Market Shaping to Combat Climate Change

Pull mechanisms represent a potentially promising tool by which policymakers can accelerate the pace of socially valuable innovation that can help combat climate change. Pull mechanisms are tools by which government, private, or philanthropic sponsors incentivize innovation by increasing the returns to said innovation generally, i.e.by paying for research outputs. Unlike patents, pull mechanisms do not result in a specific firm ending up with a monopoly over new inventions, which may result in higher prices and lower quantity supplied of the newly invented goods, in turn hampering efforts to rapidly decarbonize the economy. Unlike other tools such as grants, pull mechanisms can be designed to be agnostic across firms and technological pathways, helping sidestep the problem that program sponsors (such as the government) are often highly uncertain which firms or approaches will prove most successful in the long run. For many climate challenges, such as decarbonizing heavy industry like cement or developing cheap means of removing carbon dioxide removal, there is a wide panoply of possible solutions. Many will likely prove technologically infeasible, and others may prove technologically possible but economically unviable. A well-designed firm- and technology-agnostic approach is flexible enough to support different pathways is a useful tool in a toolbox in encouraging innovation under such uncertainty.