This blog was submitted as part of CDPR’s Summer Blog Competition “The Student Standpoint“.
The energy sector, while driving economic growth, is also the main contributor to climate change, accounting for over 75% of global GHG emissions (IEA, 2024). Decarbonisation is essential but slow-without action, which could result in temperatures rising from 2.6 to 4.8°C by 2100 (Dickie, 2024). Drawing on Stanford’s Energy Modelling Forum, International Monetary Funds Insights, and Gujarat’s Emissions Trading Scheme, this blog argues the need for policy innovation, political will, and equitable global action to tackle the issue of climate change.
Global energy infrastructure vulnerabilities and technological pathways
Rising temperatures and extreme weather patterns are straining already fragile energy systems. In the U.S., power outages cost $79–$150 billion annually (LaCommare & Eto, 2021). Brazil, where hydropower supplies 64% of electricity, has faced drought-driven shortfalls, turning to costly thermal plants and raising tariffs (EnergyNews, 2024). In China, 2022 droughts cut Yangtze basin hydropower by 26%, boosting coal use, yet total electricity generation still declined 4.9% in 2023 (Wong & Duhalde, 2022).
Addressing the dual challenge of strengthening energy system resilience while transitioning to renewables requires coordinated strategies on both the supply and demand sides. Supply-side strategies encompass resilient infrastructure investments, diversification into renewable sources, and improvements in energy efficiency across generation and transmission networks. These include transitioning from high-carbon fossil fuels, adopting carbon capture and storage (CCS), and expanding nuclear power. Moreover, carbon pricing strategies tailored to penalise fuels not just based on carbon intensity, but also their import-export profiles, can enhance national incentives for emissions reductions. However, this approach, while domestically advantageous, risks creating global inefficiencies by not fully aligning penalties with emissions intensity, reflecting a broader “how inefficiency” (Huntington and Brown, 2003) in international climate policy frameworks.
Demand-side interventions, targeting reductions in final energy consumption, also remain essential, minimising new infrastructure needs and avoiding entrenchment in carbon-intensive technologies.
Structural barriers to decarbonisation
Market failures and innovation gaps
Firstly, market failures misalign the political and economic incentives of stakeholders. As GHGs are a classic case of negative intergenerational and international externalities, there is a free-rider incentive to undervalue the societal costs of emissions. Short-term national costs are concentrated, whereas climate benefits remain long-term and diffuse. Consequently, international climate agreements gravitate toward lowest-common-denominator commitments, rather than optimal collective action (Maggi, 2016).
Fossil fuel lobbying and the monopolistic energy sector
The fossil fuel industry also remains a pertinent factor. According to IMF estimates, global fossil fuels subsidies totalled around $7 trillion, cementing dependence on them and under-investment in innovation in cleaner fuels (Black et al., 2023). The latter’s R&D also lags, since the benefits of innovation have spillover effects on other market participants, which investors might not necessarily want, as it dilutes the return from their efforts (Margolis & Kammen, 1999; Foxon & Pearson, 2008). Moreover, this innovation comes with a risk premium attached, due to uncertainty about long-term prices and policy stability, making investors reluctant to invest compared to traditional proven-at-scale non-experimental technologies (Bazilian & Roques, 2008; Gross et al., 2010) (NBER Working Paper No. 29154).
Furthermore, the energy sector e.g. electricity grids and gas transmission networks have natural monopolistic and oligopolistic structures (Baumol et al., 1982).
While certain arguments favouring efficiency can be made, such structures reduce incentives for innovation, competition and increase barriers to entry, as newer alternatives are outpriced in the market. Additionally, in developing countries, the high upfront costs of renewables like solar panels dissuade people from their uptake due to financial constraints/ unwillingness (Johnston & Vos, 2005; Chaurey & Kandpal, 2010). Therefore, without government intervention, the existing market cannot deliver the required pace and uptake of renewable energy development. Government subsidies/ innovation grants/ mechanisms and antitrust regulation are needed to reduce and distribute costs over a longer time frame compared to traditional outlets. However, this is difficult to implement amid entrenched fossil fuel lobbies.
