By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.
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.
