Systematic review of the outcomes and trade-offs of ten types of decarbonization policy instruments

Renewable electricity traded as ‘green certificates’ can redistribute wealth from consumers to energy companies – with 83% of the available evidence suggesting they have a “negative impact”, along with 63% of the evidence for energy taxes, which can disproportionately affect rural areas.

A review of ten types of policy used to reduce carbon suggests that some costs fall on those less able to bear them – but it also shows these policies can form the bedrock of a ‘green recovery’ if specifically designed and used in tandem.

Unless low-carbon policies are fair, affordable and economically competitive, they will struggle to secure public support
Cristina Peñasco

University of Cambridge researchers combed through thousands of studies to create the most comprehensive analysis to date of widely used types of low-carbon policy, and compared how they perform in areas such as cost and competitiveness. The findings are published today in the journal Nature Climate Change. The researchers also poured all their data into an interactive online tool that allows users to explore evidence around carbon-reduction policies from across the globe. https://www.cam.ac.uk/research/news/low-carbon-policies-can-be-balanced-to-benefit-small-firms-and-average-households-study

Around 7,000 published studies were whittled down to over 700 individual findings. These results were coded to allow comparison – with over half the studies analyzed “blind” by different researchers to avoid bias.

The ten policy “instruments” covered in the study include forms of investment – targeted R&D funding, for example – as well as financial incentives including different kinds of subsidies, taxes, and the auctioning of energy contracts.

The policies also include market interventions – e.g. emissions permits; tradable certificates for clean or saved energy – and efficiency standards, such as those for buildings.

Researchers looked at whether each policy type had a positive or negative effect in various environmental, industrial and socio-economic areas.

When it came to “distributional consequences” – the fairness with which the costs and benefits are spread – the mass of evidence suggests that the impact of five of the ten policy types are far more negative than positive.

“Small firms and average households have less capacity to absorb increases in energy costs,” said co-author Laura Diaz Anadon, Professor of Climate Change Policy.

“Some of the investment and regulatory policies made it harder for small and medium-size firms to participate in new opportunities or adjust to changes.

“If policies are not well designed and vulnerable households and businesses experience them negatively, it could increase public resistance to change – a major obstacle in reaching net zero carbon,” said Anadon.

For example, feed-in tariffs pay renewable electricity producers above market rates. But these costs may bump energy prices for all if they get passed on to households – leaving the less well-off spending a larger portion of their income on energy.

However, the vast tranche of data assembled by the researchers reveals how many of these policies can be designed and aligned to complement each other, boost innovation, and pave the way for a fairer transition to zero carbon.

For example, tailoring feed-in tariffs (FiTs) to be “predictable yet adjustable” can benefit smaller and more dispersed clean energy projects – improving market competitiveness and helping to mitigate local NIMBY-ism.

Moreover, revenues from environmental taxes could go towards social benefits or tax credits e.g. reducing corporate tax for small firms and lowering income taxes, providing what researchers call a “double dividend”: stimulating economies while reducing emissions.

The researchers argue that creating a “balance” of well-designed and complementary policies can benefit different renewable energy producers and “clean” technologies at various stages.

Government funding for research and development (R&D) that targets small firms can help attract other funding streams – boosting both eco-innovation and competitiveness. When combined with R&D tax credits, it predominantly supports innovation in startups rather than corporations.

Government procurement, using tiered contracts and bidding, can also improve innovation and market access for smaller businesses in “economically stressed” areas. This could aid the “levelling up” between richer and poorer regions as part of any green recovery.

“There is no one-size-fits-all solution,” said Peñasco. “Policymakers should deploy incentives for innovation, such as targeted R&D funding, while also adapting tariffs and quotas to benefit those across income distributions.

“We need to spur the development of green technology at the same time as achieving public buy-in for the energy transition that must start now to prevent catastrophic global heating,” she said.

Peñasco and Anadon contributed to the recent report from Cambridge Zero – the University’s climate change initiative. In it, they argue for piloting a UK government research programme akin to ARPA in the US, but focused on new net-zero technologies.

Prof Laura Diaz Anadon is Director of Cambridge’s Centre for Environment, Energy and Natural Resource Governance (C-EENRG). The review was also co-authored by Prof Elena Verdolini from the RFF-CMCC European institute on Economics and the Environments (EIEE) and the Euro-Mediterranean Centre on Climate Change and University of Brescia. Anadon and Verdolini lead part of the EU project INNOPATHS that funded the research.

The text in this work is licensed under a Creative Commons Attribution 4.0 International License. Images, including our videos, are Copyright ©University of Cambridge and licensors/contributors as identified. All rights reserved. We make our image and video content available in a number of ways – as here, on our main website under its Terms and conditions, and on a range of channels including social media that permit your use and sharing of our content under their respective Terms.

Published: 18 January 2021 by Cristina Peñasco, Laura Díaz Anadón & Elena Verdolini in Nature Climate Change (2021) Cite this article

Science Daily overview: University of Cambridge researchers combed through thousands of studies to create the most comprehensive analysis to date of widely used types of low-carbon policy, and compared how they perform in areas such as cost and competitiveness. The findings are published today in the journal Nature Climate Change. The researchers also poured all their data into an interactive online tool that allows users to explore evidence around carbon-reduction policies from across the globe.

“Preventing climate change cannot be the only goal of decarbonisation policies,” said study lead author Dr Cristina Peñasco, a public policy expert from the University of Cambridge. “Unless low-carbon policies are fair, affordable and economically competitive, they will struggle to secure public support — and further delays in decarbonisation could be disastrous for the planet.” Around 7,000 published studies were whittled down to over 700 individual findings. These results were coded to allow comparison — with over half the studies analysed “blind” by different researchers to avoid bias.

