The Right Incentives For Climate Action
As the closure of the Strait of Hormuz continues to disrupt global oil and gas flows, countries are increasingly focusing on short-term energy priorities to the detriment of long-term decarbonization goals. In such a context, the difficult task of designing climate policies that realign incentives takes on new importance.
The benefits of these climate policies are d globally, but their costs are borne locally and nationally. This creates an incentive to free ride on others’ efforts to reduce emissions, which becomes stronger when geopolitical pressures make energy security the overriding priority. In such a context, the difficult task of designing policies and mechanisms that realign incentives takes on new importance.
Brazil’s experience shows that well-designed climate policies with reliable metrics and standards, as well as consequences for non-compliance, can have a big impact. In the 1980s, a spike in the number of infants born with anencephaly in the Brazilian city of Cubatão was attributed to uncontrolled industrial pollution. In the wake of this and other public-health crises tied to extreme pollution, the national environmental ministry devised the PROCONVE program, a vehicle-emissions standard that required automakers to produce significantly cleaner cars. After implementing the policy, Brazil observed a substantial reduction in vehicular emissions. A command-and-control policy worked as intended—setting a clear standard, applying it uniformly, and measuring the results.
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Brazil also found a way to alter incentives in the Amazon, which, by 2004, had already lost roughly 15% of its rainforest (an area the size of Ukraine), owing to insufficient monitoring and enforcement activities. The federal government began to use satellite imagery from the National Institute for Space Research to measure deforestation reliably, enabling enforcement almost in real time. This formerly lawless zone became governable. The result was a roughly 85% decline in Amazon forest-clearing rates within less than a decade, cutting national emissions significantly.
In addition to pricing and regulation, information-based policies are a powerful tool for raising awareness about the social and environmental costs of individual choices and making social norms visible. Brazilian data show that substituting fish for meat one day per week could reduce household food-related emissions by 11% without increasing costs—information that could significantly reduce total national emissions if it were internalized by households. Moreover, a 2014 study conducted in the United States found that home energy reports based on social comparison significantly reduced households’ consumption.
When policy sets constraints—whether through carbon pricing, performance standards, regulatory frameworks, or public investment—markets find the most efficient way to meet them. Markets are not the problem; unregulated externalities are. So is the lack of global coordination, which can be solved by carbon border adjustments that penalize free riding, climate clubs that reward participation, and technology transfers that lower the cost of compliance for poorer countries. Once policymakers correct these failures, markets become the solution.
The political headwinds against climate action have intensified, even as global temperatures reach record highs. Every year of delay compounds the costs of decarbonization. But just because some countries are stepping back does not mean others should give up. The future of the planet will be shaped by millions of individual and collective decisions. Change is still possible; the central challenge for policymakers is whether they are willing to design the incentives that make it inevitable.
This commentary is published in collaboration with the International Economic Association’s Women in Leadership in Economics Initiative, which aims to enhance the role of women in economics through research, building partnerships, and amplifying voices.
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