The UN Paris Agreement has established a target of keeping the increase in the global average surface temperature to “well below” 2°C relative to preindustrial levels, and to pursue efforts to limit the temperature rise to 1.5°C. As greenhouse gas (GHG) emissions continue to rise around the globe (Le Quéré et al. 2018), strong measures are necessary to reach the target. According to the Paris Agreement process, each participating country was required to submit nationally determined contributions, which represent each country’s effort to reduce GHG emissions by 2025–30. However, there is a large difference between these pledged reductions and the reductions necessary to limit global warming to below 2°C by 2100 (UNEP 2017). Under the Paris Agreement, the countries are also invited to communicate their “mid-century, long-term low greenhouse gas emission development strategies” (UNFCCC 2018). Given the emissions gap, policymakers will invariably have to prepare more ambitious plans to intensify GHG mitigation measures.

While all government or industrial leaders face uncertainties that affect their decision-making process, including uncertainty about the future costs of low-carbon technological options, the magnitude of mitigation actions by other economic actors, and the pace of economic growth—one thing is certain—GHG emissions have to be reduced more. Moving to lower-carbon or no-carbon energy today will ease the task of reducing GHG emissions in the future.

Some argue that uncertainty justifies the “wait to act” strategy. Maybe we should wait and see if the climate impacts are indeed as bad as some researchers describe? Maybe we should wait and see if new technologies will reduce emissions in a cheaper way? However, with growing global emissions, waiting to act is not a good option because it increases the cost of the necessary mitigation actions, as a larger amount of emissions would have to be ultimately reduced. Framing uncertainty as a risk problem is more productive, because then decision-makers need to be prepared for bad outcomes, whatever they are. Industry leaders and government decision-makers have many years of experience in dealing with risk. Risk management is a well-established practice to identify and analyze potential risks, and take precautionary steps to minimize them.

Our research at the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change shows that even limited actions toward reducing GHG emissions result in a substantial reduction in the risk of exceeding a certain temperature threshold (Bosetti et al. 2012). Even if we cannot predict the climate and its impacts with precision, especially at regional and local levels, that does not mean that the best strategy is to do nothing. The world is already making progress toward addressing climate change: in particular, there has been tremendous progress in policies to promote renewable energy and to bring down the costs of renewable energy. But there are still many challenges in making low-carbon energy competitive with traditional energy sources.

Policy frameworks are the key to determining a nation’s ability to incentivize the deployment of new technologies, attract private capital, internalize externalities (such as the health effects of air pollution), modernize electricity transmission and distribution, and expand access to energy. These policy frameworks should combine certainty about policy goals to ensure a stable investment environment for economic actors and flexibility to adjust policy parameters to optimize the performance of the system such that the policy goals are reached at a minimal cost for a society.

A good way to manage uncertainty while developing a long-term strategy is to establish a clear and transparent policy mix that allows for periodic policy review and adjustments. In many cases, pilot programs (one or two years) can help fine-tune policy design and prepare economic actors for policy compliance; thereafter, however, policies with longer time horizons (five years or more) are recommended to provide planning and investment certainty to market participants. These medium-term policies should contribute to overarching long-term mitigation strategies and should be accompanied by robust planning processes to ensure consistency across instruments as well as to establish the supporting institutional and regulatory frameworks.

Depending on administrative and technical capacities and available political support, decision-makers should seek ways to introduce the most efficient policy instruments that enable flexibility in mitigation actions. Carbon pricing through taxes or quantity controls with tradeable units both leave the allocation of resources to the market and can thereby equalize abatement costs across all covered entities, avoiding technology-picking and offering superior cost-effectiveness over alternative instruments. Other types of instruments—such as technology support through standards or subsidies—can be successful in building coalitions of support.

At a later stage, however, such targeted support measures should be reviewed and, where political will and institutional capacities allow, gradually phased out as more cost-effective mitigation instruments, such as carbon pricing, are introduced and scaled up. In any scenario, a crucial way to manage uncertainty and attract clean energy investment is to ensure property rights, contracts, and transparent dispute settlement procedures to guarantee the rights of investors.

Fragmented government structures with nonintegrated objectives have been identified as barriers to effective translation of national commitments to the regional and local level and to industrial actors (see, e.g., Resosudarmo et al. 2013 for the case of Indonesia). In many cases, different departments and ministries within a government have different objectives and priorities. To reduce uncertainty in future policies, integration and mainstreaming of climate policy priorities across all levels of the government is recommended. Any policymaking deals with multiple objectives, so coordinated policies must be created that address multiple objectives.