The ten policy “instruments” covered in the study include forms of investment — targeted R&D funding, for example — as well as financial incentives including different kinds of subsidies, taxes, and the auctioning of energy contracts. The policies also include market interventions — e.g. emissions permits; tradable certificates for clean or saved energy — and efficiency standards, such as those for buildings.

Researchers looked at whether each policy type had a positive or negative effect in various environmental, industrial and socio-economic areas.

When it came to “distributional consequences” — the fairness with which the costs and benefits are spread — the mass of evidence suggests that the impact of five of the ten policy types are far more negative than positive. “Small firms and average households have less capacity to absorb increases in energy costs,” said co-author Laura Diaz Anadon, Professor of Climate Change Policy.

“Some of the investment and regulatory policies made it harder for small and medium-size firms to participate in new opportunities or adjust to changes.

“If policies are not well designed and vulnerable households and businesses experience them negatively, it could increase public resistance to change — a major obstacle in reaching net zero carbon,” said Anadon.

For example, feed-in tariffs pay renewable electricity producers above market rates. But these costs may bump energy prices for all if they get passed on to households — leaving the less well-off spending a larger portion of their income on energy.

Renewable electricity traded as ‘green certificates’ can redistribute wealth from consumers to energy companies — with 83% of the available evidence suggesting they have a “negative impact,” along with 63% of the evidence for energy taxes, which can disproportionately affect rural areas.

However, the vast tranche of data assembled by the researchers reveals how many of these policies can be designed and aligned to complement each other, boost innovation, and pave the way for a fairer transition to zero carbon.

For example, tailoring feed-in tariffs (FiTs) to be “predictable yet adjustable” can benefit smaller and more dispersed clean energy projects — improving market competitiveness and helping to mitigate local NIMBYism*.

The researchers argue that creating a “balance” of well-designed and complementary policies can benefit different renewable energy producers and “clean” technologies at various stages.

Government funding for research and development (R&D) that targets small firms can help attract other funding streams — boosting both eco-innovation and competitiveness. When combined with R&D tax credits, it predominantly supports innovation in startups rather than corporations.

“We need to spur the development of green technology at the same time as achieving public buy-in for the energy transition that must start now to prevent catastrophic global heating,” she said.

Materials provided by University of Cambridge. The original story is licensed under a Creative Commons License.

Peñasco, C., Anadón, L.D. & Verdolini, E. Systematic review of the outcomes and trade-offs of ten types of decarbonization policy instruments. Nature Climate Change, 2021 DOI: 10.1038/s41558-020-00971-x

University of Cambridge. “Low-carbon policies can be ‘balanced’ to benefit small firms and average households.” ScienceDaily. ScienceDaily, 18 January 2021. <www.sciencedaily.com/releases/2021/01/210118113112.htm>.

ABSTRACT:

The literature evaluating the technical and socioeconomic outcomes of policy instruments used to support the transition to low-carbon economies is neither easily accessible nor comparable and often provides conflicting results. We develop and implement a framework to systematically review and synthesize the impact of ten types of decarbonization policy instruments on seven technical and socioeconomic outcomes. Our systematic review shows that the selected types of regulatory and economic and financial instruments are generally associated with positive impacts on environmental, technological and innovation outcomes. Several instruments are often associated with short-term negative impacts on competitiveness and distributional outcomes. We discuss how these trade-offs can be reduced or transformed into co-benefits by designing research and development and government procurement, deployment policies, carbon pricing and trading. We show how specific design features can promote competitiveness and reduce negative distributional impacts, particularly for small firms. An online interactive Decarbonisation Policy Evaluation Tool allows further analysis of the evidence.

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Data availability

The details of the study design, all data and information compiled for this research and the procedures for their analysis are detailed in this published article and its Supplementary Information files. The datasets with the coding of the evidence generated during this study (including those available in the Supplementary Information) are available from the corresponding author upon request. The coded evidence can also be accessed free of charge through the online ‘Decarbonisation Policy Evaluation Tool’ (https://dpet.innopahts.eu). This tool allows the reader to explore additional research questions or different aspects of the evidence. This tool includes various functionalities, including (1) allowing the user to filter different evidence according to the research method, (2) weighing the evidence using weights specified by the user, (3) filtering by policy instrument or outcome and (4) reading the systematic coding of the papers along different categories, including jurisdiction, time period, additional details regarding the data and research methods, the sector and so on. Source data are provided with this paper.

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Acknowledgements

This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement no. 730403. We thank all of the INNOPATHS partners for feedback during the development of the DPET online tool and this paper, and in particular S. Verde for the precious feedback and help with some of the systematic review coding as well as Nice & Serious and P. Larkin for the online development of the DPET tool. C.P. and L.D.A. also acknowledge the interactions enabled by the Economics of Energy Innovation and System Transition (EEIST) project—which is funded by the Department of Business, Energy and Industrial Strategy (BEIS) of the UK Government—during the last few months of this project.

Author information

Affiliations

Department of Politics and International Studies (POLIS), University of Cambridge, Cambridge, UKCristina Peñasco
Centre for Environment, Energy and Natural Resources Governance (C-EENRG), Department of Land Economy, University of Cambridge, Cambridge, UKCristina Peñasco & Laura Díaz Anadón
Department of Law, University of Brescia, Brescia, ItalyElena Verdolini
RFF-CMCC European Institute of Environmental Economics (EIEE), Euro-Mediterranean Centre of ClimateChange (CMCC), Milan, ItalyElena Verdolini

Contributions

C.P., L.D.A. and E.V. designed the systematic review. C.P. implemented the design of the systematic review, identifying the sample of papers included in the study. C.P., L.D.A. and E.V. coded the papers in the review, analysed the results and wrote the manuscript.

Corresponding author

Correspondence to Cristina Peñasco