Sequencing in Climate Policy to Ratchet-up Stringency over Time

A major outcome of the Paris climate agreement is the aspirational goal of greenhouse gas (GHG) neutrality in the second half of this century. How and through which policies, at multiple levels of governance, can this goal be realized? Most economists advocate carbon pricing as a preferable and even necessary instrument to minimize costs. Nonetheless, the actual role of carbon pricing remains limited. This paper articulates various barriers that may limit the stringency of policy in general and carbon pricing in particular that would first need to be overcome. These barriers include high cost and lack of cost effectiveness; the presence of a blocking political constituency or absence of advocates with an economic interest in the goal; inadequate institutions and governance; lack of technology; and incomplete coordination across jurisdictions leading to free riding, leakage and competitiveness concerns. We do not claim this list to be comprehensive; other barriers could be described as well. We suggest that these barriers might be overcome through a sequence of policies including non-price and informal pricing policies or a limited application of carbon pricing, incrementally advancing a climate policy regime and enabling what we call dynamic “ratcheting-up”. Policy sequencing recognizes that policies that might eventually be essential to achieve high stringency like carbon pricing cannot – or can only in a limited way – be implemented at an early stage because of barriers we describe. These barriers might be overcome through the effects or reforms of earlier stage policies. In a sequence of policies leading to ratcheting-up over time each stage would be conducive to achieving the subsequent more stringent one. Depending on the particular barriers in place there might be multiple routes by which to break out of a particular situation of constrained policymaking. We develop a conceptual model of dynamic “ratcheting–up” and in this framework consider what may be empirical examples of policy sequences in California and Germany, arguably two of the world’s most advanced and ambitious jurisdictions in climate policy development. A refined understanding of policy sequencing will be of both theoretical and practical use. From a theoretical perspective this paper contributes to developing a theory of climate policy change over time and builds an understanding of the policy design space beyond stylized textbook instruments. From a practical viewpoint, the study provides a starting point to address questions like: Do we simply need more of the same climate policies, i.e. will current approaches dominated by policies supporting specific technologies prevail and can just be scaled up, or do we need something different (e.g. ambitious carbon pricing)? Can we identify previously successful sequencing options to build a toolbox of approaches that might be pursued in different contexts? And can we identify the conditions under which they have been successful, and possible risks and side effects?