The Regulatory Policy Institute Research Group

Climate policy – ‘Tain’t what you do, it’s the way that you do it.

Given the observed limitations of quantitative emissions reduction agreements, we explore the role of complementary science and technology approaches based on sharing of knowledge and know-how in mitigating relevant externalities.

The standard approach to climate change policy runs as follows. If a nation reduces its own carbon emissions, the bulk of any climate-related benefits will be enjoyed by other countries, since for global climate change purposes it does not matter where emissions are made. Therefore, if each nation acts individualistically, there is an ‘externality’ (a conferred but unrewarded benefit) in play, giving rise to egregiously inadequate incentives for carbon reduction. Consequently, international treaties, in which nations commit to levels of carbon reduction collectively, are of the utmost significance.

However, though it may look ‘obvious’ at first sight, the second of these three propositions is a non sequitur. It misses the key point that the effects of ‘carbon reduction in one country’ depend upon how it is achieved – and how it is achieved is a question of strategic choice.  

Good strategy needs to be indirect, focussed on the ‘how to’ question. It almost invariably requires a decomposition of the challenges into identifiable and achievable sub-strategies. Thus, to pursue the goal of happiness we might identify activities that tend to cause happiness and pursue those. As George Bernard Shaw put it: Folly is the direct [our emphasis] pursuit of happiness …”.  In other words, the direct approach overlooks the ‘how to’ question.

Now, apply this everyday cognitive framing to the carbon reduction problem.  The most obvious, indirect strategic path is to reduce the cost of low/zero carbon technologies since, if these costs were lower than those of existing technologies, they would be adopted without much ado. 

The next question is how that might be achieved, and to this there is a well-substantiated answer in economics: via competitive discovery processes, where what is to be discovered is new technological knowledge/information. A critically important insight here is that these processes come with externalities of their own. The discoveries set in train positive feedback loops to everyone’s benefit.

To take an extreme example that illustrates a more general point, imagine the global benefits of the discovery of a fusion reactor by scientists and engineers in nation A.   Given a strategic, cost-reduction objective, there is now an additional externality at play. Considering the effects of successful discoveries/innovations by A, it can be expected that they will lead not only to reduced emissions in A, but also in nations across the world (as they adopt the new technology). All these consequential, rest-of-the-world (ROW) reductions are of benefit to the citizens of Nation A and are appropriately attributable to it. In this context, it is also important to distinguish between those elements of science and technology policy which serve the purpose of reducing costs and diffusing knowledge with those primarily directed at pursuit of commercial comparative advantage.

That these benefits are not encompassed by the current (‘carbon reduction in one country’) accounting systems is a flaw in those systems, which we would suggest creates incentives for misdirection of resource allocation at the national level. As is often the case, problematic externalities are created or enhanced by policy actions, not by some given feature of the relevant context.  In our climate policy example, it would therefore seem important to focus on the optimal interaction between negative and positive externalities that form part of policy setting. To borrow the covid analogy, the best policy outcome required a balance to be found between the negative externalities of permanent rolling lockdowns and the positive externalities associated with open access vaccine research. 

Finally, although it should not require stating, none of the above points have bearing on the issue of determining an aspirational, global, or national, path of carbon abatement. They apply whatever the path. Rather, the take-away conclusion is that the costs of achieving any given path and the likelihood of achieving it in practice are liable to be harmed by neglect of the key ‘how to’ questions of good strategic analysis. 


Gerard Fox, Harold Hutchinson, and George Yarrow (for the Regulatory Policy Institute Research Group)

For further elaboration of points of detail, see  Re-thinking climate change policies: A tale of two externalities 

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