Regulatory Carrots and Sticks in Climate Policy: Some Political Economic Observations

This Article sets out an informal political economic theory which explains the relative permanence of regulatory carrots—legislative subsidies and mandates for product use—versus the transience of regulatory sticks—traditional costly regulatory requirements. After setting out the elements of this theory, I illustrate it with the dramatic rise in the Obama Administration and abrupt cessation in the Trump Administration of attempts to use conventional U.S. environmental regulatory sticks to end the U.S. coal industry. The Article turns then to describe a concrete example of a regulatory carrot—the U.S. corn ethanol mandate—that has survived despite overwhelming evidence that its environmental benefits, if any, are far outweighed by its environmental and economic costs.

This Article concludes by discussing subsidies for solar energy. These subsidies, found throughout the world, continue despite growing economic evidence that the economic benefits from solar power— particularly the profits that accrue from making solar photovoltaic (“PV”) panels—will be highly concentrated geographically, with few countries sharing in the economic rents from solar power mandates. There is evidence that this concentration will not result because particular counties’ regulatory carrots are more generous and effective, but because production of renewable energy products and services such as crystalline silicon solar PV cells and modules are capital intensive with pronounced economies of scale. When this is true, international competition in such nationally subsidized, capital intensive renewable energy industries may interact with government-determined demand for renewable energy products in a way that turns the ordinary rules of supply and demand on their head. Lower costs and prices may lead to a contraction or inward shift in subsidized demand, so that the demand expansion necessary for competitive market conditions may not be realized. At the same time, the environmental benefits from solar power are, at least so far, small at best. Thus for most countries, solar power has generated higher electricity prices with few environmental or economic benefits. And yet—as further evidence for my positive theory of the persistence of carrots—in the United States, solar subsidies were not only retained but, in the case of solar PV panels, actually strengthened by the imposition of import tariffs.