The Mitigation Trinity: Coordinating Policies to Escalate Climate Mitigation

The Mitigation Trinity: Coordinating Policies to Escalate Climate Mitigation

One Earth Perspective The Mitigation Trinity: Coordinating Policies to Escalate Climate Mitigation Felix Creutzig1,2,3,* 1Mercator Research Institut...

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Perspective The Mitigation Trinity: Coordinating Policies to Escalate Climate Mitigation Felix Creutzig1,2,3,* 1Mercator

Research Institute on Global Commons and Climate Change, Berlin, Germany Economics of Human Settlements, Technical University Berlin, Berlin, Germany 3Twitter: @efesce *Correspondence: [email protected] https://doi.org/10.1016/j.oneear.2019.08.007 2Sustainability

Climate-change mitigation is a global collective-action problem of high urgency and is required for stabilizing the Earth system. But, the global coordination of credible policies to mitigate climate change is hampered by heterogonous nation states diverging in both capabilities and domestic economic interests. To make mitigation more attractive, and ensure automatic escalation in ambition, I suggest mutually reinforcing climate policies that are linked via public finance: pricing carbon within an expanding climate coalition, using the revenues to build infrastructures to accommodate low-carbon technologies and systems, and applying normative pressure to divest from fossil fuels. An algorithmic strategy based on auctioning would guarantee efficiency and escalate mitigation. Together, carbon pricing, infrastructure investment, and morally motivated collective action constitute the mitigation trinity. Introduction Climate change is a megatrend and only rapid action can avoid the risk of passing of Earth system thresholds toward a ‘Hothouse Earth’’ pathway.1 No nation alone can respond to this challenge, and international cooperation and collective action are required to bring together nation states, business, and other societal actors. So far, most of the literature on international cooperation has focused on how to overcome the gametheoretic free-rider problem: climate-change mitigation is a global public good, and it is perceived as short-term optimal to abstain from action and leave mitigation efforts to other parties (e.g., see Heitzig and Kornek2). However, these studies mostly abstract away from specific climate policies or consider a single climate policy, such as carbon pricing. Considering different policy and financing instruments jointly might instead increase the scope for climate coalition building and dynamically alter the incentives for countries to join collective action. Recent climate-change negotiations demonstrated an understanding of the necessity to act and displayed a commitment of many nations to reduce their emissions. What is missing is a policy framework that realizes ambitious mitigation goals globally. Three barriers hamper mitigation efforts: (1) Leakage: any successful domestic or regional policy reduces world market prices of fossil fuels and induces counterfactually higher emissions in non-mitigating countries.3–5 (2) Development: without affordable fossil fuels, developing regions could be deprived of economic development opportunities.6 (3) Political economy: fossil fuel incumbents defend their territory even as disastrous impacts become apparent and alternatives are competitively available.7 I suggest tackling this three-sided challenge with mutually reinforcing carbon pricing and infrastructure investments that are linked via public finance. Under this approach, a climate coalition 76 One Earth 1, September 20, 2019 ª 2019 Elsevier Inc.

would implement a coordinated set of carbon-pricing measures, including emission trading schemes and carbon taxes. A traditional climate economic perspective based on the behavioral model of rational choice might stop here. But because infrastructures are path dependent and significantly influence the choices people have, they should become part of explicit climate-policy portfolios. Lastly, establishing norms and moral sentiments are additional important, if not necessary, tools to rapidly reducing greenhouse gas (GHG) emissions, especially where fossil fuel interests are dominant. Together, carbon pricing, targeted infrastructure investments, and restrictive supply policies must become part and parcel of international climate policies. The provision of infrastructures plays a key role given that adaptive changes to carbon pricing are only possible if low-carbon opportunities are available. For example, a car driver can switch only to cycling if the bike infrastructure is safe and convenient and enables medium-distance travel in acceptable time. As infrastructures are part of public policy and cannot be provided instantaneously in response to prices on GHG emissions, they must be planned separately and in advance. Providing infrastructures becomes an explicit component of climate policy. If foresight is adaptive but not perfect, complementing the carbon tax in a climate coalition with building infrastructures reduces the opportunity costs of fuel switch and facilitates uptake in low-carbon technologies and systems. Fostering infrastructures in noncoalition countries would ease the counterfactual burden of introducing carbon prices and the transition away from cheap coal and enable a steady enlargement of the climate coalition. If financial support for infrastructures is conditional on domestic carbon pricing, mitigation efforts automatically escalate. However, even as low-carbon infrastructures and options are established, fossil fuels are often only complemented and not supplemented. These industries may have substantial sunk costs in existing power plants or stocks and would possibly forgo huge fossil fuel rents. There is no incentive to leave the market place. Instead, such players attempt to block carbon

