A Net-Zero Target Compels a Backwards Induction Approach to Climate Policy

Jurisdictions around the world increasingly affirm their contributions to the 2015 Paris Agreement by pledging net zero targets. We argue that delivering on a net-zero target compels a backward induction approach to climate policy, which differs from the prevailing approach by stipulating that the objective for designing policy pathways must change from minimizing the cost of the policy to maximizing its credibility. Our argument rests on the premise that private investments play a key role for net zero, and to align them with net zero, getting expectations right is more relevant than getting the prices right. Backward induction compels a dynamically consistent pathway that can overcome the problem that emitters may expect the rules and targets of climate policy as open for constant political renegotiation. We furthermore sketch the main elements for a regulatory strategy to put this approach into action that builds on instilling commitment.