Uncertainty about the strength and durability of climate policy, which is exacerbated by the lack of carbon pricing, is likely hindering investment at a time when enabling economic recovery and fostering future growth are especially pressing.
Economic theory and empirical evidence suggest the introduction of carbon pricing does not harm and may amplify economic recovery during recovery from economic recession, supporting the notion that resolving climate policy uncertainty can be a stimulus for economic growth.
The role that policy uncertainty plays in impacting investment is generally ignored in studies of the cost of climate policy. Most studies implicitly consider policy scenarios as alternative cases each of which is implemented with “certainty,” and they therefore do not recognize or value the economic benefits and costs of policy properly.
Climate science justifies stringent and urgent climate policy action, but such action is not on the agenda in many jurisdictions. Inaction, on the other hand, may impart economic costs by perpetuating policy uncertainty that stifles investment. which is important to economic recovery after COVID.
Durable carbon prices—even modest ones—can have outsized influence on long-run investment and emissions by shaping expectations about future policies that drive greater investment.
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