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Perspective pricing and other effective climate policies.8 This political economy can be addressed heads on by political protests voicing justified moral outrage that change the space of what is politically feasible. As a consequence, the supply of fossil fuels can be restricted directly. In turn, this would further facilitate carbon pricing and low-carbon infrastructure provisioning. In the following, I discuss the role and design of carbon pricing, infrastructure provision, and supply-side restriction in turn. I then consider further options that might be more problematic in that they introduce new and undesirable rent economics. Together, carbon pricing, infrastructure investment, and morally motivated collective action constitute the mitigation trinity. Pricing Carbon A price on GHG emissions has been identified as a key policy instrument in the economics of climate change.9 A price instrument is the classic and arguably best approach to address the costs of climate change (an externality in economic speech) and is crucial to incentivize a reduction of GHG emissions while keeping the costs of abatement down. In global mitigation scenarios, an increase in prices on GHG emissions induces a fuel switch depending on technology specification and other variables. Risks, uncertainties, and ethical considerations make the outcome of models highly contingent on relatively arbitrary specifications, but it is not uncommon for stringent mitigation scenarios to identify emission prices above US$100/tCO2eq in 2030.10,11 Pricing GHG emissions reduces the rents accrued by fossil fuel owners (in one set of comprehensive mitigation scenarios by about 30%, or US$9–$12 trillion) and also creates a considerable climate rent (of US$21–$32 trillion).12 Pricing carbon has distributional implications. These must be addressed explicitly to make pricing politically feasible. A central problem of carbon pricing is the well-documented prisoner’s dilemma: economies that introduce carbon pricing will bear the costs of climate-change mitigation, while other economies who abstain from mitigation measures will benefit from reduced impacts of climate change at zero costs. This free-rider dynamic constitutes an important roadblock to climate-change mitigation in global governance. As a key measure to overcome free riding, a climate club of nation states and/or regional economies could implement relevant mitigation measures, such as carbon pricing; such a climate club is stable (reaching a coalition Nash equilibrium) and achieves high levels of abatement if stabilized with small trade penalties on non-participants.13,14 A climate coalition would hence be the starting point of a global climate-governance regime. The initial climate coalition would comprise jurisdictions that have emission trading or carbon taxes by 2020. By 2016, the virtual climate coalition comprised 17 jurisdictions that have emission trading15 and at least 5 with explicit carbon taxes.16 Around 17% of emissions by G20 countries are covered by carbon pricing.17 The total amount of GHG emissions covered or scheduled in 2018 comprised 20% of total global net emissions, involving 45 countries and 25 subnational entities.18 Total revenues grew at 50% from 2016 to 2017, reaching US$33 billion in 2017 and a total value of carbon pricing at US$82 billion in 2017. The dominant player is the European Union (EU) with its emissions trading system (ETS) scheme, complemented by country-level carbon

