Beyond the fixation on carbon pricing : a new framework for designing climate policy

The focus of climate economics has traditionally been on CO2 as a negative externality. For decades, this has led policymakers to strongly focus on carbon pricing as the preferred climate policy instrument. But addressing the climate crisis differs fundamentally from a pollution problem. It requires a rapid transformation towards sustainable energy production and the electrification of other sectors, which carbon pricing alone has proven insufficient to deliver. This article outlines an economic framework that moves beyond the narrow lens of externalities and draws attention to the key roles that capital costs and price elasticity play in shaping green investment and the shift to low-carbon consumption. Together with political economy considerations, these observations suggest a pragmatic approach where carbon pricing is not the primary instrument but is instead sequenced with other policies, namely policies that lower the cost of capital for green investments and targeted positive incentive policies that help to create affordable and attractive low-carbon alternatives.