Getting expectations right more relevant than getting prices right: Credibility is key for policies to achieve net zero targets

Identifying a policy pathway that maximizes the credibility of net-zero targets can be achieved by working backwards from net zero– an approach the authors call “backwards induction” – to identify policy choices today that enable the target to be reached. This is key because private investment in the green-energy transformation is instrumental to achieving net zero, and investment will not be unleashed unless investors expect that the targets are achievable and ultimately will be enforced.

As a positive example, the authors refer to the EU and a major innovation in the Fit for 55 policy package: the combination of technology transformation with increasingly stringent, and comprehensive emissions pricing. This combines forward-looking policy targets with measures that prevent backsliding by phasing out the availability of fossil fuels in electricity and transportation.

“It’s all about credibility and commitment if we want to achieve a net-zero-consistent policy pathway”, explains Michael Pahle, co-author of the paper and researcher at the Potsdam Institute for Climate Impact Research. “Policy debates are too often about antagonization of market-based and regulatory instruments, but for maximize credibility we need both.”