Why Carrots and Sticks Are Essential for Decarbonisation

Past and Recent Developments

Climate models once assumed governments would act rationally and consistently. Reality has proved otherwise.

Earlier approaches focused on technical efficiency. Since around 2017, researchers began testing policy sequencing  subsidies first, penalties later to reflect political reality.

In the US, the Inflation Reduction Act accelerated renewables and EV adoption through tax credits. However, political volatility now threatens those gains.

The UCSD-led study, involving researchers such as David Victor, uses the GCAM-USA model across all 50 states to show that:

• Subsidies drive early adoption before 2030

• Penalties are essential for deep cuts after 2035

• Inconsistent policy raises long-term costs

Europe, by contrast, has leaned heavily on penalties through carbon markets, while China blends incentives with regulation.

Future Outlook

The research points to a clear conclusion: durable, predictable policy beats short-term ambition.

Globally, we are likely to see:

• Stronger carbon penalties in the EU and UK by 2030

• Wider use of carbon border measures to protect low-carbon industries

• Increased pressure on exporters to prove embedded emissions

For businesses, this means long-term investment decisions must assume both rising carbon prices and targeted support mechanisms.

Impact on UK Businesses

UK firms are already living in a “sticks-first” environment.

Under the UK ETS and CBAM:

• Manufacturing, steel, cement, and chemicals face rising compliance costs

• Retail and logistics benefit indirectly from cheaper renewables

• Professional services see growing demand for carbon reporting and strategy

US policy uncertainty also matters. Supply chains exposed to US clean tech incentives may face disruption, increasing costs and risk for UK importers and exporters alike.

What UK Businesses Can Do Now

To stay competitive in a carrots-and-sticks world, UK organisations should:

• Audit supply chains for CBAM exposure and embedded emissions

• Target 20–30% emissions cuts by 2030 using existing incentives

• Scenario-test policy risk, not just technology risk

• Diversify green investments beyond politically volatile markets

• Engage suppliers early on data, reporting, and transition plans

Programmes like our SBS Net Zero-Program,  SBS Compliance and the Supply Chain Program can help turn regulatory pressure into strategic advantage.

Final Thoughts

The UCSD study confirms what many UK leaders already feel: net zero is not about choosing carrots or sticks  it’s about using both well.

For businesses, the winners will be those who plan for rising carbon costs and move early to capture incentives, efficiency gains, and market trust.

The question is no longer if policy pressure will increase,  but whether your organisation is ready when it does.