A net-zero target compels a backward induction approach to climate policy

Abstract

Jurisdictions worldwide increasingly affirm their contributions to the Paris Agreement by pledging net-zero targets. We argue that delivering on net-zero targets compels a backward induction approach to climate policy, which stipulates that maximizing credibility should be the objective of policy pathways design. This implies choosing policies that strike a suitable balance between building commitment and attaining cost efficiency. Our argument rests on the premise that private investments play a key role for net zero, and that getting expectations right—through credible commitment to a policy pathway—is more relevant than getting the prices right to align the investments with net zero. We sketch the main elements for a regulatory strategy to put this approach into action. Net-zero pledges are emerging around the world, but to be consequential they must compel credibility as a core objective of climate policy design. This paper proposes an approach, named backward induction, that aims to maximize policy credibility by balancing building commitment and cost efficiency.