taxes, for example, in Sweden, Switzerland, and the UK. In North America, state-level initiatives include California, Massachusetts, Quebec, and other states or provinces. In Asia, schemes exist in Japan, Korea, and China, and a full roll-out of emission trading in China in 2020 is eventually expected to cover 8 Gt CO2 annually (Figure 1). These countries and subnational entities would be the first members of the climate coalition. A key goal could be harmonize carbon pricing at a relevant minimum level, somewhere between US$20/tCO2 and US$50/tCO2. US$20/tCO2 would be relatively low but corresponds to levels in existing carbon markets, such as the EU ETS. A price of about US$50/tCO2 in 2020, increasing to US$150/tCO2 in 2030, is estimated to enable decarbonization in the EU, complying with EU climate-change-mitigation goals.19 With China joining in 2020, a strong climate coalition, to start with, would comprise one-quarter of the total net emissions. If prices were raised, on average, to about US$20/tCO2 in 2020, which is not implausible given current price trends, especially in Europe, this would have a total value of US$250 billion at current annual emission rates (approximately 50 Gt CO2/year in 201020) and could involve about US$100 billion in revenues (as many certificates are distributed for free in grandfathering schemes, transferring value to polluting industries) (Figure 2A). The climate coalition should aim to translate close to 100% of the value into revenues by 2025. In summary, carbon pricing as the rational economic instrument serves as a stick that internalizes the costs of the polluters and reduces the incentive to use fossil fuels (Figure 3). This revenue would grow with tightening of caps, growing tax rates, and expansion of the climate coalition but would decline when effectively limiting GHG emissions. Trade penalties would ensure stabilization of the climate coalition and effective abatement and would avoid the perceived need to distribute emission certificates gratuitously. Nonetheless, carbon pricing within the climate coalition alone is insufficient to meet the global mitigation challenge both in terms of geographical scope and in terms of comprehensive climate policies. For effective and ambitious climate-change mitigation, (nearly) all countries would need to adopt carbon pricing or related policies––the coalition needs to expand. Also, low-carbon infrastructures are necessary to provide the opportunity for behavioral change, innovation, and new business models. Specifically, carbon pricing works instantaneously, whereas infrastructures takes years to build and stay for decades, if not longer. That leads to a situation where carbon pricing and existing (fossil-fuel-oriented) infrastructures mismatch, increasing the social and political costs of carbon pricing. In other words, inertia and imperfect foresight make infrastructures ill adapted to the usage of low-carbon technologies, and the long livability of existing (fossil-fuel-based) infrastructures provides an advantage to fossil fuels. Inversely, low-carbon infrastructures are lacking. The case of urban transport is an example. Cities will add about 2.5 billion people in the next three decades and at the same time meet an unabated motorization trend producing congestion and air pollution. About half of the urban population in the global South experiences restricted access, associated with high travel burdens or exclusion from opportunity.21 This gridlock and lack of access can best be met by integrated transit systems requiring investments into infrastructures.21 One Earth 1, September 20, 2019 77

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Perspective

Figure 1. Geographical Scope of Carbon Pricing in 2018 Source18 available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO).

Another barrier is that developing countries rightly argue that they require affordable energy for development, often understood to imply coal. Achieving universal access to power by 2030 is estimated to cost US$12–$40 billion annually until 2030.22 Hence, to accelerate the transition to a global climate-mitigation regime, carbon pricing should be supplemented with building low-carbon infrastructures and making low-carbon energy sources for developing countries attractive. Building Infrastructures Economic models and integrated assessment usually neglect the role of infrastructures. In these models, carbon pricing incentivizes the uptake of low-carbon technologies. Insofar as public infrastructures are required, it is implicitly assumed that governments have perfect foresight and provide infrastructures accordingly. However, this perspective is flawed. Infrastructures, such as highways and the built environment, are not instantaneously replaceable; they display lifetimes of decades if not centuries.23 At the same time, they provide the template for the cost structure of technology use. A fossil-fuel-based infrastructure will make the use of fossil fuel technology cheap and that of low-carbon technologies expensive, and vice versa. In other words, the costs of abandoning fossil fuels appear unreasonable high given the existing infrastructure template. In turn, the forward-looking adoption of low-carbon infrastructures 78 One Earth 1, September 20, 2019

will make the transition to low-carbon energy and transport system appear more affordable (Figure 3). Behavioral circularities render this problem particularly vexing. Infrastructures are demand inducing, notably in the transport sector24,25: demand for low-carbon options requires the availability of low-carbon infrastructures. Commonly, however, climate stabilization models implicitly assume that demand is simply a function of the relative marginal costs of energy technologies. The inertia abundant in infrastructures and the lack of perfect foresight by decision makers imply that short-term carbon prices need to become unreasonably high to induce effective abatement.26 This is particularly worrisome for emerging economies that rely on low energy prices for maintaining the purchasing power of their citizens. It is hence important to keep the costs of mitigation low in developing countries and emerging economies. This requires front-up infrastructure investments to change the cost-and-demand landscape (Table 1). Urban transportation again perfectly exemplifies the infrastructure challenge. A modeling study on optimal multi-objective pricing of private motorized transport in Beijing reveals that marginal pricing can be slashed by 30%–50% (while maintaining the same effect) if alternative infrastructures for bus rapid-transit systems are counterfactually provided.30 The optimal infrastructure provision is also a function of urban form if utilization of transport mode depends on population density: the municipal government optimally invests into public transport networks

