Which Government Policies Accelerate the Low-Carbon Transition?

The right government policy can trigger a transition away from fossil fuels. Learn best practices for low-carbon policy.

“The Basics” provides essential knowledge about core business sustainability topics.

The Earth is warming. The resulting changes are touching businesses around the world, as floods and fires destroy assets, and droughts dry up shipping channels and wipe out crops. The culprit? Humans burning fossil fuels, like coal, oil, and natural gas. (Curious how that works? Check out our primer, What is Climate Change?)

But, there’s hope! Government policy can catalyze widespread action!

Governments at any level, from municipal to national, can create policies to speed up the low-carbon transition. The low-carbon transition, sometimes called “decarbonization,” means moving from fossil fuels to energy sources that do not release greenhouse gases. These alternative energy sources include solar, wind, and nuclear power. This transition can also include action to remove greenhouse gases from the atmosphere, such as conserving forests.

This article explains the basics of low-carbon policies.  It details:

• Types of low-carbon policy

• Best practices in low-carbon policy

• Examples of low-carbon policies and their impacts on businesses.

• How low-carbon policies can protect the vulnerable — both people and businesses

Why should you learn about these issues? Because these policies will affect your business and your world. And, because you can make a difference. Businesses are uniquely positioned to push for policy change. Our next article will describe how companies can lobby for low-carbon policy.

Our expert advisor on this article is Dr. Graeme Auld, professor of Public Policy and Administration at Carleton University (Canada). He’s a leader on environmental policy design who co-authored NBS’s guide on “Building Effective Environmental Policy.”

Types of Low-Carbon Policy

Let’s start by understanding the general types of low-carbon policy. What are our options in shifting away from fossil fuels?

To describe them we use policy categories provided by the Organization for Economic Cooperation and Development (OECD). (While we present these categories separately, they’re rarely used alone. Governments usually bundle many types of policy together to achieve their goals.)

Price-based

Price-based policies use monetary incentives to get companies and consumers to act differently. Carbon taxes, or “carbon pricing,” are a great example. They subject goods and services to fees based on their greenhouse gas emissions. A carbon tax might increase the cost of fueling a gasoline vehicle fleet, motivating a company to buy electric vehicles.

Subsidies are the opposite of carbon taxes. Here, the government gives companies money to incentivize their low-carbon activities. For example, a state-run electrical grid could pay more for electricity produced from wind and solar energy than it pays for electricity produced from natural gas.

Cap-and-trade systems are also considered price-based policies. The policy sets a total amount of emissions that can be released for a sector or region. Businesses covered by the policy buy or are granted emission permits. If a business emits more than its permits allow, it must buy emission permits from other businesses.

Technology support

Technology support policy, sometimes called green industrial policy, targets specific promising innovations and helps them scale. (There’s some overlap with price-based policies, as technology support can include financial incentives, like subsidies.)

Technology support policy can support different parts of the innovation process. For example, governments can give money to businesses to research and develop low-carbon technology. Policy can also speed up the adoption of technologies that already exist.

The United States’ Inflation Reduction Act (IRA) offers an example of technology support. Companies can get up to a 30% credit on their investments in wind, solar, energy storage, and other renewable energy projects. Consumers receive similar incentives, like a $2000 tax credit when they install a heat pump for home heating. These incentives act on the back end of the innovation process, accelerating the adoption of existing technologies. The IRA has resulted in new clean energy infrastructure and up to 170,000 new jobs in the clean energy sector.

Command and control

Command and control regulations require organizations to meet specific standards or face penalties like fines or stop-work orders. Examples of command and control policies include:

• Technology standards, like requiring automakers to produce electric vehicles

• Prohibiting certain activities, such as burning coal

• Requiring companies to report their greenhouse gas emissions

• Land use planning, such as limiting deforestation in construction and agriculture projects

Information and education

People need to have the right skills to participate in the low-carbon transition. For example, countries across the European Union are struggling to get enough skilled workers for the clean energy sector. Governments can promote entry into the sector by co-creating new training programs, offering free tuition, and marketing the value of a career in clean energy.

Additionally, businesses and consumers need to know about new government policies before they act on them. Governments may choose to share policy details broadly, using social media, bill boards, or radio ads. They could even communicate with specific stakeholders, like business leaders, by presenting at trade shows, conferences, or other niche events.

