Lessons for the EU – policy mixes are the way to go

Experiences from 1500 policies world-wide, show that an effective climate mitigation strategy must include a mix of approaches that include carbon pricing.

The UN Environment Programme has been publishing annual emission gap reports since 2010, highlighting the big gap between what is needed to prevent dangerous climate change, and what governments are planning to do to tackle climate change. Year after year the reports call upon governments to increase their level of ambition and improve their pledges and commitments to take action.

Over the last few years, another gap has become increasingly visible, as in addition to failing to commit to adequate levels of action, many governments are also failing to implement the (weak) commitments they have already made. This is what is called the implementation gap. The gap has two elements: one is that governments while make commitments are not necessarily making the efforts to translate these commitments into the necessary policies and measures; and the other is that many governments are struggling with putting in place the right policies and measures to deliver the emission reductions needed.

In a new first of its kind study, addressing the second of these concerns, researchers from the Potsdam Institute for Climate Impact Research (PIK) assessed 1,500 climate policies and their impact on greenhouse gas emissions. In the study, “Climate policies that achieved major emission reductions: Global evidence from two decades”[1], researchers came to two important conclusions that are very relevant for the EU climate policy debate:
(a) Most policies are only successful when they are part of a mix of approaches that may include measures related to taxation, regulation, subsidies and/or labelling; and
(b) Most of these policy mix approaches are most successful when they include policies that put a price on pollution, such as through taxes and/or emissions trading (see figure).

Or as the authors say: “The key ingredient if you want to reduce emissions is that you have pricing in the policy mix. If subsidies and regulations come alone or in a mix with each other, you won’t see major emission reductions. But when price instruments come in the mix like a carbon energy tax then they will deliver substantial emissions reductions.”

For years now, EU climate and energy policy discussions have focused on the role and relationship between different policy instruments. The relative success of the EU’s Emissions Trading System (ETS) has led to proposals to (a) expand emissions trading beyond the original energy and industry sectors, including but not limited to fossil fuel suppliers in the buildings and transport sectors, agriculture and land-based emissions and land-based and industrial removals; and (b) phase out regulatory measures such as the (national) binding targets for renewable energy production and energy demand reduction. In this discussion, which runs across the European Commission, European Parliament, Member States as well as NGOs and industry lobbyists, both sides raise arguments related to the effectiveness of the ETS, the value and impact of overlapping policies, as well as the desire to (not) increase household and/or business costs for energy and consumer products.

Contributing to this discussion, the study highlights that the impact of most policies is substantially larger if a policy instrument is part of a mix rather than being implemented alone. Several popular instruments – such as bans, building codes, energy efficiency mandates, and subsidies – are found to have a limited impact when they are implemented as a stand-alone policy. In developed economies such as the EU, regulation is found to be the most effective stand-alone policy (33%), but pricing is an equally important element of effective policy mixes because 50% out of all successful policy mixes include pricing.

The study thus goes against those arguing that policy mixes may be subject to overlapping instruments and perform no better than a single instrument, making it clear that for a number of policy instruments the empirical evidence suggests there are complementary effects when they are part of policy mixes. These include popular subsidy schemes and regulatory instruments such as bans, building codes, energy efficiency mandates, and labels, for which the authors found larger reduction effects in policy mixes as compared with the case of a stand-alone implementation. This suggests that some of these most widely used policy instruments are complementary or even reinforcing in policy mixes, which is in line with the theoretical understanding that these specific instruments alone often have a limited scope (for example if they only apply to new cars or new appliances) and are subject to rebound effects. Further explanations for this complementarity point to the fact that policy mixes can address a multitude of market failures and may be more successful in increasing the overall policy stringency and maximising policy credibility, which shapes the expectations of consumers and investors.

Based on this new study, a number of suggestions can be made for future EU climate and energy policy development:
(a) continue with the policy mix approach including regulatory measures, carbon pricing, subsidies and labelling and not bet on emissions trading to do the job on its own;
(b) ensure full pricing of all greenhouse gas emissions covered by the ETS, which means ending all free allocations;
(c) expand carbon pricing to all greenhouse gas emissions, not necessarily through expanding the Emissions Trading System, as the same (possibly even better) results can be achieved by carbon taxation (e.g. through finally adopting the revised Energy Tax Directive).

1 Stechemesser et al. Climate policies that achieved major emission reductions: Global evidence from two decades. Science. August 2024. https://www.science.org/doi/10.1126/science.adl6547

Figure: Many countries have adopted schemes that force greenhouse gas emitters to pay.