Türkiye’s net zero ambition. Why policy credibility is key to the low carbon transition
This simple exercise shows that policy credibility drives the net economic costs of the low-carbon transition. A recent study at the Grantham Research Institute on Climate Change and the Environment confirms this view. The study assumes that expectations regarding the commitment to a policy depend on the net economic costs of that very policy. It shows that weak policy commitment can trap the economy in a vicious cycle of credibility loss, carbon-intensive investments, and increasing net costs of decarbonization, which may ultimately lead to a failure of the transition.
The importance of policy credibility is not a new concept in economics
Policy credibility has been widely studied in the context of monetary policy, where central banks need to anchor inflation expectations to achieve price stability and avoid costly fluctuations in output and employment. Most importantly, anchoring expectations reduces the need for large changes in interest rates. The same logic applies to climate policy, where governments need to anchor emission expectations around their NDCs. This helps to accelerate the low-carbon transition and minimize its economic and social costs. A key lesson from monetary policy is that institutional arrangements can enhance policy credibility and reduce uncertainty. Central banks can adopt inflation targeting regimes, independent governance structures, transparent communication strategies, and forward guidance mechanisms.
Innovative instruments are available
In climate policy, expectations are even more crucial for guiding long-term investment decisions and fostering innovation. Therefore, governments need to adopt institutional changes that can improve the credibility of their NDCs and signal their commitment to the low-carbon transition. This could involve legal measures such as giving constitutional status or statutory backing to the NDCs, or international treaties such as the carbon club proposed by Nordhaus (2015), where countries agree to impose tariffs on non-members who do not comply with a common carbon price. Another option is to use financial instruments such as sustainability-linked bonds, where the interest rate depends on the achievement of certain environmental targets. For example, Chile issued the world’s first sovereign sustainability-linked bond in 2021.
In conclusion, strengthening government commitment to the low-carbon transition and enhancing policy credibility is critical to reduce uncertainty and encourage private sector participation.
