Climate policy

Climate policy employs a mix of market-based and regulatory instruments. Carbon pricing, including carbon taxes and emissions trading systems (ETS), internalizes the social cost of greenhouse gas emissions, incentivizing reductions where they are cheapest¹. Regulatory approaches include emissions standards for vehicles and power plants, renewable portfolio standards, and energy efficiency mandates. Subsidies and tax credits support the deployment of clean technologies, while information-based tools like labeling and disclosure requirements shape consumer and investor behavior. The choice of instrument depends on political feasibility, administrative capacity, and distributional impacts.

The international climate policy regime is anchored by the United Nations Framework Convention on Climate Change (UNFCCC), adopted in 1992, and its landmark Paris Agreement of 2015, which commits nearly all nations to nationally determined contributions (NDCs) to reduce emissions². The Kyoto Protocol (1997) set binding targets for developed countries, but the Paris Agreement shifted to a bottom-up approach, with periodic global stocktakes to ratchet ambition. Climate finance, technology transfer, and loss and damage mechanisms are integral to supporting developing countries. The Conference of the Parties (COP) meetings serve as the primary negotiation forum, with COP26 in Glasgow and COP28 in Dubai marking recent milestones.

National governments translate international commitments into domestic law. The European Union's Green Deal and its Emissions Trading System are among the most comprehensive regional policies. China has established a national ETS covering the power sector, while the United States has used a mix of federal regulations and state-level initiatives, such as California's cap-and-trade program. Subnational actors—cities, states, and regions—often pioneer ambitious targets, as seen in the C40 Cities network. Policy coherence across sectors, including energy, transport, agriculture, and land use, is critical to avoid unintended consequences.

Beyond headline mechanisms, climate policy includes lesser-known tools like carbon border adjustment mechanisms (CBAMs), which impose tariffs on imports based on their embedded emissions to prevent carbon leakage³. Climate litigation has emerged as a policy driver, with courts in the Netherlands and Germany ordering governments to strengthen their targets. The concept of 'just transition' addresses the social and employment impacts of decarbonization, particularly for fossil-fuel-dependent communities. Additionally, climate policy intersects with monetary policy: central banks are incorporating climate risks into financial supervision, and some are exploring green quantitative easing. The role of non-state actors, such as corporate net-zero pledges and divestment campaigns, also shapes the policy landscape.

Carbon pricing

A market-based tool that puts a price on greenhouse gas emissions, either through a carbon tax or an emissions trading system.

Nationally Determined Contributions (NDCs)

Climate action plans submitted by countries under the Paris Agreement, outlining their emission reduction targets and adaptation measures.

Just transition

A framework ensuring that the shift to a low-carbon economy is fair and inclusive, protecting workers and communities dependent on fossil fuels.