By designing consumer-focused incentive- based mechanisms that capitalize on big data- driven innovation and fairly entrench individual responsibility, policy-makers will align their efforts to target market failures. This is fundamental, because achieving net zero will require change across the economy and society. The UK government’s Ten Point Plan for a Green Industrial Revolution is a good example.175 The plan’s ambition to deliver “jet zero and green ships” requires changes in the volume and patterns of foreign travel, while accelerating the shift to zero-emission vehicles, green public transport, cycling and walking requires consumers to purchase EVs, adopt ride- sharing habits and change their day-to-day patterns of movement. This paper presents three principles that can help guide practical policy design actions to mitigate some of the political and behavioural constraints that impede the successful deployment of market mechanisms as consumer behaviour-altering instruments. The three principles are coherence, fairness and appeal. Coherence It is important that instruments are designed to help their targets, such as consumers and businesses, understand the costs and environmental implications of each design choice. Design options and associated implementation and operational costs should be tested to investigate the relative advantage or disadvantage of one choice over the other, with the need for ease of understanding and engagement being the goal. For example, under carbon pricing regimes that place instruments at the producer level, businesses face trading costs. It is important to examine the likely range of trading costs that makes one type of carbon pricing regime, such as cap-and-trade and carbon taxes, equivalent from the perspective of a business’s total costs, and assess how carbon pricing design elements, such as supply control mechanisms, can mitigate these costs. An example of a supply control mechanism is the market stability reserve (MSR),176 which the EU deploys in the EU-ETS. From an informational perspective, while cap-and- trade, for example, does not offer the same degree of price certainty as a carbon tax, it can play a much stronger role in raising awareness of the implications of CO2 consumption on business and consumer budgets. In this context, the conditions under which cap-and-trade and taxes generate the same level of emission reductions would need to be examined, along with how design elements, such as price collars, may make the former the preferred carbon pricing instrument. Fairness For fairness purposes, policies should explicitly account for variations in target characteristics, such as the socio-demographics of consumers and economic attributes of businesses. Surveys indicate voter support for using climate change policy instruments if the potential negative effect on low-income households is mitigated.177 Therefore, policy-makers should endeavour to quantify the potential distributional impacts of design choices by investigating how different types of households and businesses are affected by the instruments they design, both in terms of implementation and their design features. For policies affecting households, microeconomic analysis can be undertaken using datasets combining household expenditure, the associated emission for each commodity group and estimates of consumer demand for different commodities. This analysis can then be used to quantify sensitivities to price changes for different commodities for households of certain socio- demographic attributes (and businesses’ financial constraints) as well as their associated emission equivalence. These estimated parameters can feed into models used to illustrate the distributional and GHG emission implications of implementing specific design features of policy instruments. Appeal Evidence suggests that voters will support climate policy instruments when revenues generated are spent on low-carbon research and development and subsidies to promote deployment. Hence, assessing the level of public acceptability or demand for proposed new regime(s) – and how this varies by institutional design features, feasible scope (e.g. across commodity groups, sectors and households) and allocation of benefits and burdens (e.g. revenue recycling and cost containment provisions) – should be a fundamental part of climate change policy-making.4.1 Principles for the design of market instruments to address the climate finance gap Bridging the Gap: How to Finance the Net-Zero Transition 27

Bridging the Gap How to Finance the Net Zero Transition 2025