Complementary Climate Policies for Supply and Demand

Geir Asheim and Bard Harstad

No 35128, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The traditional approach to climate policy is to regulate the demand side, for example through an emissions fee. Supply-side regulation has received less attention. The two instruments are perfect substitutes in the first best but we show that they are complements in a second-best setting with free-riding incentives. Demand-side policies alone lower the market price of fossil fuels and raise the gains from trade for a country that defects. For a treaty to be maximally robust, strong, and self-enforcing, it must properly balance supply- and demand-side instruments. The results hold with homogeneous countries and are strengthened by heterogeneity.

JEL-codes: D62 F53 H23 (search for similar items in EconPapers)
Date: 2026-04
Note: EEE POL
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