Now, let’s look at best practices for using these policies to spur the transition away from fossil fuels – and toward a healthy, vibrant future for all.

Best Practices in Low-Carbon Policy

There’s no one-size-fits-all approach to low-carbon policy. Here’s why there’s variation:

• Each level of government has different powers, and can only adopt low-carbon policies that are within their scope of responsibility (for example, a municipal government has no power to implement at national carbon tax)

• Policy needs will vary from region to region (for example, the changes needed in China and Nigeria will be quite different.)

• There’s still debate in some areas of policy (for example, what is the appropriate role for carbon offsets?)

But there are some general best practices. Below, expert Graeme Auld identifies best practices that help ensure polices reduce emissions. Policies that include these elements can shape how governments, companies, and even individuals behave.

Policies that reduce emissions may have short-term costs, especially for some businesses and sectors. But good government policy can help ease the transition, supporting vulnerable people and businesses.

If your business gets involved in political lobbying, advocate for policies that include these practices. And if you’re not lobbying, but simply reacting to policies, this description can help you understand the policy goals.

1. Aim for 1.5 degrees.

Ten years ago, the world lacked consensus on how much to cut emissions. That has changed.

Every country in the world, except Nicaragua and Syria, has now signed the Paris Agreement. In this agreement, countries commit to limiting average global temperature rise to no more than 2°C above pre-industrial levels – but ideally 1.5 degrees. That would avoid the worst impacts of climate change.

Now, other levels of government, from cities to regional authorities, must set similar goals. If your government bodies haven’t set that goal, encourage them to do so.

(Companies can set these goals, too! More than 9,000 companies have promised to reach net zero – that’s a state where the company’s greenhouse gas emissions are balanced by their balance removals. If your company doesn’t have a net zero goal, check our article: How to Be a Net Zero Company.)

2. Be transparent and accountable.

Goal setting must be combined with transparent and accountable short-term action. Sadly, a 2022 United Nations report finds governments and companies often set impressive sounding goals, but take little action or defer action long into the future.

Accountability is achieved by regularly reporting on emissions reductions, using a recognized standard.

3. Use financial incentives.

Money can be an effective motivator for behaviour change when used as either a carrot (reward) or a stick (penalty).

Financial rewards can be applied in many ways. For example, the government could give companies money for R&D, or offer tax credits on the purchase of low-carbon technology. A cap-and-trade policy combines penalty and reward, with some companies buying permits to allow emissions and other companies selling their unused emission permits.

Optimizing financial incentives can also involve getting rid of policies that don’t support a low-carbon trajectory, such as fossil fuel subsidies.

4. Include a price on carbon.

A carbon tax (“price”) is a particular type of financial incentive – but it’s important enough to get its own section. Carbon taxes increase the price of goods and services based on their greenhouse gas emissions. That makes businesses and consumers more likely to factor pollution into decision making. A carbon price aligns financial incentives with what is good for society.

The OECD recommends a carbon price of at least USD 33 (EUR 30) per tonne of CO₂. (One tonne of CO₂ causes enough global warming to cause at least USD 33 in damage.)

Carbon taxes have long been hailed as the solution to the climate crisis. They’re good at accelerating the uptake of low-carbon technologies that are almost market-ready. But if low-carbon technologies are still in their infancy, they’ll require more investment than a tax can provide. Other policy supports, like subsidies, are needed, too.

Carbon taxes have other limitations, too. Fossil fuel use can be tightly connected to social practices we value (driving our kids to hockey practices), long-lasting and infrequent decisions (where we decide to buy a house), or the way sectors are structured (a national electricity grid fueled by fossil fuels). A small price bump may not be enough to these change emission-intensive behaviours.

5. Be consistent.

Policy direction should stay consistent over time. That’s because climate change is like long-term health – it requires consistent and ongoing choices. Stable policy also helps companies feel confident making big investments for compliance.

That doesn’t mean policy can’t evolve. The overall direction just can’t swing back and forth.

It’s hard to keep policies stable, as new leaders come into office and other conditions change. But it’s still important. The effects of instability are currently being seen in Canada. Elected leaders implemented a carbon tax and proposed a firm cap on emissions for oil and gas companies. But a different political party – one promising to eliminate both policies – is favoured to win the coming election. As a result, many oil companies are openly delaying their investments in emissions reduction.