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Perspective A

C

B

Figure 2. Conditional Financing of Low-Carbon Infrastructures if Recipient Countries Levies Carbon Pricing or Abrogates Carbon Taxes (A) The climate club forms that jointly prices GHG emissions and obtains revenues from carbon pricing, around US$100 billion in 2020. (B) It auctions a monetary grant to the non-climate club country that offers the most climate effective bundle of carbon pricing and low-carbon infrastructure investment. (C) Policies are self-reinforcing: as the volume of carbon pricing increases, both by extension of the climate club and by increasing price levels, more low-carbon infrastructures can be funded, which in turn facilitates low-carbon behavior and increases the effectiveness of carbon pricing.

where population density and ridership are sufficiently high to ensure financial viability.31 Interestingly, urban form itself depends on the marginal costs of the low-cost transport mode (because of time costs, this is car transportation). As a result, both pricing of transport fuels and provision of low-carbon transport infrastructures are essential elements of reducing GHG emissions because of urban transport. In addition, the experience of urban transport infrastructure has also been shown to endogenously shape preferences.36 Revealed preferences hence are inadequate to decide on infrastructure investments; infrastructure provision becomes, also from this perspective, an explicit tool of decision makers interested in climate-change mitigation.37 Part of the carbon-tax revenue of climate-coalition countries should hence be used to build infrastructures for renewables and other low-carbon technologies in non-coalition countries, possibly via the Green Climate Fund (Figure 1). Expected costs of low-carbon infrastructures will exceed US$1 trillion per year globally both for transport and energy (Figure 3). However, in each case this corresponds to investments that would also be necessary for conventional infrastructures. Low-carbon infrastructures will provide higher net returns on investment. Initially, carbon pricing would bring revenue of about US$250 billion or about 10% of the infrastructure spending required. Financial transfers to foster low-carbon technologies would channel and direct the overall investments rather than provide the whole or even the majority of funding for energy systems. Credit securities could be given to build physical infrastructures for low-carbon transportation, especially in cities that have more

difficult access to financial markets than national governments. In the case of the electricity sector, other ‘‘soft’’ infrastructures are lacking. In many European countries, projects suffer delays because of a lack of harmonization in legal frameworks, trading schemes, and administrative procedures; regulatory and administrative issues impair the development of renewable-energy projects.38 The high number of administrative bodies involved in the approval procedures for the installation and the complexity and lack of standardization of environmental procedures hinder renewable-energy deployment, for example, in Italy and Poland.38 Africa, while abundant in renewable energy potential, lacks investments. Energy-generation technologies, especially renewables, are very capital intensive and require skills and governance capacity, all of which are scarce in many African countries.39 Without such soft infrastructure, a transition to low-carbon energy systems is prohibitively expensive. Hence, in addition to carbon pricing, a second cornerstone is necessary to provide capability for developing countries, which are arguably more concerned with development, livelihood, and adaptation challenges. In particular, a global climate pact will only be successful if economies in transition can obtain affordable energy from non-fossil fuels. Part of the carbon tax revenue of climate coalition countries should hence be used to build up infrastructures for renewables and other low-carbon technologies in non-coalition countries, possibly via the Green Climate Fund (Figure 2B). Investing in renewables will cost about the same as a conventional energy investment strategy: about US$1 trillion One Earth 1, September 20, 2019 79

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Perspective Key policies

Economic effect Fossil fuels

Scks

Carbon pricing & trade sancons Infrastructure

Carrots

Deployme nt & fuels

Deployme nt & fuels

Infrastructure

Deployme nt & fuels

Deployme nt & fuels

Infrastructure

Deployme nt & fuels

Feed-intariffs

Infrastructure

Tribute

Infrastructure

Shaming of fossil investments Infrastructure

Candy

Deployme nt & fuels

Infrastructur e provision

Infrastructure

Sermon

Low-carbon fuels

Deployme nt & fuels

Infrastructure

Deployme nt & fuels

Infrastructure

Commons and rents

Behavioral model

Climate coalion of major economies; connuously enlarging

Protecon of global commons; generaon of climate rents

Raonal choice

Focus on developing naons; condional on subsequent carbon pricing

Generaon Adapve of social foresight, commons path dependence

Focus on countries with major fossil fuel stocks or dependence

Protecon of global commons

Moral dues, default effect

Expansion of feel-in-tarrifs to developing countries

Generaon of social rents to owners of RE capacity

Raonal choice and moral framing

Closure of coal mines via auconing-up accessed ressources

Generaon Raonal of rents for choice resource owners

Deployme nt & fuels

Buy-out of fossil fuel owners Infrastructure

Scope and ming

Deployme nt & fuels

Figure 3. Coordinated Set of Instruments for the Global Governance of Climate-Change Mitigation A joint application of carrots, sticks, and sermons would accelerate global decarbonization. Candy and tribute could also support the decarbonization, and may be necessary in the short term, but would also induce undesired incentives and produce rents for resource and capital owners. The bars in the economic effect column represent relative price levels. The blue shaded bars code for the relevant domain, where policy instruments are changing price levels. The arrow codes for the direction in relative price change by policy instrument.

