Beyond Carbon Pricing: Six sustainability transition policy principles for net zero

Download the study "Making the great turnaround work: Economic policy for a green and just transition"

1. Introduction

The new net-zero emission targets are a game changer. They require a swift, economy-wide, and radical transformation of business and consumption practices, supported by a new suite of policies. Conventional climate policy approaches such as carbon pricing have remained very limited in their effects and political feasibility, and they are insufficient to support the fundamental changes needed.^[1] Research suggests that this relates to a mismatch between the nature of the climate problem and proposed solutions.^[2]

Conventional climate policy approaches are often based on neoclassical economic theorising. Climate change is regarded as a market failure related to a negative externality in the form of greenhouse gas (GHG) emissions. In this view, the core thrust of climate policy is about fixing markets, through adjustments in relative prices.^[3]

This framing, however, misses the core of the problem: Current energy systems and economic sectors have coevolved over decades with fossil fuel use and high levels of (energy) consumption. To tackle climate change, we must fundamentally transform established sectors and systems, not just market prices. Public policies are crucial for this transformation. This paper builds on sustainability transition perspectives that are receiving increasing international attention in policy practice.^[4] It presents six principles to inform net-zero transition policies^[5]: i) Target system transformation and radical innovation, ii) prioritise effectiveness over efficiency, iii) tailor policies to specific sectors and places, iv) align policies with transition phases, v) adapt policies as a reaction to unintended developments, and vi) build strong coalitions to support the transformation.

Sustainability challenges such as climate change, loss of biodiversity, or depletion of natural resources are wicked problems in the sense that they are very difficult to address.^[6] They are complex and systemic, wide in scope, and highly political. There is also a high degree of uncertainty, for example with regard to unwanted consequences of potential solutions.^[7]

To effectively address climate change, we need a swift and rapid reduction of all GHG emissions in all sectors to net-zero levels, at the latest by mid-century. This process of “deep decarbonisation”^[8] will include sectors such as energy, road transport, and buildings, for which low-carbon electricity is an option, but also “difficult-to-decarbonise” industries around chemicals, steel, cement, aviation, shipping, and agri-food, for which other solution strategies need to be developed.^[9]

Table 1 looks into problem characteristics, solution characteristics, and governance issues around climate change and what implications they have for research and policy. Climate change is a highly complex problem whose dynamics and interactions (e.g. between natural and socio-economic systems) are still not fully understood. In technical, social, and economic terms, we are confronted with massive lock-ins around fossil fuel infrastructures and energy-intensive practices.^[10] Time is running out: At the global scale, we only have a very limited carbon emission budget left, and that of the United States was already exhausted in 2021.^[11]

To adequately address these characteristics, we must develop new theoretical frameworks. One approach is the sustainability transition perspective (Section 3). It suggests conceptualising deep decarbonisation as a large-scale transformation that involves multiple transitions in multiple sectors.^[12] The problem characteristics also have policy implications (Section 4): For example, policies should be tailored to the particularities of different sectors and places. To break up lock-ins, dedicated decline policies such as bans or phase-outs can be implemented. Given the urgency, it is important to first target big emission reductions such as coal-fired power generation.^[13]

For decarbonisation, there is a broad array of technical and non-technical solution strategies (e.g. around hydrogen or radical changes in lifestyles) with a high level of uncertainty regarding future performance. It is often not possible to predict their development and impact due to multi-causality, interdependence, time lags, or incomplete knowledge. For example, biofuels were once hailed as a great option, but later, several unwanted effects (e.g. monocultures, competition with food, additional carbon emissions from soil) became visible.^[14]

This has several implications. For research, it is important to study how different solutions influence each other and to also include a broader range of sustainability issues (e.g. land or resource use, justice) in our assessments.^[15] For policy, it is vital to support a variety of innovations, especially radical ones, and to build flexible systems to avoid new lock-ins.

In terms of governance, there is no central authority. At the same time, in each sector and country, a broad range of actors are involved in climate-relevant decision-making, including public and private, individual and collective. These actors may have diverging interests and conflicting views on problems, priorities, and potential solutions.

To improve our theorising of politics, one approach is to work with policy process theories.^[16] For policy-making, it is important to garner broad support for the transformation.^[17] A specific strategy can be to start with pioneers and, over time, forge coalitions of “winning actors”.^[18] A complementary approach is participatory decision-making.

