Project goal

Policymakers often cite political economy constraints – usually confined to a few economic sectors – as a reason to delay necessary efforts to decarbonize their economies. This raises the question: what are the economic costs of delayed action in decarbonizing? We evaluate the economic costs of delaying efforts to decarbonize across four policy scenarios:

1. No delay (the optimal policy)
2. Delaying decarbonization in a set of politically challenged sectors
3. Delaying any action in a set of politically challenged sectors
4. Delaying all action in every economic sector From this analysis, we hope to inform policymakers as to the costs and benefits of delay in decarbonizing, particularly when political economy constraints are present that make decarbonizing certain sectors difficult.

I am very pleased to have been hired as a short-term consultant at the World Bank Climate Change Group while this work is being completed!

Abstract

When leaders face political economy constraints, is it best to delay all decarbonization initiatives until a sectorally coordinated strategy can be implemented, or is it preferable to implement an approach where sectors’ decarbonization strategies are uncoordinated? This question underscores a crucial trade-off – here coined the “timing versus allocation” trade-off – for politically constrained climate policymakers: (i) to sacrifice the optimal timing of climate policies to preserve the optimal allocation of emissions across economic sectors, or (ii) to preserve the optimal timing of abatement investment to the detriment of the allocation of emissions across sectors. This paper systematically explores this trade-off by presenting a modeling framework that elucidates the economic implications of various sub-optimal policy approaches to decarbonization that involve relaxing or delaying decarbonization efforts in a subset of sectors or economy-wide. The paper shows that the cost difference between an economy-wide, coordinated decarbonization strategy and an uncoordinated approach with heterogeneous carbon prices is smaller than the cost of delaying action and implementing a coordinated policy in the future. This implies that it is preferable to implement some policy in each sector, insofar as this is politically feasible, with less politically challenged sectors compensating with a marginal increase in policy ambition. The paper further elucidates how sectors with high annual emission rates, such as energy, are more costly to delay in comparison to their mid- to low-emission counterparts, such as industry, despite these sectors being nominally more costly sectors to decarbonize.

Working paper and citation

World Bank Policy Research Working Paper No. 10941

Citation: Bauer, A. M., S. Hallegatte, F. McIsaac. The Timing versus Allocation Trade-off in Politically Constrained Climate Policies. World Bank Policy Research Working Paper No. 10941, The World Bank, Washington DC, 2024.

Collaborators

Florent John McIsaac and Stephane Hallegatte.

Project code

All source code for this project can be found on my Github.