tions would fare in the face of different kinds of shocks, Morris said. In addition, from a systems perspective, they apply macroeconomic modeling that simulates and quantifies various scenarios to understand the stability of the financial sector as a whole and how different types of shocks might play out.

ON THE OUTCOMES AND TRADE-OFFS OF DECARBONIZATION POLICY INSTRUMENTS

Cristina Peñasco, Banque de France and University of Cambridge, discussed how models can help to understand the potential outcomes and trade-offs of different decarbonization policy instruments. Asserting that current policy implementations will not meet the emissions reduction goals of the Paris Agreement (Figure 4), she suggested that a better, wider set of policies and instruments is needed to overcome environmental problems, address socioeconomic concerns, and smooth the clean energy transition.

Understanding the benefits and drawbacks of different scenarios can help nations effectively implement decarbonization policies. For example, Peñasco and colleagues identified a range of outcomes related to environmental effectiveness, technological effectiveness, competitiveness, and distributional aspects of policy instruments such as energy taxes and exemptions, greenhouse gas allowance trading systems, and feed-in tariffs (Peñasco, Anadón, and Verdolini 2021). Reconciling empirical insights with what is being modeled is key in understanding the true risks and opportunities of climate policies, she said.

Peñasco also highlighted how traditional policy principles might be adjusted in establishing principles for the clean energy transition to overcome some of the potential negative economic effects of certain policies and generate win-win solutions (EEIST 2022). For example, instead of remaining “technology neutral” and assuming government interventions raise costs, it may be more effective to make technology choices and invest and regulate to bring costs down. She also emphasized the value of combining policies, adapting policies as needed, and coordinating internationally to grow clean technology markets. Finally, she noted that there is no one-size-fits-all approach, stressing that it is important for each jurisdiction to adjust policy design and implementation to suit its unique needs.

ADDRESSING THE ROLE OF UNCERTAINTY IN UNDERSTANDING RISKS

Noting that there are very different pathways to achieving decarbonization, Johannes Stroebel, New York University, highlighted how various policies may impact the macroeconomy in different ways, leading to uncertainties around their feasibility and ultimate impacts. For example, some decarbonization policies could lead to negative outcomes like higher energy prices or inflation, stranded

energy assets, and employment reallocation. He emphasized that such risks stem from the fact that different policies and strategies come with different risks and outcomes, rather than from decarbonization itself. For example, he said, carbon taxes or drilling restrictions can tend to raise energy prices, while subsidies for renewables tend to lower them. Policy uncertainty can also be a source of risk. When emissions rules are uncertain, for example, businesses can be expected to delay decarbonization investments until the policy landscape becomes more clear. For this reason, policies that are less ambitious but more certain can ultimately have a greater impact than more ambitious policies that turn out to be unrealizable, Stroebel noted.

Even as decision makers focus on understanding the risks of decarbonization policies before they act, Stroebel pointed out that allowing emissions to continue unabated and not pursuing decarbonization is “equally risky, potentially even more risky” than the possible adverse outcomes of decarbonization policy. He noted that decarbonization can help to avoid or reduce climate change-related risks in multiple sectors, such as housing, insurance, and financial markets. Finally, he added that while the benefits of decarbonization are global, the risks are often borne domestically, which can create a disincentive for individual countries to push for decarbonization. Given this, he suggested that decision makers could focus on creating policies that maximize domestic opportunities, recognize and offset drawbacks, and avoid strategies that are unlikely to be implemented or likely to be unpopular, such as policies that raise energy prices.

CURRENT U.S. POLICY SOLUTIONS AND REMAINING CHALLENGES

Heather Boushey, Council of Economic Advisers, discussed how the Biden administration has sought to support decarbonization with policies such as tax credits and subsidies, many of which target low-income or high-need communities, as well as by investing in an innovation-to-commercialization pipeline that de-risks capital investments. She posited that this combination of approaches can successfully address political economy questions, close gaps, and create economic development.

Boushey also highlighted several challenges. One key area is workforce development. The workers who will drive the large-scale implementation of clean energy will require better connections with these industries as well as assurances that they are developing careers in fields that have a strong future, Boushey said. Another issue, she continued, is that there can be a lack of fiscal space to make the types of investments that are needed, suggesting a need to better demonstrate the benefits of investing now to solve the looming risks related to climate change. She suggested that macroeconomic modeling can support this by comparing the anticipated benefits of decarbonization investments to the risks posed by unabated climate damage.