per year globally29 and possibly less, given the higher-thanexpected price decrease in renewable technologies. Hence, financial transfers to foster low-carbon technologies would rather channel and direct the overall investments than provide the whole or even the majority of the funding for energy systems. Specifically, there are two options to build up infrastructures in developing countries. First, the infrastructures could be explicitly delivered, for example, in terms of railway networks and other transport infrastructures. Second, infrastructures could be built by deploying output technologies, generating the infrastructures along the way. This second option is arguably appropriate for renewable energies, where building up capacities and human skills are central. Such capacities emerge more from learning by doing than by abstract training.40 It follows that developing and emerging economies without much capacity 80 One Earth 1, September 20, 2019

would profit most from technological transfer in terms of capacity and skills. Auctioning Infrastructure Support for Carbon Pricing To escalate climate action, additional funds for infrastructure support, provided by the climate coalition, could be provided by auctioning off funds for bidding countries, states, or other jurisdictions that offer the highest volume in carbon pricing (emissions covered multiplied by price level) in return. For example, renewable support should be generous but also made conditional on a comprehensive strategy by receiving countries to decarbonize. To achieve that, support for renewable supply would be auctioned according to the volume of the carbon-pricing proposal. Countries that want to get substantial chunks of renewables would need, as a precondition, to commit to introducing a carbon tax, possibly phasing it in in the coming

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Perspective Table 1. Key Transport and Energy Infrastructures and Finance Needs Globally and Interplay with Carbon Pricing Urban Transport

Inter-urban Transport

Nascent Renewables

Mature Renewables

Infrastructure

highways, public-transit networks, bicycle highways, urban form

HSR, aviation

grid, human capacity, regulation

storage, demand-side options, regulation, grid interconnections

Finance need

ca. US$1.8 trillion per year27,28; net social returns of same magnitude27

ca. US$1.0–$1.4 trillion per year; similar to investments needed anyway29

Interplay with pricing

Beijing: congestion charges can be slashed by 30%–50% if bus rapid transit is provided;30 urban form and transit systems’ financial viability depend on fuel costs of cars31

China: HSR between Beijing and Shanghai stopped aviation growth; together with HSR, emission trading in aviation could stabilize emissions of aviation from 2020 onward

emerging markets for PV and wind replace investments into coal power plants, making carbon pricing feasible also in developing countries32

high penetration rates of PV and wind will depend on storage technologies, demand-side options, and appropriate regulation;33,34 these rates are a precondition to price out remaining fossil fuels

Geographical focus

rapidly urbanizing Asia and Africa

China, South-East Asia, India, transnational European corridors

Africa, South-East Asia (PV already outcompetes coal in China and India35)

in markets with >20% intermittent renewables

The following abbreviations are used: HSR, high-speed railway; PV, photovoltaic.

years. The tax level and scope serve as metrics for climate ambition. Similarly, a carbon tax covering the transport sector could be used for bidding for funds that expand public-transit infrastructure in rapidly urbanizing cities. Jurisdictions that offer carbon pricing for the first time may be preferred over jurisdictions that already have experience with carbon pricing. This algorithmic understanding of coordinated climate action in pricing and infrastructure supply ensures that the climate coalition grows automatically, motivating the climate coalition to provide (expanded) green climate funds for renewable energies (Figure 2C). Carbon prices and low-carbon infrastructures are mutually supportive. Such climate-conditional foreign aid would be beneficial (Pareto-improving) for all participating countries.41 With global rapid urbanization, many low-carbon infrastructures, especially in transport, will be located in urban areas. But cities are in a difficult spot when it comes to joining a global climate coalition. These are jurisdictions that, with few exceptions, such as Singapore, cannot implement carbon pricing. Funding cities is equally a problem, as donors and lending agencies prefer to hand out large grants and loans to countries rather than smaller grants to cities.42 Nonetheless, two ways forward promise to include cities in global climate coalitions. First, grants can be channeled via national governments that implement nationwide programs that support urban low-carbon transformations, such as the Indian Smart City Challenge. In this way, national governments could levy, for example, a nationwide carbon fee and transfer funds for public-transit investments to municipalities. Second, finance could be provided or communicated by global city networks, such as the C40 Finance Facility, and directly support cities. Pricing parking or congestion could serve as an indirect proxy of carbon pricing. However, in most cases, non-carbon incentives, such as congestion reduction, accessibility improvements, and public health, are the main drivers of urban mobility transformations. From this perspective, city-scale financing is best understood as a supporting addition to the global climate coalition,

