Climate Policy for Coordination

Inge van den Bijgaart and Åsa Löfgren

No 12916, CESifo Working Paper Series from CESifo

Abstract: Decarbonizing basic materials industries requires coordinated investment between downstream firms adopting abatement technologies and upstream input providers. We model the resulting indirect network effects, which generate a no-investment equilibrium alongside a coordinated one. Carbon pricing and non-discriminatory subsidies cannot resolve this coordination failure without overshooting the optimum. Subsidies targeted at firms below a cost threshold implement the optimal coordinated equilibrium without distortion. We further show that excluding the lowest-cost firms, who invest voluntarily once others lead, shrinks the subsidized group, and that targeting remains effective under imperfect observability and imprecise targeting. Our results provide formal support for targeted industrial policy.

Keywords: climate policy; coordination; industrial decarbonization; indirect network effects; industrial policy (search for similar items in EconPapers)
JEL-codes: H23 O33 Q54 Q58 (search for similar items in EconPapers)
Date: 2026
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