2022b), which are designed to work in tandem to reduce risks for both communities and firms in driving clean energy investments. For example, the incentives that are created around EV technologies and infrastructure will affect decisions among both consumers and car manufacturers and affect the future trajectory of EV adoption, she explained.

To address risks related to impacts on communities, Morris underscored the need to acknowledge the distributional outcomes of decarbonization. Whatever the means through which it is achieved, any policy that ultimately reduces coal consumption will inevitably hurt the economies of coal-producing areas, for example. This makes it important, both politically and morally, to anticipate and address the unintended consequences of decarbonization policies to avoid leaving communities behind, perhaps through retirement pensions, place-based benefits, or other social safety nets to combat disproportionate impacts, she noted. “It behooves us to get ahead of those issues and really try to help people where they are,” Morris stated. Peñasco agreed and added that policies to mitigate social risks must be effectively communicated, noting that communicators who acknowledge and balance the complexities, interconnections, trade-offs, benefits, and drawbacks of a given policy are more likely to be successful in gaining trust.

In reply to a related question from Chris Field, Stanford University, about job losses in legacy industries, Boushey suggested that policymakers prioritize full employment and address regional inequities through policies that are “government-enabled but private sector-led.” For example, industry could be incentivized to invest in sectors that will be part of the energy future while being sensitive to community impacts, she noted.

Accelerating Decarbonization

Rachel Cleetus, Union of Concerned Scientists, asked about strategies to accelerate decarbonization. Peñasco highlighted the value of policy instruments that have successfully integrated effective innovation with emissions reductions in the past, such as subsidies, while considering second-order effects. In reply to a related question from Jun Shepard, U.S. Department of Energy, she also stated that targeted tipping points enabled the United Kingdom to use carbon price floors, subsidies, and electricity reforms to transition away from coal and toward clean energy. Boushey stated that the U.S. federal government has prioritized easing barriers and removing hurdles to new energy implementations to increase the speed of adoption, and added that it is important to partner with affected communities to ensure implementations do not exacerbate existing problems.

Morris agreed that urgency is needed, especially as climate-related events such as wildfires, droughts, and extreme weather events continue to increase, although she expressed her hope that such events will not be the only thing that drives the political will to invest in decarbonization. Stroebel added that most

people and governments agree on what needs to be done; what they argue about is the details of how to do it, what is most feasible and politically palatable, and how future elections may impact those factors.

Tim Lenton, University of Exeter, asked if what he described as “billions of dollars the fossil fuel industry receives as subsidies in the United States” could be redirected to create benefits in clean energy industries. Morris replied that removing such subsidies (which, she noted, are largely indirect) may not reduce emissions, because the price of oil—which is beyond the government’s control—is what drives consumption. She suggested that removing fossil fuel subsidies may be more effective in other countries, especially where they are replaced with other strategies to help people afford energy.

The Role of Central Banks

Edmonds asked what role central banks can play in facilitating clean energy transitions, and Morris replied that each central bank operates differently. For example, the European Union’s Central Bank has legislative authority that enables it to create mandates in support of government decarbonization policies, while the U.S. Federal Reserve does not and thus has less jurisdictional authority. Recognizing that central banks play a role in monetary policy and price stability—both of which will be impacted by climate policies—Stroebel suggested that central banks could include climate events and energy transitions in their stress testing to understand and address the risks to financial stability. Morris noted that the Federal Reserve has conducted some climate-scenario analyses to better address climate events internally and externally.

Boushey added that it is important to consider how the relationship between central banks and fiscal authorities impacts prices and inflation, as was demonstrated during the COVID-19 pandemic. Peñasco agreed, and she and Morris named the Network for Greening the Financial System,¹ which analyzes the financial impacts of climate scenarios, as a helpful resource.

Känzig asked about the idea of outsourcing decarbonization decisions to climate councils, similar to the way governments outsource monetary policy to central banks. Stroebel replied that a democratic legislative process would likely be more effective than such a body and also more appropriate given the scale of the risks faced and the scale of the fiscal resources necessary to take meaningful action. Boushey agreed, adding that it is critical to balance using the power of the market to bring good ideas to commercialization with strategies that ensure the path forward will also work for families and communities in order to retain political salience. “Maybe we’ve spent too long letting technocrats think about this and not enough time actually thinking about the community perspective,” she said.

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¹ See https://www.ngfs.net/en.