Optimal policy packages under policy and preference heterogeneities to address climate change

Abstract

Policies addressing climate change have undergone extensive research; however, the existing literature lacks a comprehensive evaluation of climate policy packages. The “curse of dimensionality” renders it challenging for researchers to concurrently scrutinize policies across multiple dimensions and diverse government preferences. This study introduces a comprehensive assessment framework to address this issue. It considers the heterogeneity associated with five categories comprising 27 policies, constituting a climate policy package, and the heterogeneity related to six government preferences. The study identifies characteristics of the optimal policy package under preference heterogeneity: e.g., in cases where the government prefers addressing climate change, robust implementation of carbon pricing tools and energy subsidies is recommended, alongside moderately reductions in individual income taxes and increases in agricultural subsidies to alleviate economic and social welfare losses. For moderate governments, moderate adoption of carbon pricing measures, coupled with a reduction in energy tax rates, is suggested to mitigate adverse impacts on industries. For other preferences, alternative strategies are also be provided. This study offers robust decision support for global policymakers, assisting them in making optimal strategy under diverse preferences.