Competing domestic interests and “how” inefficiencies
On the global policy stage, the prioritisation of domestic economic and political interests over climate rationality creates further inefficiencies. Most global climate models focus on where emissions should be cut (i.e., which countries) and when (i.e., how fast), assuming that countries will adopt policies that minimise the total cost to the world. However, as the Stanford Energy Modelling Forum (EMF) shows, this assumption obscures a third, critical dimension of inefficiency-how emissions are reduced, driven by countries’ energy trade positions and domestic political pressures. Instead of uniformly targeting emissions reductions based on carbon intensity across all fuel sources, they exhibit a preference for deeper cuts in fuels they import, where reducing consumption improves their terms of trade and there is more lenient treatment of domestically abundant or export-oriented fuels. As a result, the cost of decarbonization to the global system may rise, even as individual countries seek to minimise their own burden. This is starkly evident in the U.S. proposal of the British Thermal Unit tax in 1993, which penalised fuels inconsistently with their carbon content: coal, the most carbon-intensive, was taxed the least. Similarly, the US and Australia were reluctant participants in the Kyoto negotiations, protecting domestic coal producer interests and fearing their economic losses from uniform carbon pricing. Both countries opted for policies that minimised national costs, even at the expense of higher global abatement costs (Huntington and Brown, 2003). This highlights how energy security and domestic lobbying, not climate rationality, drive major policy design. However, for the global economy, carbon pricing systems like carbon tax and cap-and-trade become imperative in such scenarios, otherwise individual national interests tend to produce fragmented and insufficient global action.
Policy instruments: carbon pricing and emissions trading
Carbon taxes vs Cap-and-trade
Till 2019, 51 carbon-pricing policies have been implemented or are scheduled for implementation worldwide and will cover about 20% of global GHG emissions. Stavins (2019) highlights identical incentives for both carbon tax and cap-and-trade instruments. In theory, each can be designed to generate public revenue, either via a carbon tax or through auctioning allowances, allow for border carbon adjustments to address competitiveness concerns, and can be calibrated to support technological change and innovation through price signals.
In practice, however, distinctions emerge. Cap-and-trade systems are more vulnerable to price volatility, though this can be mitigated through banking, borrowing, or price collars. Carbon taxes, by contrast, offer price certainty but leave total emissions uncertain. The Weitzman rule-favouring taxes in cases of stock pollutants like CO₂-supports this view, but real-world uncertainty in abatement costs and benefit correlation complicates the equation. Administrative complexity also differs: while taxes are generally simpler in design, legislative processes can introduce distortions. Cap-and-trade systems, meanwhile, face risks of market manipulation and higher transaction costs, particularly if allowance markets are illiquid or poorly monitored.
Yet the core argument of Stavin remains: the specific designs of carbon taxes and cap-and-trade systems may be more important than the choice between the two instruments. The difference between the two fades with the specifics of policy design and implementation, indicating a fluid policy continuum rather than a dichotomy.
Case studies: Gujarat ETS and EU ETS
A successful example of a local implementation is the Gujarat ETS (cap and trade system for pollutants), launched in partnership with Yale University. It cut particulate emissions in Surat by 20–30% without raising industry costs, offering a scalable model. Yet, as of mid-2025, only 3.2% of global emissions are priced above recommended levels, hindered by price volatility and fluctuating demand (World Bank, n.d.). Beyond just carbon pricing, other examples like the EU ETS initially faced challenges like over-allocation and the 2008 recession but nevertheless reduced CO₂ by 2-4%. Free permits led to windfall profits, up to billions of euros, mainly for large firms, especially in the power sector (with cost pass-through rates of 20-100% in electricity and over 50% in transport fuels) prompting reforms like auctioning. However, strong governance is essential to prevent market abuse and fraud (Laing et al., 2013).
Other considerations and barriers
There may be informational and awareness barriers, as consumer adoption remains slow due to bounded rationality, information asymmetries and short-term decision horizons. These may be solved by upholding energy standards, conducting information campaigns, and providing technical training. Decarbonisation also faces resistance when perceived as unfair or unaffordable. For example, France’s “yellow vest movement”, triggered by fuel taxes that disproportionately impacted the lower-middle class, highlights the importance of contextualising policy (Al Jazeera, 2018). Institutional and policy barriers may be addressed by fostering innovation, revising technical regulations, supporting international technology transfer, and (perhaps) liberalising energy industries.
In conclusion, overcoming structural inertia demands more than technological fixes, it requires reshaping market structures and realigning global incentives. Key steps include lowering entry barriers, democratizing energy systems, contextualizing policies, incentivizing renewable R&D, and aligning national interests to ensure a just, contextual and plausible energy transition.
About the Author: Aiman Memon is a Physics undergraduate at the Lahore University of Management Sciences (LUMS) with research interests spanning quantum computation, applied physics, and interdisciplinary problem-solving. She is the founder of Climate Collective Pakistan, a grassroots youth-led initiative that integrates science education, research, and innovation to advance climate resilience. Also an Executive Consultant at the LUMS Students’ Policy Research Initiative (LSPRI), she contributes to evidence-based policy projects at the nexus of STEM and sustainable development.