6. Find synergy between policies.

Policy makers use related policies, called a ‘policy bundle,’ to achieve their emissions reduction goals. Policies in seemingly unrelated areas, like investment, labour, agriculture, and land use also influence companies’ decarbonization decisions.

All policies should be mutually re-enforcing. But a 2015 OECD report shows gaps. For a long time, the regulatory system has incentivized fossil fuel use and depended on funds from fossil fuel taxes to pay for critical government services. Good policy making means looking at policy in all areas and asking, “Do all polices promote economic thriving and less fossil fuel use?”

7. Tie to local context.

Your region’s solution for climate change will look different from other areas’. What are local economic activities? Stakeholder concerns? Social justice issues?

If agriculture is the primary industry, policy should focus on emissions related to that. Where oil and gas are the primary industry, policy might focus on capping production and offering financial support and retraining for affected workers.

8. Aim for climate justice.

Climate change impacts aren’t felt equally. Some regions are more affected by the environmental changes – like low-lying coastal communities. Certain sectors are vulnerable in the low-carbon transition – like oil and gas workers. Some communities have been harmed more by fossil fuel extraction and processing.

Addressing these inequities is called climate justice. Policy action can start by asking: What protection should be offered using taxpayer money? Should justice mean compensating oil companies for stranded assets (like their recent investments in extraction technology? Or should it mean helping families that lose their income to meet their needs?

Justice is also relevant at a global level. Poor countries are usually most vulnerable to climate change impacts, but have benefited least from burning fossil fuels. The Green Climate Fund, supported by wealthier nationals, enables poorer countries pay for emissions reduction and adaptation. Damage and loss funding helps poorer countries recover from climate damage.

Dr. Eunice Sampson, a climate finance expert in West Africa and NBS advisor, described the need for sensitivity in climate policy. “So far, global climate policy has been a case of one-size-fits-all, trying to make approaches uniform. Let’s be more sensitive about how we go about it, and let’s be careful to ensure that no continent is left behind.”

9. Communicate – and listen.

New policies must be communicated clearly to the people who need to act on them. To act, people must understand what the policy is about, how it will help them and their community, and what action is required. Policies should include clear plans to communicate the right information to the right people.

Those affected often have great insights to make policies more effective. Governments need to listen to people, too, through careful participation processes.

10. Consider new frontiers.

The impacts of climate change are growing, and the world is approaching 1.5 degrees Celsius of warming – the threshold at which impacts will start accelerating quickly and become increasingly irreversible. As urgency grows, there’s political will to try new, more assertive forms of policy.

For example, ten years ago free trade was a top priority. Countries rarely created policies to restrict the flow of goods across borders. But in 2023, the EU passed the Regulation on deforestation-free products, prohibiting deforestation practices. Many industries will have to prove their products have not originated from recently deforested land if they want to import or export products across EU borders.

Our window of opportunity to drop emissions is shrinking. We will need new types of policy to reach our goal.

Balancing Perfect Policy and Rapid Action

Limiting warming to 1.5 degrees is critical for all life on Earth. We’ll need everyone’s help to avoid the worst impacts of climate change. Companies should be cutting emissions in their own operations, and lobbying for effective low-carbon policy.

It’s really a win-win. Pushing for subsidies could help fund your low-carbon investments, or a carbon tax could make your competitors carbon-intensive products more expensive!

Even if you think your company might be a loser in the low-carbon transition, don’t try block the change. Instead, get involved and shape change in way that works best for you. Look for opportunities you can capture.

This transition is not going to be perfect. There will be cost, stranded assets, and inefficiency. But let’s still figure out how to do it. Don’t let perfection be the enemy of the good.

About the Series 

“The Basics” provides essential knowledge about core business sustainability topics. All articles are written or reviewed by an expert in the field. The Network for Business Sustainability builds these articles for business leaders thinking ahead. 

Additional Resources

• Hicks-Webster, C., & Dyez, K. 2022. What is Climate Change – Primer. Network for Business Sustainability.

• Auld, G., Burlica, B., Mallett, A., Nolan-Poupart, F., & Slater, R. 2011. Building Effective Environmental Policy: Systematic Review. Network for Business Sustainability.

• Rennert, K. & Kingdon, C. 2022. Social Cost of Carbon 101. Resources for the Future.