In this policy brief, we offer an introduction to the family of policy instruments known as “flexible performance standards.” We describe and examine the attributes of performance standards that elevate them to be chosen in many jurisdictions, often as a precursor to carbon pricing, and we explain why flexibility improves their cost-effectiveness and the potential they may have as complementary policies to strengthen carbon pricing to drive innovation, with a specific focus on the industrial sector. The brief ends with a discussion of the potential to apply flexible performance standards to the Swedish industrial sector to achieve emissions reductions in line with the national climate target.
- Political economy constrains carbon prices to low levels that are insufficient to drive innovation and investments necessary to reach long-term climate targets for the industrial sector.
- Flexible performance standards mimic carbon pricing but suppress the change in product prices that make carbon pricing politically difficult.
- Performance standards create incentives to innovate to reduce emissions while protecting competitiveness for regulated industries.
- Performance standards can overlap carbon pricing, augmenting the incentives for innovation and providing a potential on-ramp to more stringent carbon prices in the future.
- Tradable performance standards can provide broader opportunities for cost savings by bridging across sectors or jurisdictions.