Economic Incentives to Meet Emissions Targets

The potential profits in generating green energy can constitute economic incentives to meet emissions targets, if steered by governments

The renewable energy market size “will reach over two trillion U.S. dollars by 2030”, according to the Group Next Move Strategy Consulting.  This is an enormous, and potentially profitable, business opportunity.  It won’t materialise, though, of its own accord – because existing businesses will be tempted to continue the use fossil fuels.  Government economic incentives, regulations, and funded research projects can help to persuade and direct individuals and companies to adjust their behaviour, and to install the necessary technology, to meet the carbon emission targets described above (  This is a way of mitigating global warming.

An International Monetary Fund (IMF) study has recommended introduction of a carbon tax; it suggested that a “global agreement to make fossil fuel burning more expensive is urgent and the most efficient way of fighting climate change” – as reported in an Independent article: Huge global carbon tax hike needed in next 10 years to head off climate disaster, says IMF.  The study examined the impact on energy prices and how to gain consumer acceptance “by routeing the money raised straight back to citizens”.  Other taxes could be reduced, for example.

China is the world’s largest emitter of carbon dioxide, and it continues to invest in coal-fired electricity generation.  If all the developed economies introduced a carbon tax themselves, and charged such a tax on imports, China would be incentivised to cut its dependence on coal – as suggested in the Foreign Affairs article Competition with China can save the planet.

An alternative to taxation is the so-called ‘cap and trade’ system, where each country has carbon allowances which can be distributed to organisations that produce carbon emissions.  The ability to trade these permits means that those who are best placed to make big reductions in emissions would be incentivised to do so – but an Economist article, Green market forces, pointed to the risk of estimating errors and deliberate abuses.

As discussed later (6.7.5), politics should be seen as providing the negotiating forum to enable agreement to be reached on the provision of economic incentives to meet emissions targets, but the choice of technologies should not be left to politicians.  An Economist article on alternative energy technologies, Green dreams, argued that there is a risk of getting sub-optimum results if technologies are mandated:

“Governments that try to pick winners often choose losers.  Subsidies distort investment: since the German government fixed the price for solar power at munificent levels, the country has been sucking in huge numbers of solar panels that could be put to better use in sunnier climes.  A global carbon tax would be a more efficient way to close the price gap between fossil and alternative fuels.”

A high carbon tax would incentivise changes in behaviour, by encouraging people to make different choices.  If energy were more expensive, people would be encouraged to use less of it.  They have several options:

●  They can switch to more environmentally friendly cars.

●  Car-sharing is economical.  People can increasingly find someone to share with through Internet social media.

●  People can cut down on travel.  Working from home is becoming easier with advances in electronic communication.

●  People can be less wasteful in their use of domestic energy, by turning down heating or air-conditioning.

These options all make immediate savings for those who adopt them, as well as helping to meet global targets.

Governments can also encourage energy savings, by introducing economic regulations to ensure that new buildings have high standards of insulation for example.  This might be cost-effective, reducing energy costs for the building’s lifetime.

Reductions in energy consumption would undoubtedly be helpful, but would not be sufficient on their own.  High carbon taxes would also affect companies’ choices of technology.  The energy industry would be incentivised to use the available alternatives to fossil fuels, as described in the next sub-section (  Governments could also more easily justify investments in innovation, taking a long-term view of their cost effectiveness.  Several such programmes are already underway, as described below (



This page is intended to form part of Edition 4 of the Patterns of Power series of books.  An archived copy of it is held at https://www.patternsofpower.org/edition04/3574b.htm