where measures deserve support without strictly accounting toward a carbon-pricing club. The level of carbon pricing matters. Indeed, the auctioning can be designed such that any increase in carbon pricing can be supported by funds for additional infrastructure investments. This makes it more likely that carbon pricing eventually reaches sufficiently high levels. The climate coalition is growing year by year, while low-carbon infrastructures and renewables become more abundant. The process is self-reinforcing. There is a push from the top: high-income countries that are not yet part of the climate coalition will be subjected to moral pressure to join.39 There is also a pull from the bottom: countries that have low per capita income will receive massive renewable investments if they phase in carbon taxes. Similarly, carbon pricing and infrastructure investments are supportive of each other. Carbon prices incentivize the adoption of low-carbon infrastructures and provide additional funds. Low-carbon infrastructures offer alternatives to use of fossil fuels and hence decrease both the economic and political costs of carbon pricing (Figure 2). Moral Sentiments and Restricting Fossil Fuel Supply Public policies are commonly analyzed from an economic perspective. However, individuals respond not only to economic incentives but also to moral sentiments.43,44 Humans are motivated not only by their own preferences but also by their moral duties.45 Incentives and duties, and individual and collective action, are strongly interrelated and cannot be analyzed in isolation; they have important consequences for a holistic understanding of the climate-solution space.46 GHG emissions can be classified as a morally dubious action, jeopardizing intergenerational equity. This is especially so if alternatives are available at reasonable costs. If market instruments, such as carbon pricing, are not well aligned with the moral imperative of climate-change mitigation, decision makers’ intrinsic motivation can be incited by visualizing and highlighting the morally right action pointing to low-carbon alternatives. This One Earth 1, September 20, 2019 81

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Perspective Box 1. The Overton Window

The Overton Window is a framework that seeks to explain how ideas change over time and influence politics. According to this model, ‘‘politicians mostly only pursue policies that are widely accepted throughout society as legitimate options.’’ Such policies ‘‘lie inside the Overton Window. Other policy ideas exist, but politicians risk losing popular support if they champion these ideas. These policies lie outside the Overton Window.’’47 ‘‘The Overton Window can both shift and expand, [by increasing or shrinking] the range of ideas politicians can support without risking [support by voters, media, or lobbies]. Sometimes politicians can move the Overton Window themselves by courageously endorsing a policy lying outside the Window, but this is rare.’’ The Extinction Rebellion movement explicitly aims to change the Overton Window.48 The slow evolution of societal values and norms is the prime mover of a changing Overton Window.47

is in contraction to the rational choice model and the understanding of actors as ‘‘homo oeconomicus’’: individuals should satisfy their preferences, but it remains the duty of public policy to align market incentives with public interests. However, the understanding of homo oeconomicus itself can be understood as a social norm.46 If public policy makers have either incomplete information or follow different rationales than the long-term public interests, then moral pressure arguably becomes a justified strategy to convert decision makers in banking on climatechange mitigation. Moral sentiments serve to shift the ‘‘Overton’’ Window of what is understood to be political feasible47 (Box 1). Effectively, moral sentiments could increase the supply costs of fossil fuels, for example, by increasing the financing costs of fossil fuel mining or by limiting fossil fuel supply (Figure 3). Arguably, coal is the adequate target of such efforts as it produces the lowest rents and has the lowest market value of all fossil fuels (the notion of the climate budget implicates that about 200 Gt CO2 of coal remains to be burned12,49). The divestment movement poses an educative example, as total divestment sums exploded from US$50 billion in 2014 to US$600 billion in 2015.50 The effectiveness of this approach is debated; one study has suggested a notable additional mitigation effect until 2030 on the one hand51 but an analysis pointing to limited effectiveness in avoiding carbon bubbles, and in diverting investments toward renewables beyond baseline, on the other.50 Yet, there is agreement that the divestment movements change the overall landscape of what is morally appropriate, influencing investors, policy makers, and the media. The target of the divestment movement and similar activities is the restriction of fossil fuel supply, a crucial and perhaps necessary component of climate action.52 Doing so would triangualize decarbonization and add a third component to carbon pricing and low-carbon infrastructure investments. Notably, the US coal industry has increasing difficulties in financing their activities, ending in bankruptcies of even the largest US coal producer; lending banks cite both climatechange concerns and the unprofitable prospects of US coal as main concerns.53 Similarly, the Swedish government, and the owner of the major European utility company Vattenfall, cites climate concerns in indicating that Vattenfall should sell its East German Lausetia coal mines. In key coal-producing countries (from Poland to Germany, the US to Australia, and China to India), policy makers, investors, and coal mining have established close connections with ties that are difficult to cut. Indeed, closing coal mines results in unemployment in often otherwise structurally weak regions. In turn, any effort against continued investments into coal and other fos82 One Earth 1, September 20, 2019

