It is worth making the point again that there is no silver bullet policy for dealing with climate change. Many economists will argue that carbon pricing is a panacea and can drive all the change that is needed. This is false. Carbon pricing, a type of economic signal, is useful and effective in many settings, but it is ineffective in parts of the economy prone to market failures. In short, market failures often result in carbon pricing not delivering its expected impacts.

This leads to the next point worth stating bluntly: A portfolio of policies, including performance standards, economic signals, support for R&D, and supporting policies, is the most effective, lowest-cost way to drive down greenhouse gas emissions. Properly designed, they reinforce each other through system dynamics that emerge organically.

However, a portfolio is not simply a grab-bag of policies. There are hundreds of policy options that have little value. The right policies must be selected for each sector, and then they must be designed and implemented well.

Selecting between the four policy types discussed earlier is just the first step to a strong policy portfolio; the specific policies selected must be designed well to function effectively. Each type of policy has certain characteristics that determine whether it is successful.

Experience with designing and evaluating energy policy over many years has elucidated a set of policy design principles that are essential components of performance standards, economic signals, and R&D policy, and that separate successful policies from failures (although supporting policies are an important element of any policy portfolio, their heterogeneity means they lack a set of design principles and are therefore excluded from this section).

The most important design principles for each type of policy are generally applicable based on policy type, although each principle will not apply to every policy. They are not overly complicated. In fact, most of these policy design principles are obvious, yet they continue to be overlooked in energy policy, often with disastrous consequences.

Policymakers have many options available when it comes to climate and energy policy, but these options generally fall into four categories:

• Performance standards set minimum performance requirements and can push more efficient and cleaner technology into the marketplace. They are particularly well suited for instances where there are significant market barriers or information is hard to come by.
• Economic signals, which either subsidize products and outcomes or tax inputs or emissions, can encourage adoption of more efficient technology and less polluting behavior. They are particularly effective for industries that are highly price sensitive and where there are significant substitutes available. Together, performance standards and economic signals reinforce one another to drive companies to innovate and produce better technology that makes its way into the marketplace and into the cars, factories, and power plants that make up the economy.
• Research and development support can lower the costs of performance standards and economic signals while making new technologies available.
• Supporting policies, which vary widely, are important as well and can increase information access and push new, more efficient technologies into use.

Performance standards, economic signals, and support for R&D are most effective when designed in accordance with a set of broadly applicable design principles. These straightforward principles can help separate good policy from bad while minimizing costs.

Policymakers must choose from the hundreds of policy options available to them to create a strong policy portfolio that leverages the relationships between each type of policy to drive down greenhouse gas emissions.