2. A brief guide to sustainability transitions

The field of sustainability transition studies offers novel perspectives to address grand sustainability challenges.^[19] It argues that fundamental changes in existing systems, so-called transitions, are needed, and it provides lessons for initiating and accelerating such transformation processes.^[20]

Socio-technical systems are the primary unit that changes during a transition.^[21] Mature socio-technical systems are highly resistant to radical change because their elements have coevolved over time, and eventually they become locked-in.^[22] In energy, we have seen how difficult it is to break up the lock-in around fossil fuels.^[23] Nonetheless, socio-technical systems can and do change. The ongoing low-carbon energy transitions in electricity supply and in road transport are prominent examples.^[24]

Transitions entail two key processes, which both require policy support: the emergence and diffusion of innovations and the destabilisation and decline of existing system structures.^[25] Innovations include new technologies but also non-technical novelties (e.g. changes in policies, business models, practices, or lifestyles). Decline can include established technologies such as internal combustion vehicles but also prevailing practices such as commuting to work by car.

Policies often play a key role in initiating, guiding, and accelerating transitions.^[26] They are used to formulate long-term sustainability goals, they can target (radical) innovation, they can change price signals, or they can phase-out specific practices.^[27]

Transitions unfold in a non-linear way over different phases.^[28] This is often depicted in the form of an S-curve. At an early stage, progress is slow and confined to small market niches. Later, one or more innovations start to diffuse. Over time, changes accumulate, resulting in a major transformation of the socio-technical system.^[29] Towards the end, dynamics slow down again as a new system forms and stabilises.^[30] As a transition unfolds, new lock-ins can occur, resulting in “dead-end pathways”: investments into short-term improvements (e.g. switching from coal to natural gas) with limited potential for deep decarbonisation.^[31] Especially investments into long-lasting infrastructures such as gas pipelines have to be carefully monitored in this regard (see below).

The transition to net zero includes multiple transitions unfolding in parallel in different sectors such as electricity, transport, buildings, and industry (Figure 1). Like individual transitions, the overarching transition to net zero is characterised by different phases. After a first phase, in which low-carbon innovations such as renewable power-generation technologies emerged, we currently observe an acceleration of the transition in the electricity sector (second phase).^[32] We also see that low-carbon electricity has become a key element for decarbonising other sectors such as transport and buildings, which means that the overall transition expands in scope.^[33] This new phase of development marks a shift from the transition of a single socio-technical system to one that involves multiple sectors (third phase). In future years, the scope has to widen even further to also include a broader range of solution strategies for decarbonisation (fourth phase).^[34]

3. Key principles for net-zero transition policies

Below we offer six key principles to guide policy-making for deep decarbonisation.^[35] They reflect the policy implications in the last column of Table 1.

I System transformation

To embark on a net-zero emission pathway, incremental changes will not suffice. Instead, radical innovations and fundamental transformations of established socio-technical systems are necessary. This includes, for example, changes in urban planning to reduce the demand for transport, creating multimodal and widely accessible mobility systems instead of just pushing electric vehicles, or new bio-based building materials to complement low-carbon steel and cement.

To achieve such fundamental system transformations, it is vital to support both (radical) innovation and decline.^[36] First, policy-makers need to develop transformative, mission-oriented innovation policies.^[37] These policies support the development of key innovations (e.g. hydrogen airplanes or ammonia for shipping) as well as market formation, competence-building, standard development, and infrastructure investments, that is, the many complementary elements required to build alternative systems. Second, policy makers need to implement decline policies targeting incumbent system structures. They have to break up lock-ins (e.g. by signalling that specific business models will not be viable in the future) and accelerate the phase-out of carbon-intensive technologies, businesses, and practices. Examples of decline policies include removing fossil fuel subsidies, technology bans (e.g. fossil fuel heating), phase-out policies (e.g. coal), divestment campaigns, and carbon pricing.^[38] The European Green Deal is an example of a package of transformative, mission-oriented policies. It includes measures that support low-carbon innovations such as hydrogen-based fuels as well as decline policies such as the phase-out of coal.