sil fuels needs to be accompanied by measurements to support coal workers and their families, for example, with infrastructure investments, alternative renewable-energy deployment, and direct social welfare. Arguably, the concrete policy and investment decision are as much about the moral significance of the specific divestment decision as about the comparative costs of fossil fuels and their alternatives (Figure 1). Moral incentives could be mirrored in the international coordination of closing coal production.39 Defining an order of moral obligation and sequenced coal closure would result in moral pressure on specific members of the international community. Rich countries, such as the US, Germany, and Australia (followed by Russia and Poland, then China and South Africa, and finally India and Indonesia), should commence with closing coal mines. The advantage of such a sequenced coal closure is that an internationally negotiated treaty is not required; instead, moral pressure is applied stepwise to specific and small groups of countries. Avoiding the Generation of New Rent Economies Our list of policy instruments for climate-change mitigation is incomplete. Other policy instruments have also been suggested. Among them, a global expansion of feed-in tariffs (FiTs) and supply-side policies on limiting fossil fuels have prominently been suggested. While both kinds of policies could reasonably support a global decarbonization trajectories, they also provide perverse incentives and generate rents for owners of natural resources and social capital (Figure 3). FiTs are the world’s most prevalent renewable-energy policy and have been a successful policy in the short and medium term in increasing renewable-energy sharing. Arguably, they have been a key driver of promoting solar and wind technologies from niche technologies to mainstream options for power generation by driving down costs of technological learning curves. It has been suggested to expand FiTs globally, especially to developing countries.54 However, as argued above, the marginal technological costs of renewable energy, notably for wind and solar energy, have already been driven down; instead, regulatory and administrative hurdles call for the establishment of soft infrastructures. While FiTs might initially be instrumental in indirectly generating such soft infrastructures, they also incentivize rentseeking behavior.55 As the marginal deployment costs are already competitive in markets, or close to competitive, the risks of socially generated rents for owners of renewable-energy capacity are increasing. In this sense, FiTs can be seen as the ‘‘candy’’ in the policy spectrum in climate-change mitigation (Figure 3).

