A Balance Of Incentives & Penalties Works Best For Clean Energy Adoption

Support CleanTechnica’s work through a Substack subscription or on Stripe.

Or support our Kickstarter campaign!

Governments around the world invest in fossil fuels for what is often framed as national security. However, there is a basic inconsistency of national investment in fossil fuels with mitigating climate change. Many oil and gas producers falsely claim they are simply meeting demand rather than accruing fabulous wealth. In contrast, if the fossil fuel industry assumed the full cost of its impacts on people and the planet, rapid change in how the world consumes energy would take place, and the world would be a safer, healthier place.

Simple, right? Actually, no. It turns out that, rather than solely incurring financial damages, a combination of incentives and penalties works best to inspire the transition to clean energy.

Researchers from the University of California San Diego and Princeton University have concluded that it takes both subsidies for clean energy and taxes on pollution to significantly reduce the greenhouse gas emissions that cause climate change.

Why are both approaches necessary? It seems that, while financial incentives spark rapid adoption of cleaner technologies in the short term, it’s only when policies also punish polluters that real climate action occurs.

Tensions between Choice & Forced Change

The world needs to achieve net-zero emissions at a global scale because it remains our primary solution against the ongoing climate crisis and for securing sustainable development. Implementing energy subsidies creates positive outcomes for clean energy technologies and their application, and offering incentives like subsidies has been traditionally thought to be the most persuasive means to prod the switch to clean energy. But it’s not quite that straightforward.

David Victor, professor at the UC School of Global Policy and Strategy and a climate modelling researcher, says that a combination of incentives and penalties is consistent with economic model simulations — and those simulations are the backbone of nearly all climate policy discussions. “For years, models have told us what’s economically efficient—but not what’s politically possible,” Victor explains. “Our goal is to bridge that gap so policymakers can craft strategies that survive real-world politics.”

Using real data from federal and state programs, the UC/ Princeton research team compared scenarios such as:

• Incentives only—Long-term subsidies that make renewable energy and electric vehicles more affordable;
• Penalties only—Economy-wide carbon pricing that makes fossil fuels more expensive;
• Combined approaches—Starting with incentives, followed by penalties after 10 or 20 years; and,
• Inconsistent policies—Reflecting political instability, with incentives that start, stop and restart over time.

Incentives were the greatest mover of change and are seen by the researchers as being very effective to accelerate the clean energy transition in the immediate future. These policies include tax credits for electric vehicles and renewable power; government grants and loans for clean manufacturing; and, rebates that help homeowners install heat pumps, rooftop solar panels, and energy-saving upgrades.

Nonetheless, “only with policy sticks are there unambiguous signals to substantially shrink the size of incumbent fossil fuel industries,” the UC/ Princeton authors argue.

Their research has the potential to influence policy design and political timing for decarbonization.

Incentives & Penalties: Rewards vs. the Polluters Pay Principle

The Biden administration’s clean energy incentives enacted under the Inflation Reduction Act (IRA) stimulated electric vehicle adoption, solar power adoption, wind power development, battery cell and battery pack production, mining and processing of battery minerals, adoption of heat pumps, and other energy efficiency improvements. At that time there was political consistency that stabilized incentive programs and insured their reliability. In fact, the UC/ Princeton researchers determined that being able to count on incentives for clean energy programs is just as important as the size of the subsidies or the stringency of future penalties.

• When incentives are applied consistently, the economy can reach an 80% reduction in energy-related carbon emissions by mid-century.
• When those incentives are withdrawn or delayed, investment slows and later emissions cuts become more expensive.

So incentives cannot be the only guiding force to clean energy adoption.

No US federal government has ever taken the next step to implement a tax on climate polluters, commonly referred to as the Polluters Pay Principle. The Principle, as acknowledged by many international and national laws, requires that those responsible for polluting the environment should be held accountable for the associated costs. It emerged initially as an economic principle for cost allocation, which allows for the internalization of external costs. The aim is to distribute responsibility to parties who cause the pollution — rather than passing the burden on to a third party who may be innocent as to the cause of such pollution.

The reality is that the current Trump administration isn’t likely to consider penalties for burning fossil fuels. If fact, Sabin Center’s Climate Backtracker, which identifies steps taken by the Trump–Vance administration to scale back or wholly eliminate federal climate mitigation and adaptation measures, tallies nearly 300 Trump 2.0 actions to scale back or halt climate and clean energy progress. Trump 2.0 has reneged on federal subsidies that would have ushered much more wind and solar power onto the grid and regressed to a stance where fossil fuels are all.

“In the United States, we are removing the reward policies designed to accelerate decarbonization, and it’s unlikely this administration will introduce any policies that punish larger emitters,” Victor said. Environmental penalties play a crucial role in enforcing corporate environmental compliance and performance. “When policy is unpredictable, companies delay investment,” Victor continued. “That delay can make it politically and economically harder to act later.”

The current Trump administration is anything but predictable; the President is frequently referred to TACO (ie. Trump always chickens out!).

It’s All about People’s Attitudes

You might think that people’s attitudes about environmental policy and values are fixed. But it turns out the language within policies can serve as a mechanism to shift underlying values. So what can be done to cultivate green values? Here are three clues.

1. Mandates that involve less invasive actions, such as taking public transit rather than driving, draw less opposition than those that impinge on privacy or bodily autonomy, such as reducing meat consumption.
2. People are less turned off by mandates when they feel the policies are effective. So it’s important to convince people that the environmental policies in question actually work.
3. Mandates provoke less backlash when people feel they don’t restrict their freedom.

The phenomenon known as “crowding out” describes how most individuals will only agree to adopt a new behavior if it is voluntary. What happens if that same behavior is mandatory? They tend to rebel, as Sarah DeWeerdt writes in Anthropocene, insisting that they have the right to choose without having requirements placed upon them.

That tension between mandatory and obligatory systemic change is at the heart of the climate crisis.

We can make the world as safe as possible through renewables, which are the engine that can drive the transition away from burning fossil fuels. The blueprint to triple global renewable capacity by 2030 will require world leaders to lift barriers, cut costs, and connect clean power to people and industry.

The UC/ Princeton study authors express hope that their work illuminating the incentives and penalties paradigm will lead to “understanding what works—and when” and will be “key to reaching global climate goals.”

Resources

• “An empirically based dynamic approach to sustainable climate policy design.” K. Schmelz and S. Bowles. Nature Sustainability. 2025.
• “Guide to investigating fossil fuels: Government regulations and policies.” Megan Darby. Global Investigative Journalism Network. February 13, 2025.
• “Identifying key polluters: The feasibility of applying the Polluter Pays Principle to marine greenhouse gas emissions.” Ling Zhu and Xinwei. Cambridge University Press. February 24, 2025.
• “Mixing incentives and penalties found key to cutting carbon emissions long term.”  Sadie Harley. Nature Climate Change. December 22, 2025.
• “Modelling the impacts of policy sequencing on energy decarbonization.” Huilin Luo, et al. Nature Climate Change. December 22, 2025.
• “People like the idea of being green. But they hate being told what to do even more.” Sarah DeWeerdt. Anthropocene. January 20, 2026.