II Effectiveness

A key challenge of climate change is that there is only a limited GHG budget left to stabilise global warming at or around 1.5°C.^[39] Decarbonisation policies should therefore prioritise effectiveness, that is, focus on measures that rapidly reduce large amounts of emissions (e.g. coal phase-out, renewable energy deployment). This also implies that we move beyond lowest-cost solutions: Effectiveness should be favoured over efficiency. As interest rates are at historically low levels (e.g. due to Covid-19 recovery programmes), there is a window of opportunity for large-scale investments into low-carbon technologies and infrastructures.^[40]

III Sensitivity to context

Policy mixes for deep decarbonisation have to be tailored to the broad variety of context conditions. Due to the scope of climate change, policies need to cover all parts of the economy and the globe, eventually.

However, there are vast differences, both across sectors and places (or jurisdictions). Countries and regions vary substantially in terms of political systems, institutional stability, administrative capabilities, societal values, practices around food, farming and housing, and mobility patterns. Also, difficult-to-decarbonise sectors such as aviation, shipping, agri-food, and heavy industry require specific solutions.^[41] These do not just include low-carbon production technologies but also major demand-side changes (flying less), a substitution of products (plant-based proteins, bio-based construction), and new business practices (reuse and repair rather than planned obsolescence).^[42] 

Net-zero policies have to take these context specificities into account. “One-size-fits-all” approaches are not likely to be politically feasible or effective. For example, carbon pricing has been met with fierce resistance in France and in Ontario, it does not seem to be politically feasible in the United States, and it has taken decades to become a relevant element in EU climate policy.

IV Adapting policies to transition phases

The progress and also the pace of the transition to net zero are likely to differ for each place and sector. Policies have to be adapted accordingly. Policy-making becomes more challenging over time as the complexity of the transition increases, for example due to the expansion in scope.

Transformative innovation policies are a key element in the transition policy mix for all phases.^[43] In early stages, they are the primary focus of policy-making. From the acceleration phase onwards, they have to be complemented with policies targeting decline (see above)^[44]. In the third phase, cross-sectoral policy coordination comes on top of the existing policy challenges. For example, it is important to avoid bottlenecks in the expansion of renewable power generation, which will be needed in many different sectors. In the fourth phase, finally, policies have to support the development of entirely new decarbonisation strategies, for example massive reductions in demand through changes in behaviour and lifestyles, or radically new technologies around hydrogen.

V Policy evaluation and learning

A fifth element in transition policy approaches is about learning and reflexivity. Policy outcomes have to be monitored closely to avoid unwanted effects such as environmental problem-shifting or new lock-ins into dead-end pathways. Problem-shifting occurs when solutions create new problems or aggravate already existing sustainability issues, either in different places or sectors.^[45] Examples include land use for biofuels (and competition with food production) and the increasing use of minerals for batteries.^[46] Against this background, policies have to be evaluated regularly, and the scope of policy evaluation has to be broader than usual.^[47]

VI Politics

Transitions create winners (e.g. firms that develop low-carbon technologies) and losers (e.g. people in coal-mining regions, ). As a consequence, transitions are highly contested, and transition policies have to deal proactively with politics. Actors will struggle over policies, technologies, ideas, and values.^[48] Effective transition policies cannot be enacted without the support of key stakeholders. Therefore, it is essential for policy-making to build strong coalitions of actors (innovators, advocacy groups, new businesses, re-orienting incumbents) who will support the transition as it advances.^[49] As a consequence of the already ongoing transition towards low-carbon electricity and also as a result of the Covid-19 pandemic, many incumbent actors that typically have strong influence on policy-making are weakened.^[50] This represents a unique window of opportunity to strengthen the constellation of actors supportive of the net-zero energy transition and to help incumbent firms in their re-orientation towards low-carbon business models.

4. Conclusion

Sustainability transition perspectives are receiving increasing attention in policy and practice.^[51] This paper discussed how they can be used to address the net-zero energy transition, which is an extraordinary challenge given its complexity and urgency. It highlighted six key principles to guide “transitions based” decarbonisation policies. For credible policy responses, it is also important to balance changes on the supply side (e.g. net-zero electricity generation) and on the demand side (e.g. lifestyle changes). The latter will be more difficult to address, but it is essential for deep decarbonisation.