References
International Energy Agency. (2024, August). Greenhouse gas emissions from energy: Data explorer. International Energy Agency. https://www.iea.org/data-and-statistics/data-tools/greenhouse-gas-emissions-from-energy-data explorer
Dickie, G. (2024, October 24). Climate set to warm by 3.1 °C without greater action, UN report warns. Reuters. Retrieved from https://www.reuters.com/business/environment/climate-set-warm-by-31-c-without-greater-action un-report-warns-2024-10-24/
LaCommare, K. H., & Eto, J. H. (2021). Cost of power interruptions to electricity consumers in the United States (U.S.). Lawrence Berkeley National Laboratory. https://www.scirp.org/reference/referencespapers?referenceid=3081502
EnergyNews. (2024, August 9). Drought in the Amazon forces Brazil to import energy. EnergyNews. Retrieved from https://energynews.pro/en/drought-in-the-amazon-forces-brazil-to-import-energy/
Wong, D., & Duhalde, M. (2022, August 31). China’s record heatwave, worst drought in decades [Infographic]. South China Morning Post. https://multimedia.scmp.com/infographics/news/china/article/3190803/china-drought/index.html
Maggi, G. (2016, April 12). Issue linkage, bargaining power and over‑reporting in international negotiations (Working paper). Yale University, Department of Economics. https://economics.yale.edu/sites/default/files/2022-10/IssueLinkageDraft_041216.pdf
Black, S., Parry, I., & Vernon‑Lin, N. (2023, August 24). Fossil‑fuel subsidies surged to record $7 trillion. International Monetary Fund. https://www.imf.org/en/Blogs/Articles/2023/08/24/fossil-fuel-subsidies-surged-to-record-7-trillion
Margolis, R. M., & Kammen, D. M. (1999). Underinvestment: The energy technology and R&D policy challenge. Science, 285(5428), 690–692. http://www.jstor.org/stable/2898477
Foxon, T. J., & Pearson, P. J. G. (2008). Overcoming barriers to innovation and diffusion of cleaner technologies: Some features of a sustainable innovation policy regime. Journal of Cleaner Production, 16(S1), S148–S161. https://doi.org/10.1016/j.jclepro.2007.10.011
Huntington, H. G., & Brown, S. P. A. (2003, October). Energy security and global climate change mitigation (EMF Occasional Paper OP‑55). Stanford University Energy Modeling Forum. https://web.stanford.edu/group/emf-research/docs/occasional_papers/op55.pdf
Bazilian, M., & Roques, F. A. (Eds.). (2008). Analytical methods for energy diversity and security: Portfolio optimization in the energy sector—A tribute to the work of Dr. Shimon Awerbuch (1st ed.). Elsevier Science. https://doi.org/10.1016/B978-0-08-056887-4.X0001-7
Gross, R., Heptonstall, P., Blyth, W., & Greenacre, P. (2010). Risks, revenues and investment in electricity generation: Why policy needs to look beyond costs. Energy Economics, 32(4), 796–804. https://ideas.repec.org/a/eee/eneeco/v32y2010i4p796-804.html
Johnston, D., & Vos, R. (2005). Breaking barriers to rural electrification in Africa. United Nations Department of Economic and Social Affairs (UNDESA) Working Paper. https://sustainabledevelopment.un.org/content/documents/ecaRIM_bp.pdf
Chaurey, A., & Kandpal, T. C. (2010). Assessment and evaluation of PV‑based decentralized rural electrification: An overview. Renewable and Sustainable Energy Reviews, 14(8), 2266–2278. https://doi.org/10.1016/j.rser.2010.04.005
Stavins, R. N. (2019). Carbon taxes vs. cap-and-trade: Theory and practice (Discussion Paper). Harvard Kennedy School, Belfer Center for Science and International Affairs. https://www.belfercenter.org/publication/carbon-taxes-vs-cap-and-trade-theory-and-practice
World Bank. (n.d.). Compliance carbon pricing: Prices and coverage. In Carbon Pricing Dashboard. Retrieved July 15, 2025, from https://carbonpricingdashboard.worldbank.org/compliance/price
Laing, T., Sato, M., Grubb, M. J., & Comberti, C. (2013). Assessing the effectiveness of the EU Emissions Trading System (Working Paper No. 106). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science.
Al Jazeera. (2018, December 4). The yellow vest movement explained. Al Jazeera. https://www.aljazeera.com/news/2018/12/4/the-yellow-vest-movement-explained
