. These two papers document the progress, and explain the theory of why such complementary sets of policy are essential to success.

Research team:
Lead Author on OXREP paper: Michael Grubb; co-authors: Paul Drummond, Alexandra Poncia, Karsten Neuhoff, Jean-Charles Hourcade 

Links

• Read 'Policy complementarity and the paradox of carbon pricing', by M.Grubb, A.Poncia, P.Drummond, J.C.Hourcade, K.Neuhoff. Oxford Review of Economic Policy, Vol.39:4 - access this external webpage.
• Read a previous work in this area, 'Three decades of mitigation policy: what has it delivered?', by Hoppe J., B.Hinder, R.Rafaty, A.Patt, M.Grubb, Ann. Rev. Energy, Vol.48 - access this external webpage.
• Read more of the publications of Michael Grubb - access this external webpage.

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