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Economic incentives for countries to decarbonise

Updated Monday, 21 February 2022
Acting alone is as important as acting together.

One of the reasons that progress on tackling climate change has been so challenging is because of the perception that there is little incentive for countries to act in isolation. Action on climate change has long been seen as a ‘public good’, which is to say it is of benefit to everyone, not only to those who have paid for it.

As a result, nobody has an incentive to act, but instead everyone waits in the hope of ‘free riding’ on the generous actions of others. How often have you heard someone say ‘What’s the point of us [insert action of choice] when [insert country of choice] isn’t?’ However, recent research (Mercure et al., 2021), led by Exeter University and involving myself and other Open University academics, suggests that this climate policy ‘game’ is beginning to look outdated.

OK, so what’s changed? We identified three factors:

  1. Our understanding of the economic impacts of climate policy is developing.
    The traditional modelling approach, still widely used, assumes an ‘optimised equilibrium’. Think of perfect markets, where supply always matches demand, everything is perfectly priced and all resources (including people) are used optimally, with a perfect foresight of what the future consequences of any decision will be. This makes the modelling easier, but it’s not how the real world works. We don’t have perfect foresight, or complete understanding. We often don’t even behave rationally! In the real world there are inefficiencies (e.g. unemployment) and these can be reduced through government action, for instance by incentivising new green industries. New ‘simulation-based’ approaches do not assume optimisation or equilibrium, but instead model the evolution of the global economy through time, and they are beginning to address these weaknesses. They show that investment in new technologies does not always come at a price  the benefits may outweigh the costs. Think of Roosevelt’s ‘New Deal’, when government spending was used to create jobs which brought the USA out of the Great Depression.
  2. New technologies are now developing rapidly.
    The growth of a new technology starts slowly. It’s likely to be expensive at first, and perhaps necessary infrastructure is lacking. People will be unfamiliar with it and may be hesitant. However, this slow uptake builds over time, through fashion, increased accessibility, cheaper production, through economies of scale and learnt efficiencies, and even through reduced financing costs as the technology becomes less risky to invest in. These positive (self-amplifying) feedbacks, neglected in equilibrium models, can lead to rapid rates of uptake which accelerate a technological transition even in the absence of policy. As an illustration of this rapid change, the costs of generating solar and wind energy are already (or will soon be) as low as the cheapest fossil fuels.

  3. Climate policy.
    The Paris Agreement, which aims to limit global temperature increase to well below 2 °C, has now been signed by 194 states plus the European Union, while more than 130 countries have now set or are considering a target of net-zero emissions by 2050. These pledges will drive further investments and efficiencies and increased uptake of renewable energy.

Photo of a person putting a coin into a globe piggy bank

So, what does all this mean for geopolitical incentives? We set out three broad categories of country in the new climate policy game:

  1. Fossil fuel importing countries
    These are economically better off decarbonising – creating jobs and economic stimulus by investing in renewable technologies, and saving money on increasingly expensive fossil fuel imports.
  2. Uncompetitive fossil fuel producers 
    For example, producers with expensive shale oil or offshore drilling. These will not benefit from free riding, but they will be exposed to substantial losses and unemployment from their increasingly redundant oil assets. They too are incentivised to develop their own renewable technologies to offset these losses and create alternative job opportunities.
  3. Fossil fuel exporters with cheap oil (primarily OPEC countries).
    These are likely to be better off flooding the market while they still can – even their fossil fuels will be outcompeted by renewables eventually.

To cut a long story short, it’s becoming increasingly clear that the best option (and arguably the only rational one) is to decarbonise. Maintaining a fossil fuel economy is becoming unviable, and addressing economic diversification towards renewables, while complex, is necessary to protect economies from the volatility and inequality that is characteristic of technological revolutions.


  1. Mercure, J.-F., Salas, P., Vercoulen, P., Semieniuk, G., Lam, A., Pollitt, H., Holden, P.B., Vakilifard, N., Chewpreecha, U., Edwards, N.R. and Vinuales, J.E. (2021) ‘Reframing incentives for climate policy action’,  Nature Energy, 6, pp. 1133-43. Available at  (Accessed: 21 February 2022).

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