Policy mixes outperform standalone measures in advancing emissions reductions

Key messages

• Carefully designed combinations of policy measures often outperform stand-alone measures, resulting in larger emissions reductions. Interaction effects between instruments can generate synergies but also trade-offs, underscoring the need to account for overlaps and rebound effects.
• Policy mixes can address a multitude of market failures, increase overall policy stringency, and maximise credibility, shaping the expectations of consumers and investors.
• Policy mixes that include carbon pricing or reduced subsidies for fossil fuels typically achieve larger emissions reductions than those that rely solely on popular non-price-based instruments. Even a modest carbon price can significantly enhance the cost-effectiveness of the policy mix.
• Effective policy mixes vary by sector and national context, including level of economic development, and must be tailored to specific targeted actors, technologies, and institutional capacity.

Around the world a wide range of climate policies are used to reduce greenhouse gas emissions. Economic theory traditionally proposes one policy tool per market failure: carbon pricing for climate damages, R&D funding for knowledge spillovers, and targeted incentives for lock-in effects and network externalities. Few jurisdictions, however, have implemented an explicit carbon price near the social cost of carbon, let alone adopted a coordinated policy mix to address all market failures. The complex blend of policy instruments in place has developed across years, governments, and jurisdictional levels, resulting in limited coordination and overlaps.

Interactions between policies can alter their total impact to be more or less than the sum of their parts. In France, simulations of residential heating suggest a combination of bans on gas boilers and a subsidy scheme may increase the likelihood of carbon neutrality while reducing overall system costs and addressing distribution issues. Complementarities between policies may arise along different pathways due to spatial, temporal, or functional relationships, but individual policies may have a limited scope and are subject to rebound effects that require additional instruments like pricing. Additionally, policy mixes can address a multitude of market failures, increase overall policy stringency, and maximise credibility, shaping the expectations of consumers and investors. Identifying which instruments and policy combinations are most effective for additional emissions reductions and which lead to trade-offs across additional policy objectives represents a rapidly developing area of climate policy research.

A systematic evaluation of 1,500 climate policy measures implemented in 41 countries over the last two decades found emission reductions that match zero-emissions targets are possible but need to be scaled. The assessment identified 63 large emissions reductions leading to an average cut of 19%, with total emission reductions between 0.6 billion and 1.8 billion metric tonnes CO₂. These successful cases form a collective evidence base to learn from, and can all be explored using the Climate Policy Explorer. Carefully designed combinations of policy measures often outperform stand-alone instruments (Figure 10A). Many popular instruments – bans, building codes, energy efficiency mandates, and subsidies – either result in larger reductions only in combination with other policies or have a smaller impact alone. Policy mixes that include carbon pricing or reduced fossil fuel subsidies typically achieve larger emission reductions than reliance solely on popular non-price-based instruments (Figure 10A, black bars). Taxation stands out as the only instrument that leads to large emission reductions as a stand-alone policy.

Effective policy mixes vary by sector, country context, and stage of economic development (Figure 10B). Packages must be tailored to the characteristics of targeted actors, technologies, and institutional capacity, and implementation requires iterative learning and adjustment. Robust governance structures; systems for data collection, transparency, and monitoring; and ongoing evaluation are key for ensuring that policies remain effective over time and responsive to changing conditions. Additional challenges lie where climate policy is implemented across multiple jurisdictions and scales.

To reduce greenhouse gas emissions, there is no one-size-fits-all policy mix, but evidence on interaction effects of frequently used policy instruments is emerging, providing key lessons for policymakers. Dimanchev and Knittel (2023) have a framework for evaluating policy interactions and trade-offs and demonstrate that even a modest carbon price can significantly enhance the cost-effectiveness of the policy mix when paired with a performance standard. The relationship is nonlinear, with diminishing marginal returns as reliance on pricing grows. The importance of pricing is supported by observed emissions trajectories, with recent studies finding that successful large emission reductions within developed economies rely on the integration of tax and price incentives. There is often political resistance to carbon pricing, but the use of performance standards has expanded with greater public support and policy durability. To leverage the strengths of different instruments to balance trade-offs across multiple policy objectives requires well-designed policy mixes.

The type and design of policy instruments fundamentally shape how they interact with other instruments. When additional policies overlap with a fixed-quantity instrument like the emissions cap, they may not achieve added emissions reductions because the total quantity of allowances is unchanged. So fixed-quantity instruments must incorporate mechanisms to dynamically adjust the cap in response to market conditions reflecting lower demand. The European Union Emission Trading Scheme’s Market Stability Reserve is one such innovation that can help mitigate the effect by automatically reducing the supply of allowances as other policies reduce demand. Without accounting for these interaction effects, additional policies could even increase total emissions by shifting towards unregulated sources, sectors, and facilities. Unlike fixed-quantity instruments, fixed-price instruments, such as a carbon tax, maintain their price incentive regardless of overlapping policies because the incentive from the price signal remains unchanged providing a cumulative incentive for emissions reductions.

In an increasingly complex climate policy environment, a growing body of research emphasises the importance for policymakers to consider interactions and combined effects of climate policies in order to reduce greenhouse gas emissions. It is important both to promote policy combinations that generate positive synergies and avoid negative or offsetting effects. Leveraging available evidence from real-world practice provides an opportunity to learn from circumstances in which structural breaks in emissions trajectories have been observed.

Finally, climate policy mixes rarely pursue emissions reductions alone. They are often designed or evolve to achieve multiple objectives including cost effectiveness, distributional equity, innovation, energy security, and political feasibility. Policy acceptance is a crucial factor, and sequencing of policies plays a role. Recent evidence shows that the perceived effectiveness of prior policy-induced benefits is related to greater support for higher carbon prices across sectors. Research is needed to extend the knowledge base on policy combinations and interactions across multiple objectives and time. Designing effective combinations thus requires understanding sector-specific interactions, managing trade-offs, and adapting instruments to jurisdictional needs – pointing to a critical opportunity to close both the emissions gap and the emerging knowledge gap on policy effectiveness.