Developing a robust strategy to mitigate climate change can help achieve other objectives. Long-term planning should seek synergies in strategies to achieve multiple objectives. However, combining policy instruments can lower overall efficiency due to adverse interactions and trade-offs (Fischer and Preonas 2010; Paltsev et al. 2015). The experience of the European Union Emissions Trading System (EU ETS) provides an example where simultaneous operation of the trading system alongside targeted instruments to promote energy efficiency improvements and renewable energy deployment contributed to a severe imbalance of supply and demand in the carbon market, resulting in a prolonged collapse of allowance prices and a carbon price signal that has been too weak to promote fuel switching.

Policymakers should seek to integrate the objectives of different government and industrial entities with a policy package with one clear policy instrument. For example, a carbon tax designed in the Canadian province of British Columbia decreased carbon emissions, increased real GDP, reduced reliance on fossil fuel use, reduced personal income tax rates and general corporate income tax rates, and provided other tax benefits for businesses and consumers (Murray and Rivers 2015). Complimentary instruments that share a common objective with the core instrument can be employed to establish broader policy support.

The need for low-emitting technologies will shift the current technology mix, but the exact contribution of a particular technology and the timing of this shift depend on many economic and political variables. Such uncertainty about future costs and technologies should discourage governments from trying to pick the “winners”; instead, their policy and investment focus should be on targeting emissions reductions from any energy source (Paltsev 2017).

Uncertainty (in climate impacts, policy, and technology) cannot be entirely eliminated, but it does not justify an argument for “do nothing” or “do little” policies. On the contrary, an increase in mitigation and adaptation activities reduces risks for a country. Policymakers can reduce overall uncertainty by providing certainty of policy goals. A robust way to create an attractive investment climate for a low-carbon future is to employ simple and transparent instruments that incentivize actors to reduce emissions from all sources in a cost-effective manner. Enabling economy-wide carbon pricing as a central pillar of mitigation strategies is a transparent and efficient instrument for achieving more ambitious GHG emission reductions. A successful strategy establishes a combination of short-term achievable goals (to build trust among economic actors about the longevity of a policy) and long-term ultimate goals while ensuring flexible ways to achieve them. In many cases, policymakers can develop pilot programs with short time frames that can help fine-tune policy design and prepare economic actors for policy compliance. Thereafter, policies with longer time horizons can provide planning and investment certainty. Overall long-term mitigation strategy should ensure consistency across policy instruments and integrate the objectives of different government and industrial actors.

References

Bosetti, V., S. Paltsev, J. Reilly, and C. Carraro. 2012. “Emissions Pricing to Stabilize Global Climate.” In Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers, edited by R. de Mooij, I. Parry, and M. Keen, 49–67. Washington, DC: International Monetary Fund.

Fischer, C., and L. Preonas. 2010. “Combining Policies for Renewable Energy: Is the Whole Less Than the Sum of Its Parts?” International Review of Environmental and Resource Economics 4: 51–92.

Le Quéré, C., R. Andrew, P. Friedlingstein, et al. 2018. “Global Carbon Budget 2017.” Earth System Science Data 10: 405–48.

Murray, B., and N. Rivers. 2015. “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy.” Energy Policy 86: 674–83.

Paltsev, S. 2017. “Energy Scenarios: The Value and Limits of Scenario Analysis.” WIREs Energy and Environment 6: e242.

Paltsev, S., V. Karplus, H. Chen, I. Karkatsouli, J. Reilly, and H. Jacoby. 2015. “Regulatory Control of Vehicle and Power Plant Emissions: How Effective and at What Cost?” Climate Policy 15: 438–57.

Resosudarmo, B.P., F. Ardiansyah, and L. Napitupulu. 2013. The Dynamics of Climate Change Governance in Indonesia: Climate Governance in the Developing World. Cambridge, UK: Polity.

UNEP (United Nations Environment Programme). 2017. Emissions Gap Report.  https://www.unenvironment.org/resources/emissions-gap-report.

UNFCCC (United Nations Framework Convention on Climate Change). 2018. “Communication of Long-Term Strategies.” https://unfccc.int/process/the-paris-agreement/long-term-strategies.