State capacity and varieties of climate policy

Countries vary in the adoption of sticks and carrots in climate policy. Differences in institutional capacity and fiscal space shape national policies. This matters for the effectiveness of national mitigation efforts and the extent of international conflict over climate policy.

Countries vary widely in how much they seek to decarbonize their economies and in the approaches they take. Much research points to how “political will” differs across countries. The public, politicians, and interest groups support climate action to varying extent across countries. Hence, in some places powerful climate coalitions emerge, in others they do not. While political will is an important driver of national climate ambition, a country’s capacity to undertake climate policies matters as well — in particular its institutional and fiscal capacity.

A focus on state capacity helps us to understand why countries pursue different types of climate policies. In the broadest sense, climate policy entails sticks and carrots, and national climate policies vary in the relative composition of sticks and carrots. Sticks increase the cost of carbon-intensive economic activity, either via command-and-control regulations or market-based policies. Familiar examples include renewable energy mandates, fuel economy standards, and carbon taxes. By contrast, carrots incentivize the use and production of clean energy at lower costs. Subsidies, tax credits, and grants are common tools — and the basis of the Inflation Reduction Act (IRA) in the United States. While policy carrots have long played a role in climate policy mixes, the rise of green industrial policy has given them greater prominence in climate policymaking. Given different capacities to pursue fiscal climate policy, differences across national climate policies are becoming more pronounced. This has implications for the success of individual nations’ decarbonization efforts and for how national climate policies interact in the global low-carbon transition.