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Perspective While traditional climate economic rationales have emphasized demand-side carbon-price instruments, it has been more recently argued that supply-side action, particularly in coal production, could complement a carbon price and help to adequately address the fragmented nature of international climate action.56,57 The climate coalition could auction up coal mines and, by this, limit coal supply also in countries that abstain from climate policies. However, such a policy increases the value of coal mines, even in the absence of demand for coal from utilities, and hence incentivizes undesirable exploration. Even if coal-supply polices can be designed to avoid such exploration, fossil fuel owners would still be rewarded for simply owning resources, realizing fossil rents. Policies on fossil fuel supply can hence be aptly called the ‘‘tribute’’ of climate policies (Figure 3). Instead of satisfying rent-seeking fuel owners, scarce public funds are better invested in the provision of social necessities, especially in the provision of infrastructures for the use of lowcarbon technologies. Barriers to Implementation Some elements of this climate-policy architecture have been proposed or implemented previously, albeit as partially disjunct entities.9,26,39,58 The dual set of climate policies provides a comprehensive framework in which mutually reinforcing policies enable increasingly ambitious mitigation levels. The revenue of carbon pricing would enable the front-up provision of low-carbon infrastructures, such as public-transit networks and skills, and regulatory capacity for renewable energies in developing countries. Such infrastructures reduce the opportunity costs of pricing carbon and hence ameliorate the introduction of carbon pricing also in recipient economies. Rather than traditional foreign aid, infrastructure investments and carbon prices emerge as a coordinated set of mutually supportive climate policies. The combination of low-carbon infrastructures and carbon pricing will in most circumstances also deliver substantial co-benefits, which could locally outweigh climate benefits by an order of magnitude, notably by reducing air pollution, alleviating congestion, and improving energy security.30,59,60 The proposed policy architecture has to overcome several barriers that are deeply entwined with the political economy of climate policies. First, carbon pricing is politically difficult because it targets the powerful few organized interests, such as oil producers, while the benefits are distributed indirectly to everyone.61 In this political economy, more targeted regulation is often the best first step in policy sequencing, whereas carbon pricing follows only later as an additional layer of climate policy.62,63 Yet, this logic might be changing. Important countries, such as China and India, have a burgeoning solar and electric vehicle industry, bringing low-carbon industrial interests to the table. Additionally, the Friday for Future movement increases pressure on policy makers to implement more overarching action, realizing the ‘‘building of a broad popular movement to tackle climate change.’’64,65 Second, countries that are part of the climate coalition will prefer to use the revenue from GHG-emission pricing for domestic purposes. In fact, a redistribution of some revenues is justified both to avoid fuel poverty of poorer households and to communicate the procedural fairness of the pricing scheme,66 and it might be necessary to produce the incentives required for the

implementation of climate-change mitigation.65 However, investing in global climate-change mitigation avoids much higher costs later on.67 Politically, climate action is always collective action; and, when national voters agree with collective action, it is not implausible that they also agree to the international collective action contribution that is required. Normatively, supporting poorer countries or communities in climate-change mitigation is also the morally right thing to do.39 Politically, climate clubs, once established are self-stabilizing if well designed.14,68 In addition, private foundations may also support the climate coalition and may possibly even play a role in initiating the climate coalition. Third, conditionality gained a bad reputation with the International Monetary Fund attempt to use financing to leverage the neoliberal Washington Consensus. Many countries will distrust any proposal that would link established financial transfer to conditions. Hence, it is important to explicitly raise additional funds, not relabel development aid, and use auctioning, which makes all participation voluntary by design. The auctioning scheme is an opportunity and not a chain. Finally, climate financing, such as implemented in the Clean Development Mechanism, often run into the problem of additionality, where it needs to be shown that low-carbon investments funded by international bodies are additional to existing investments. This problem would not arise if support funds for lowcarbon infrastructures correspond to the volume of carbon pricing. However, a new problem is that countries that wish to introduce carbon pricing anyway would now wait to receive financial support by the climate coalition. Competition in auctioning should reduce this problem. It may simply mean that the first rounds of auctioning deliver high carbon-pricing volume for a low auctioning value. Nonetheless, design criteria of eligibility and auctioning will be crucial to algorithmically efficiently escalate climate action. The impetus of my proposal is to push international climate arenas, such as the UN Climate Action Summit and the United Nations Framework Convention on Climate Change, away from negotiating climate-change mitigation targets only to also focusing on coordinating climate policies and instruments. This refocus is crucial for stabilizing a temperature increase below 2 C and limiting the extent of the global climate crisis. ACKNOWLEDGMENTS I am grateful to Robert Socolow and Ottmar Edenhofer for providing detailed feedback on this manuscript. REFERENCES 1. Steffen, W., Rockstro¨m, J., Richardson, K., Lenton, T.M., Folke, C., Liverman, D., Summerhayes, C.P., Barnosky, A.D., Cornell, S.E., and Crucifix, M. (2018). Trajectories of the earth system in the anthropocene. Proc. Natl. Acad. Sci. U S A 115, 8252–8259. 2. Heitzig, J., and Kornek, U. (2018). Bottom-up linking of carbon markets under far-sighted cap coordination and reversibility. Nat. Clim. Change 8, 204–209. 3. Sinn, H.-W. (2015). The green paradox: a supply-side view of the climate problem. Rev. Environ. Econ. Policy 9, 239–245. 4. Van der Ploeg, F., and Withagen, C. (2012). Is there really a green paradox? J. Environ. Econ. Manag. 64, 342–363. 5. Edenhofer, O., and Kalkuhl, M. (2011). When do increasing carbon taxes accelerate global warming? A note on the green paradox. Energy Policy 39, 2208–2212.

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