Bridging the Gap How to Finance the Net Zero Transition 2025

This may involve conducting surveys to quantify consequential factors, such as the: –Proportion of businesses and consumers willing to engage with policy instruments –Level of financial incentive required to encourage unwilling participants to engage –Extent to which appeal varies along socio- demographic and economic dimensions and by key design featuresEconomic valuation methods178 can be used to assess demand, adoption and non-market valuation.179 Elicited demand curves from these exercises can be used to assess which design features are most appropriate, the socio-economic characteristics of likely participants and how to encourage and compensate laggards. Important policy design questions BOX 4 This paper advocates that the achievement of the policy design principles set out in this chap- ter can be realized by addressing the following questions during the design phase of developing instruments: 1. What is the required and feasible scope of the policy instrument? Streams of rich datasets from an array of sources, including those capturing the online presence of consumers and open finance-enabled financial transactions, now make it possible to account for the emissions consequences of consumption at a much more granular level than ever before. Policy-makers could exploit these datasets to create models of demand and corresponding emissions intensity across commodity groups and households by socio-economic characteristics. This will allow estimates of the scope required for participation in market instruments and coverage of commodity groups required to achieve change and can also inform how the instruments may support significant investments in low-carbon technologies through changes in consumer behaviour. 2. How would the instrument allocate the benefits and burdens of the required changes? A transition to a net-zero future offers large future benefits. The scope of the changes, however, involves all sectors of the economy and society – and requires significant costs – along with burdens of change which will have to be borne in the early years. The success of any instrument will depend on it being seen as acceptable across society, by allocating the benefits and burdens fairly. For example, an instrument which taxes petrol is consistent with achieving net zero; however, the gilets jaunes protests in France were driven in part by the perceived economic injustice that these types of taxes disproportionately place on lower income consumers. The French government was forced to backtrack and reconsider the policy. Hence, policy-makers should focus on developing tools that model their policies’ aggregate benefit to society by each layer of design feature and seek to allocate its benefits and costs fairly. 3. What are the appropriate institutional design features of the instrument? Any effective instrument with some consumer focus (i.e. aimed at changing human behaviour) will require that consumers engage with both the price and the emission intensity of their consumption. This implies that the introduction of such instruments will require consumers to make decisions under both financial and environmental constraints. Although we have much evidence on how individuals behave in making buying decisions alone, such as buying an item online or at a supermarket, there is a gap in our understanding of how people will behave when faced with multiple constraints. Therefore, the design of instruments should involve an understanding of how individuals can integrate both financial and environmental information in their decision-making and how features of the planned instrument can support the required information processing. Bridging the Gap: How to Finance the Net-Zero Transition 28